Study On The Method Of Target Firm’s Value Evaluation In M&A

Mergers and acquisitions (M&A) is a significant way for enterprises’ competitivenessenhancement and development. As China’s economy integrates into the world economy andthe continuous improvement of its capital market, Chinese enterprises are actively engaging inM&A deals，which has made China to be the world’s second-largest M&A market comparedto the U.S.A. It is forecasted that this trend will continue at a rapid speed. But whatever M&Aform is adopted, the issue of price is its core. If the bidding price is too high, it will lead to themerger’s loss in value; if the price is too low, the shareholders of the target enterprise won’tconvey their shares. Eventually it is impossible to reach the goals for the mergers. Pricing forthe target enterprise has become critical to the success of M&A, while the correct valueevaluation of the target enterprise is the most important issue for reasonable pricing.Therefore, the value evaluation of the target enterprise is the key part in the M&A deal.Under different motives of M&A， the angle tend to be different， which bringsdistinguishing value types and evaluation approaches. Defining target enterprise’s valueconstitute based on the two different types of M&A activities——financial M&A andstrategic one， establishing comprehensive assessment approaches and models, all those arethe research issues in this paper.Followed the logical path "The motivation of M&A—the type of M&A—the valueconstitution—the evaluation approach", the paper distinguishes financial M&A and strategicM&A clearly, and studies the evaluation method of target enterprise one by one which is thefocus of the full text. This article holds that the value of target enterprises in financial M&A istreated as that of an independent synthesis from financial view, namely the present value ofthe target firm. Refer to evaluation approach, since financial M&A neglects domino effect andpursuits the short-term gains, like normal value evaluation, traditional three approaches can beadopted. The article averages the traditional three methods method, considering the cost,market and earnings. Compared with financial M&A, in strategic M&A, target enterprisevalue constitution includes the potential growth opportunities and M&A premium as well.According to the characteristics of potential growth opportunities, the paper adopts the real option method to build the evaluation method; For M&A premium, the article integratedincremental cash flow discount method and analytic hierarchy process (AHP) to buildevaluation method.