So my question is this,
Why are acquirers willing to pay more than the DCF value to acquire a target company, especially when the DCF accounts for the intrinsic value of a company as it is the present value of all the cash flows expected to be generated by the company and as the DCF implicitly accounts for the control premium when industry average growth rates, capital structures and margins are used in forecasts?
Thanks
| +50 | Best response to “How are you?” | 31 | 3h |
| +22 | Give me all your ideas | 2 | 4d |
| +15 | What are your Vices | 12 | 20h |
| +12 | spiritual successor to drexel/milken? | 6 | 7h |
| +11 | Your experiences with digital twins in industry? | 4 | 14h |
| +1 | Anyone actually follow these guys? | 1 | 1d |
| 0 | ib with coc clan leader background? | 2 | 5d |
| 0 | GTA 5 Weapon Attachments Explained | U4GM | 0 | 19h |
Career Resources
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
When I was at university, we didn't have an internet to ask to do our homework for us.
a DCF is arbitrary and only as good as the assumptions(and even "good" assumptions tend to be wrong) made in the model. Transaction multiple are quick and dirty, and arguably more accurate.
(1) DCF w/o synergies (2) DCF w/ synergies (2) - (1) = premium willing to pay
I think if acquirers don't offer a high enough premium, shareholders can reject the offer because they might believe that the value of the company will equal what the acquirer is willing to pay reasonably soon. Also, as TooShort said, acquirers offer premiums because when purchased, synergies can increase the target firm's cash flow, thereby increasing its value.
do a DCF on a firm like coca-cola and ask yourself if that is the amount you think the company can be bought for
DCF does not "implicitly account for control premium" unless you use your compaqs multiples for terminal mult, and you certainly don't get beta from transactions. DCF is only a good measure of 'fair value', which usually would imply a base price. Premium is a reflection of what the buyer is willing to overpay for a company, which is why goodwill arises - it's literally the buyer's "good will" to pay more than the market says it should
At modi repellendus in molestiae aut. Voluptatem temporibus quia molestiae qui ut.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...