FIN.9:4.4 - Build the buyer’s acquisition comparison

Identify what the buyer obtains and pays for: assets, shares or another specified interest. Recover the included debt, cash, ownership rights and remaining obligations through FIN.7 and FDM where needed. A quoted enterprise price, an equity price and the cash required at closing are different amounts. Reconcile them before evaluating the premium.

Start from adequate standalone values of the affected businesses under their attainable no-deal continuations. Then construct what the combination changes. A cost synergy needs the actual reduction in resource commitments and the expenditure or delay needed to achieve it. Additional sales need their contribution after operating cost, investment, working capital and tax. A financing or tax benefit needs the actual available terms and usable deductions. FIN.4 supplies the accounts, FIN.6 the incremental cash and FIN.5 the corresponding financing valuation.

Use a combined with/without forecast when the effects are too interdependent to allocate reliably between businesses. Compare combined value with the sum of the standalone values on matching grounds. That difference can include both gains and losses. Integration disruption, customer departure, lost supplier terms and capacity constraints belong in the same account as hoped-for savings. Do not treat each claimed synergy as certain while assigning all execution uncertainty to a separate generic discount.

Distinguish improved standalone management from benefits requiring the specific combination. If the target could make a supported improvement without this buyer, the change may already belong to its no-deal value or to the price demanded. If only the combined resources make an improvement attainable, explain that dependence. A percentage “control premium” and a percentage “synergy premium” can charge for the same underlying change twice.

For a cash equity purchase on the simple common basis, buyer incremental value is the target interest’s standalone value plus attainable incremental buyer benefits, less integration and other incremental costs, less the equity price. Equivalently, the maximum price at zero buyer gain is standalone interest value plus net buyer benefits. That threshold is conditional on the assumptions; it is not an instruction to offer the seller all of it. Compare the surplus with other available capital uses.

Where consideration includes shares, earn-outs or contingent payments, value the actual claim transferred and its consequences for the buyer’s existing owners. Issuing shares is not costless merely because no cash leaves at closing: the recipients share in the combined business. An earn-out can shift outcome risk while creating a later payment and incentives that alter behavior. Use the relevant claim and option valuation, actual ownership terms and financing account rather than forcing every structure into a fixed cash-price subtraction.

Reconcile funding separately at each date. The target’s included cash may be accessible only after closing or remain restricted; debt may stay in place, require repayment or need refinancing. Acquisition fees, collateral and integration expenditure can precede any synergy. A source of financing with a fee or changed risk must enter the valuation once on matching grounds. A positive buyer value does not establish access to the funds or the ability and authority to realize the operational changes.