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Valuation and the differences between strategic and financial buyers

Ekdahl, Christopher (2007) MIO920
Production Management
Abstract
For any acquisition to take place the assets to be sold must be valued.
Some argue that an asset is worth whatever an acquirer is willing to
pay for it at any given time. We believe that there is an underlying
value (intrinsic value) that depends on the expected future cash flows
of the asset and the risk associated with these cash flows. There exist
several methods for estimating this value.
Traditionally when a company was up for sale the most likely
acquirer would be a “strategic buyer”, that is a competitor in the
same industry or someone with good knowledge and a large amount
of experience from the industry. In the 80’s a new breed of buyers
called “financial buyers” developed rapidly in the US. Their
motivation for... (More)
For any acquisition to take place the assets to be sold must be valued.
Some argue that an asset is worth whatever an acquirer is willing to
pay for it at any given time. We believe that there is an underlying
value (intrinsic value) that depends on the expected future cash flows
of the asset and the risk associated with these cash flows. There exist
several methods for estimating this value.
Traditionally when a company was up for sale the most likely
acquirer would be a “strategic buyer”, that is a competitor in the
same industry or someone with good knowledge and a large amount
of experience from the industry. In the 80’s a new breed of buyers
called “financial buyers” developed rapidly in the US. Their
motivation for acquiring companies was purely financial and these
buyers came to revolutionize the mergers and acquisition industry.
Today, up to 50% of transactions made include a financial buyer as
one of the parties. In 2006 over $250bn of new capital was raised to
these firms.
While working in the mergers and acquisitions department of Calyon
I observed that financial buyers and strategic buyers often derived
very different valuations of the same company.
Purpose: The purpose of this thesis is to describe the common acquisition
valuation techniques used by financial and strategic buyers, and the
potential for value creation for each of them.
Methodology: The study has been conducted in descriptive way with mostly
secondary and qualitative data.
Summery & Reflections: This thesis begins with a background discussion and definition of
strategic and financial buyers. A section on valuation follows.
Discounted cash flow analysis, relative valuation and leveraged
buyout analysis are the valuation methods described. Next, the most
common ways of creating value in an acquisition are described. The
operating and financial synergies experienced by strategic buyers are
described as well as the most common value creation levers used by
financial buyers. The thesis is concluded by a summary and some
reflections by the author. (Less)
Please use this url to cite or link to this publication:
author
Ekdahl, Christopher
supervisor
organization
course
MIO920
year
type
M1 - University Diploma
subject
keywords
Strategic Buyer, Financial Buyer, Buyout Fund, Private Equity, Valuation Methods, Value Creation, Acquisitions.
other publication id
07/5266
language
English
id
1980583
date added to LUP
2011-06-20 11:06:05
date last changed
2011-06-20 11:06:05
@misc{1980583,
  abstract     = {{For any acquisition to take place the assets to be sold must be valued.
Some argue that an asset is worth whatever an acquirer is willing to
pay for it at any given time. We believe that there is an underlying
value (intrinsic value) that depends on the expected future cash flows
of the asset and the risk associated with these cash flows. There exist
several methods for estimating this value.
Traditionally when a company was up for sale the most likely
acquirer would be a “strategic buyer”, that is a competitor in the
same industry or someone with good knowledge and a large amount
of experience from the industry. In the 80’s a new breed of buyers
called “financial buyers” developed rapidly in the US. Their
motivation for acquiring companies was purely financial and these
buyers came to revolutionize the mergers and acquisition industry.
Today, up to 50% of transactions made include a financial buyer as
one of the parties. In 2006 over $250bn of new capital was raised to
these firms.
While working in the mergers and acquisitions department of Calyon
I observed that financial buyers and strategic buyers often derived
very different valuations of the same company.
Purpose: The purpose of this thesis is to describe the common acquisition
valuation techniques used by financial and strategic buyers, and the
potential for value creation for each of them.
Methodology: The study has been conducted in descriptive way with mostly
secondary and qualitative data.
Summery & Reflections: This thesis begins with a background discussion and definition of
strategic and financial buyers. A section on valuation follows.
Discounted cash flow analysis, relative valuation and leveraged
buyout analysis are the valuation methods described. Next, the most
common ways of creating value in an acquisition are described. The
operating and financial synergies experienced by strategic buyers are
described as well as the most common value creation levers used by
financial buyers. The thesis is concluded by a summary and some
reflections by the author.}},
  author       = {{Ekdahl, Christopher}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Valuation and the differences between strategic and financial buyers}},
  year         = {{2007}},
}