Standalone Value
Technique investors and analysts utilize to determine the present value of a company undergoing a merger or acquisition deal.
What is Standalone Value?
Standalone value is the present value of a company at the assumption that the company will continue to function without any problems independently without any merger or acquisition deals.
The Standalone value is a technique investors and analysts utilize to determine the present value of a company undergoing a merger or acquisition deal.
This method evaluates the company's worth as a potential merger or acquisition partner and calculates the benefits the acquirer may gain from the transaction.
Various factors are considered to calculate the Standalone value, such as the present value of the company's personnel, assets, distribution channels, operational costs, and production structure.
If the value of an acquisition exceeds the estimated Standalone value, the acquirer will gain more benefits from the transaction than the combined value of the assets of both companies.
For example, in a software company, technical staff like software engineers may synergistically affect the acquiring company. However, suppose the company is acquired without its technical staff.
Then the acquirer will not enjoy the synergistic effects immediately and will have to incur additional expenses in recruiting and training new employees who will need time to adapt to the company's internal systems.
Key Takeaways
- Standalone value is an important concept while valuing a business as it provides a baseline for calculating the value of a company or asset.
- Analysts typically determine the company's financial performance by looking at factors like industry trends, competitive landscape, and other qualitative factors.
- Standalone Value can be affected by various factors, including the company's growth potential, market position, brand strength, and management team.
- Standalone Value is often compared to other valuation metrics, such as synergies, to help determine whether a potential acquisition or merger is beneficial.
- Finally, it is an essential metric for investors and stakeholders to consider while deciding about buying, selling, or investing in a company or asset.
What is the Synergy Effect in M&A Deals
The term synergy means "working together." It refers to an interaction or cooperation that gives rise to a whole greater than the simple sum of its parts.
In the financial world, synergy is a metric that helps parties of mergers and acquisitions deal to justify the transaction and the transaction price. The cost of the acquisition is usually calculated with the help of expected benefits to both companies after the acquisition.
These benefits of the two merged companies are then combined, known as synergy, which is further classified as operating and financial synergies:
1. Operating synergies
Operating synergies are the ability of the transaction to increase the capacity of inward cash flow, which is usually generated by the investment in the assets or transaction, which accelerates the growth of the company.
We can also explain operating synergy with examples of economies of scale or expansion of business assets generated by the transaction.
Before the merger or acquisition, both companies were separate entities and had their costs, including distribution, administration, and rental costs, which will be eliminated later.
This will help in the reduction of the operating cost of the company and will benefit the business activity in a large number of products and services.
2. Financial synergies
Financial synergies talk about the overall improvement of the financial performance of companies or businesses when they are merged into a bigger entity.
The financial improvement includes increased debt capacity, lower cost of capital, improved cash flow, and tax benefits. This helps give more bargaining power to the merger of companies, making negotiating easier and more efficient with financial institutions.
It helps improve the cash flow statements, which later affect the company's borrowing capacity as the earning capacity assures the creditors and lenders that they can pay the debt.
It also reduces the tax liability of the acquirer as the acquisition of the loss-making entity reduces the net tax liability of the entire company.
Although companies mostly focus on positive synergies, it’s not possible to experience only positive synergies as one can also have negative synergies, which may decline the company's overall performance after the acquisition.
Note
Acquiring a company with bad credit history can also negatively affect the financial reputation of the company and the lending institutions’ point of view.
How Standalone Value is Used
Standalone valuation helps determine the suitability of the acquisition deal and whether the merger and acquisition deal will be beneficial or not.
For that reason, an acquirer must have due diligence while acquiring the target company and create a positive synergy in the parent company to make M&A beneficial.
It requires calculations of the cost that the acquirer should incur on the full incorporation of the target company. This cost includes depreciation cost, acquisition of new infrastructure, recruitment, and training of staff, and organizing the executive teams all again.
A company with unique assets and capabilities makes it stand different in the market, such as any patented system of technology with which it can charge a premium price over other competitors who tend to have a higher standalone value.
As the acquirer can estimate that it will generate more revenues post-acquisition of the company, then they are highly likely to pay more or a higher price for the acquisition.
This additional value generated is referred to as synergy, which later can be experienced by the increase of operational efficiencies and strong financial performance of the company after M&A.
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