Is M&A valuation a good proxy for company fair value? I'm building a model for estimating a fair value of a company. Naturally I'd like to see if model's predicative capabilities are any good.
Would using a value of a friendly M&amp;A deal be a good proxy for company fair value?
One could argue that in a hostile M&amp;A, buyer usually overpays, but in a friendly M&amp;A both parties agree on the deal valuation having insider knowledge not only of the current status of both companies but also of their future projects, R&amp;D, etc. which would allow them to arrive to a more precise valuation than for any external observer.
The thing to always remember is that the valuation of any asset always comes back to the price that someone is willing to pay for it (i.e. if you can’t hope to sell it for that price, it’s not worth that much).
When you describe using the “value of a friendly M&amp;A deal” as a proxy for fair value, I assume you mean price paid for the very company you are trying to value. (Analysts valuing a potential acquisition target won’t know ex-ante what the ultimate deal price will be so they instead will look at precedent transactions for comparable companies to get a range for what type of multiples buyers are paying).
Assuming you know the price paid in the friendly M&amp;A deal, yes that is a very strong data point for what that business is worth. That being said, there are some caveats. For instance, say the buyer was a “strategic” (meaning an often bigger company in a similar industry as opposed to a financial buyer like a private equity firm). There may be some synergies only available to that buyer that raise the price they are willing to pay for it. For instance, say the buyer can close plants, eliminate duplicative sales roles by moving the acquired company’s products onto their sales platform, etc. Those cost savings only available to the strategic buyer make it a more valuable acquisition target than a pure financial player.
Alternatively, the context of the acquisition matters. Say the acquirer bought the business in 2008 (during the financial market collapse) vs in a booming period or in a low vs high interest rate environment. Make sure the M&amp;A transaction you are comparing to is recent because the market (and the company itself of course) can change over time.
Lastly, was the acquisition “market tested”, meaning there were multiple bidders? A friendly transaction where the acquirer was an insider can sometimes result in shady below-market prices paid. Check out lawsuits relating to Delaware shareholder appraisal rights.
The price paid in a friendly M&amp;A deal for the company you are trying to value is an incredibly strong data point, but I would caution against saying it’s better than a hostile price. The acquirer, context, timing and whether the acquisition was market-tested are all important factors in assessing the fair value (or intrinsic value) of a business.
And of course, when looking at any single acquisition, the acquirer might just have been wrong and overpaid—and you could never reasonably expect another buyer to pay that much going forward.