An M&A transaction is understood as a paid transaction with the participation of at least two parties, as a result of which the ownership of the target company in one or another volume is transferred to the buying company.
Evaluate Fair Price Amendment in M&A
In the context of the globalization of economies, mergers and acquisitions (M&A) are becoming increasingly important in business as strategic development of companies. M&A transactions are generally assessed for their effectiveness for the buying and/or targeting companies. There are many works and empirical studies devoted to this area. However, most of them were carried out for public companies with shares quoted on the stock exchange. At the same time, in the last decade, M&A transactions have become more relevant for private companies operating in the emerging capital market.
Due to the imperfection of the virtual data room cost, the lack of available and reliable information about the private target company, investors need a methodology that can take into account these market features in order to more reasonably calculate the transaction price and premium in its structure. While fair price amendment in M&A evaluation makes sure that:
- A fair price amendment is a provision contained in a public company’s charter or by-laws.
- It protects minority stockholders from getting a lower price per share than what major stockholders of the company may receive.
- Further, after the reorganization of the structure, the process of establishing supply chains follows, as well as the formation of documentation.
- And the last element of the model is the assessment of funds through which future programs and services will be sponsored.
In international practice, it is customary to distinguish between the concepts of “merger” and “acquisition” depending on the result of the transaction. So, as a result of the merger of two or more companies, a new legal entity is formed on their basis with the termination of the activities of the latter, as a result of the takeover – the absorbing company remains the only active legal entity, and the absorbed company is liquidated. This approach fully complies with the norms of legislation governing the process of reorganization of a legal entity.
Analysis of Indicators that Reduce the Company’s Costs as well as Fair Price Amendment in M&A
Having analyzed the structure of the company’s expenses, it is necessary to single out those groups of costs, the value of which can be influenced by reducing them and thus getting additional profit. You should also calculate the budgetary amount of investment required to implement cost reduction procedures. As a result, we get a change in the profitability of the buyer’s business as a whole. The invested amounts are considered the number of investments aimed at the specified changes in the buying company, and the amount required to buy the analyzed company. If this change exceeds the budgetary baseline internal rate of return, then we believe that there is an indirect effect.
If an indirect effect arises, but the acquired company generates negative cash flow, then when analyzing the change in the buyer’s business profitability, the invested amount must also include compensation for the negative cash flow from the acquired company for the period that will be required to implement changes in the buyer’s company. If a direct and an indirect effect occur simultaneously, this situation is considered a synergy, since, firstly, the costs of the company as a whole are optimized, due to which the buyer receives additional profit; secondly, the buyer receives additional funds.