No valuation in CIM?
Hi,
What is the reason not to show any valuation in the m&a CIM when you are acting as sell-side advisor? (or are there any circumstances were you actually do?)
Got this one in an interview for an mm ft m&a position, and I answered its an negotiaton issue to se how high the initial bids will be, while buers will have different synnergi potentials etc. (?)
The interviewer replied that, mostly its because aquireres have different cost of capital and that the valuation you'd do would be different for every buyer...
Im a bit confused while, I mean shouldn*t there be an optimal capital structure that you could apply to minimize its financing cost and that this would be the right one for valuing it on a standalone basis?
Take my response with a grain of salt because I am still a prospective monkey and would appreciate the responses of more experienced monkeys, but here are some suggestions:
1) You probably don't want to give an initial valuation because many buyers might stick too close to it (just adding premiums for synergies etc.) and don't maximize price. Also a bidding war might be much more difficult to initiate and to justify the bids.
2) It is true that the valuation would be different for each or most of the buyers. Buyers might make changes to certain items on the financial statements or apply different recognition criteria (not sure on this one) that might change your EBITDA for multiples or your FCFF for your standalone DCF.
3) A standalone valuation using methods such as DCF is also based on future figures and they need to be forecasted. Predictions made by yourself, a direct competitor and a financial sponsor might differ considerably and hence the standalone values.
4) Regarding the optimal capital structure: There might be an optimal capital structure for the standalone company but it might not apply to the company after the merger. Consider two small companies that are too small to tap the bond market. Each company has an optimal capital structure. Now they merge and are big enough to tap the bond market. If they can finance cheaper now, they can realize financial synergies. So not only has the optimal capital structure changed and hence the capital costs but also is a standalone valuation pretty irrelevant because it uses the wrong discount factor. And even if a company is merged into another but remains completely untouched, it might have cheaper cost of capital due to a potential brand name of the buyer.
5) However, I think bankers nevertheless create an internal standalone valuation or valuations that incorporate synergies with potential buyers. This is done in order to give the seller an idea of the transaction proceeds and to use it as a guideline when assessing non-binding offers.
I think your answer didn't hurt your chances of receiving an offer.
It would be cool if experienced bankers could comment on these ideas.
Bump
Why would a buyer take your valuation seriously if it were included? Everyone knows that what ever range you spit out will be based on aggressive future projections or an extremely generous set of comps. Buyers will run their own numbers (read discount) and come up with what they think the business is worth. Potential benefit could be from letting a buyer know what sort of valuation the company is expecting, but that's usually done over the phone. Unnecessary to put down in writing.
You're basically playing poker... do you really want to show the other side your hand?
If your first round of bids come in lower than your expectations, then you want to gradually talk them up during management meetings. If they come in higher, you don't want a put a ceiling on the value of your company, therefore it's in the bank and seller's best interest to not have it in there.
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