M&A Valuation Methods: How to Value Acquisition Targets

Introduction: What is Fair Value?

“Price is what you pay. Value is what you get.” – Warren Buffett

In M&A, getting valuation right is crucial. Pay too much, and you destroy shareholder value. Pay too little, and you lose the deal. The challenge is that “fair value” isn’t a single number—it’s a range informed by multiple methodologies.

This guide covers the primary valuation methods used in M&A transactions.

Valuation Frameworks

The Three Primary Methods

Enterprise Value vs Equity Value

Enterprise Value (EV): Value of entire business (debt + equity) $$EV = Market\ Cap + Total\ Debt - Cash$$

Equity Value: Value attributable to shareholders $$Equity\ Value = EV - Debt + Cash$$

Why It Matters:

• Acquirer pays equity value to shareholders
• But assumes (or refinances) debt
• Total cost = Enterprise Value

Method 1: Discounted Cash Flow (DCF)

Concept

The value of a business equals the present value of all future cash flows it will generate.

$$Value = \sum_{t=1}^{n} \frac{FCF_t}{(1+WACC)^t} + \frac{Terminal\ Value}{(1+WACC)^n}$$

Step-by-Step DCF

Step 1: Project Free Cash Flows

$$Free\ Cash\ Flow = EBIT(1-T) + Depreciation - CapEx - \Delta Working\ Capital$$

Projection Period: Typically 5-10 years

Key Assumptions:

• Revenue growth rates
• Margin trends
• Capital expenditure needs
• Working capital requirements

Step 2: Determine Discount Rate (WACC)

$$WACC = w_E \times r_E + w_D \times r_D \times (1-T)$$

For target, use:

• Target’s capital structure (or optimal)
• Target’s cost of equity (CAPM)
• Target’s cost of debt

Step 3: Calculate Terminal Value

Perpetuity Growth Method: $$TV = \frac{FCF_{n+1}}{WACC - g}$$

Exit Multiple Method: $$TV = EBITDA_n \times Exit\ Multiple$$

Step 4: Discount to Present Value

$$DCF\ Value = \sum PV(FCF) + PV(Terminal\ Value)$$

DCF Example

Target Company Projections (₹ crore):

Assumptions:

• WACC: 12%
• Terminal growth: 4%
• Terminal multiple: 8x EBITDA

Terminal Value (Perpetuity): $$TV = \frac{18 \times 1.04}{0.12 - 0.04} = \frac{18.72}{0.08} = ₹234\ crore$$

Present Value Calculation:

DCF Sensitivity Analysis

Terminal growth rate and WACC sensitivity:

Key Insight: Small changes in assumptions create big value swings.

DCF Pros and Cons

Pros:

• Theoretically sound (intrinsic value)
• Forces rigorous analysis of business
• Less affected by market sentiment

Cons:

• Highly sensitive to assumptions
• Terminal value often dominates
• Requires detailed projections
• Subjective inputs

Method 2: Comparable Company Analysis

Concept

Value target based on how similar public companies are trading.

$$Target\ Value = Target\ Metric \times Peer\ Multiple$$

Common Multiples

1. EV/EBITDA

• Most common for M&A
• Capital structure neutral
• Ignores depreciation differences

2. EV/Revenue

• For loss-making or high-growth companies
• Tech/SaaS companies

3. P/E (Price/Earnings)

• Simple, intuitive
• Affected by capital structure

4. P/B (Price/Book)

• For asset-heavy industries
• Banks, real estate

Step-by-Step Comparable Analysis

Step 1: Select Comparable Companies

Criteria:

• Same industry
• Similar business model
• Similar size
• Similar growth profile
• Similar geography

Step 2: Calculate Trading Multiples

For each comparable:

• Current market cap
• Net debt
• Enterprise value
• EBITDA, Revenue, Earnings
• Calculate multiples

Step 3: Analyze and Select Multiple

Step 4: Apply to Target

Target EBITDA: ₹40 crore Applied Multiple: 11.25x (median) Implied EV: ₹450 crore

Premium/Discount Adjustments

Premium for:

• Higher growth
• Better margins
• Stronger market position
• Better management

Discount for:

• Lower growth
• Weaker margins
• Smaller size
• Illiquidity (private company)

Typical Private Company Discount: 15-30%

Comparable Analysis Pros and Cons

Pros:

• Market-based (what investors actually pay)
• Simple, intuitive
• Less subjective than DCF

Cons:

• Requires truly comparable companies
• Market may be over/undervalued
• Doesn’t capture unique characteristics
• No control premium

Method 3: Precedent Transactions

Concept

Value target based on multiples paid in similar past M&A deals.

$$Target\ Value = Target\ Metric \times Precedent\ Deal\ Multiple$$

Why Different from Comps?

Precedent transactions include:

• Control premium: Premium paid for controlling stake
• Synergy value: Value of expected synergies
• Deal dynamics: Competitive bidding, strategic urgency

Step-by-Step Precedent Analysis

Step 1: Identify Relevant Transactions

Criteria:

• Same or related industry
• Similar target size
• Recent (typically last 3-5 years)
• Similar deal context

Step 2: Gather Transaction Data

Step 3: Analyze Transaction Context

• Was it competitive auction?
• Strategic or financial buyer?
• Market conditions at time
• Synergies expected

Step 4: Apply to Target

Target EBITDA: ₹40 crore Applied Multiple: 12.9x Implied EV: ₹516 crore

Control Premium Analysis

Control Premium = (Acquisition Price - Pre-Deal Price) / Pre-Deal Price

Typical Range: 20-40%

Example:

• Target trading at ₹100/share
• Acquisition price: ₹130/share
• Control premium: 30%

Precedent Analysis Pros and Cons

Pros:

• Reflects actual prices paid
• Includes control premium
• Market test of value

Cons:

• Deal circumstances vary
• Limited comparable transactions
• Market conditions change
• Synergy assumptions unclear

Method 4: Asset-Based Valuation

When to Use

• Liquidation scenarios
• Asset-heavy businesses
• Holding companies
• Real estate companies

Approaches

1. Book Value $$Value = Total\ Assets - Total\ Liabilities$$

2. Adjusted Book Value Revalue assets to market value:

• Real estate at current values
• Investments at market price
• Intangibles assessed

3. Liquidation Value What assets would fetch if sold:

• Forced sale discount
• Transaction costs
• Wind-down costs

Example

Synergy Valuation

Types of Synergies

Cost Synergies (More Reliable):

• Headcount reduction
• Facility consolidation
• Procurement savings
• Overhead elimination

Revenue Synergies (Less Reliable):

• Cross-selling
• Geographic expansion
• New customer access
• Product bundling

Valuing Synergies

$$Synergy\ Value = \frac{Annual\ Synergies \times (1-T)}{WACC - g}$$

Example:

• Annual cost synergies: ₹20 crore
• Tax rate: 25%
• WACC: 12%
• Growth: 2%

$$Synergy\ Value = \frac{20 \times 0.75}{0.12 - 0.02} = \frac{15}{0.10} = ₹150\ crore$$

Synergy Split

Who captures the synergy value?

• Target shareholders want premium for synergies
• Acquirer wants to keep synergy value
• Competitive process often transfers value to target

Typical: Target captures 30-50% of expected synergies

Putting It All Together: Valuation Football Field

Creating a Valuation Range

Valuation Range: ₹160-210 crore Negotiation Target: ₹175-190 crore

Football Field Chart

Asset Value      |===|
Comp Companies   |=======|
DCF              |========|
Precedents       |==========|
                 $140  $160  $180  $200  $220

Triangulation

No single method is “correct.” Use multiple methods and:

• Understand why values differ
• Weight methods appropriately
• Consider deal context
• Stress-test assumptions

Indian M&A Valuation Considerations

Challenges

1. Limited Comparables

• Fewer listed companies in some sectors
• Less deal activity for precedents

2. Promoter Premium

• Family businesses command control premium
• Succession considerations

3. Related Party Complexity

• Inter-company transactions
• Adjustments needed

4. Illiquidity Discount

• Private companies less liquid
• Typical discount: 20-30%

Regulatory Valuation

SEBI Takeover Code: Minimum price based on:

• Highest price paid by acquirer in 52 weeks
• Volume-weighted average price (60 trading days, 26 weeks)
• Price per share calculation formula

Key Takeaways

1. Use multiple methods – No single method is definitive
2. DCF for intrinsic value – But highly sensitive to assumptions
3. Comps for market reference – But must be truly comparable
4. Precedents include premium – Reflect actual deal prices
5. Synergies drive premium – But often overestimated
6. Create valuation range – Not a single point estimate
7. Context matters – Competitive dynamics, strategic fit influence price

Disclaimer

This article is for educational purposes only. Actual M&A valuation requires professional expertise. Consult qualified advisors for specific transactions. This is not investment advice.

Frequently Asked Questions

Q: Which valuation method is best? A: Depends on the situation. DCF for stable businesses with predictable cash flows, comps when good peers exist, precedents to understand market pricing. Use multiple methods.

Q: Why do DCF values vary so much? A: Terminal value often comprises 50-80% of DCF value. Small changes in growth rate or discount rate create large value swings. Always do sensitivity analysis.

Q: How much premium is typical in M&A? A: Control premiums typically range 20-40% over pre-deal trading price. Competitive auctions or strategic buyers may pay more.

Q: Should I use EBITDA or revenue multiples? A: EBITDA for profitable companies (more common). Revenue for growth companies, tech/SaaS, or loss-makers where EBITDA isn’t meaningful.

Q: How do you value a loss-making company? A: Use revenue multiples, DCF with path to profitability, comparable transactions, or strategic value (technology, customer base, market position).

Valuation in M&A is as much art as science. Numbers provide structure, but judgment interprets them. The best dealmakers combine rigorous analysis with commercial insight—knowing not just what a business is worth, but what it’s worth to a particular buyer in a specific context.