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
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
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