Importance of valuation in M&A

Irrespective of the purpose for which a merger or acquisition takes place, their main aim is to help entities expand their size and value in the market. After a merger or acquisition takes place, the value of the entities involved equals the sum of their independent values. However, it often happens that mergers and acquisitions tend to have a negative impact on the entities involved due to incorrect estimation of entity value. Though there are precise approaches and methodologies to estimate the value of an entity but when they are put to practical use it becomes a complex process. Therefore, it becomes significantly important to determine the right value of entities in mergers and acquisitions with the right approach and methods to avoid financial downfalls. 

Need for valuation

During mergers and acquisitions, the intended purpose of the valuation is identified so that the calculated value matches with the required purpose. Few instances where the valuation is done based on the purpose are:

• Corporate Restructuring;
• Calculating the consideration for the sale of business or acquisition;
• Liquidation of the company;
• Calculating the consideration for sale or purchase of equity stake;
• During family separation, there is a need to calculate the value of assets and businesses owned by such a family;
• The portfolio value of investments is calculated by the virtue of Private Equity Funds or Venture Funds; 
• Purchase or sale of intangible assets such as rights, patents, trademarks, copyrights, brands, etc;.
• For the purpose of getting listed on the Stock Exchange, calculating the fair value of the shares is required;
• Calculating the fair value of shares for providing Employee Stock Ownership Plan following the Employee Stock Ownership Plan guidelines.