Optimal valuation framework for M&A decision -a case study

As the trend of merger and acquisition has gradually emerged in Asia and the world during the 20th century, the study is motivated to analyze the valuation framework behind each merger and acquisition activity (M&A). Since a cross-border merger and acquisition is suggested to facilitate firms to adjust environmental transformation easily with the aid of international expertise, it is generally believed that firms can also obtain certain competitive advantages through the transaction. In particular, firms in highly competitive environment may continuously adopt takeover strategies in order to early entry the target markets. However, the cost of implementing the strategy appears to be high in terms of the time and resources involved. The acquiring firms are required to make high level of resource commitments for a long period of time in the transaction; this restrains their flexibility to future uncertainty to some extent. Accordingly, managers of the firms may concern to deal with the tradeoffs by implementing this strategy on the basis of reliable analysis. As a result, the study will attempt to incorporate a market entry model, synergy analysis model and a real option model to build up an optimal valuation framework for the decision of merger and acquisition. Firstly, the market entry model of Sanchez-Peinado and Pla-Barber (2006) is adopted to examine the rationale of a choice of market entry as merger and acquisition. Subsequently, the adoption of Damodaran (2002)’s acquisition framework enables to identify the motives of a merger and acquisition and to choose a target firm based on these motives. According to Damodaran (2005)’s synergy analysis model, the expected synergies can be valued by translating the motives of the transaction into the inputs of the model. However, it was argued that this traditional cash flow model may undervalue firms with high financial leverage or negative cash flow and fail to analyze the combined synergy. For this reason, the real option approach is then adopted to provide an alternative view of analyzing the firm value. Through the combination of these two analysis model, it is believed that an optimal valuation framework for a merger and acquisition can be established since the firm value can be accurately estimated