Importance of the Valuation/Acquisition Motives and its objectives By CS Shobhit Agrawal


Valuation is essential for the following:

(i) strategic partnerships,

(ii) mergers or acquisitions of shares of a company and/or acquisition of a business

(iii) Valuation is also necessary for introducing employee stock option plans (ESOPs) and joint ventures.                             

Objective

To conclude a transaction in a reasonable manner without any room for any doubt or controversy about the value obtained by any party to the transaction.

Further the objective of a valuation is to put parties to a transaction in a comfortable position so that no one feels aggrieved.

Importance of the Valuation/Acquisition Motives

An important aspect in the merger/amalgamation/takeover activity is the valuation aspect. The method of valuation of business, however, depends to a grant extent on the acquisition motives. The acquisition activity is usually guided by strategic behavioral motives.

Reasons as follows:

  • purely financial
  • business related
  • behavioral reasons

However, the expansion and diversification objectives are achievable either by building capacities on one’s own or by buying the existing capacities.

“Price is what you pay & Value is what you get”

The decision criteria depends upon the present value of differential cash flow whereas the acquisition is motivated by financial consideration such as taxation and asset-stripping.

Further Differential cash flow is limiting the premium which the acquirer is willing to pay on the other hand acquisition results in gains either over or above considerations in short they relate with the financial aspects only.

The acquisitions are not really the market driven transactions, a set of non-financial considerations will also affect the price. The price could be affected by the motives of other bidders. The value of a target gets affected not only by the motive of the acquirer, but also by the target company’s own objectives.

Author
CS Shobhit Agrawal
E-mail: csshobhitagrawal@gmail.com

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