Performance of Valuation Methods in Financial Transactions

Professionals and academics believe that there are three main categories of methods that must be combined to carry out an evaluation of a company and its equity. The comparables method is based on evaluation via sector multiples from listed companies or via transaction multiples. The discounted cash flows approach deems the value of a company to be the sum of its future cash flows, discounted using the weighted average cost of capital. Cash flows are calculated using the operating income, and the discount rate includes, on the one hand, the cost of equity derived from the capital asset pricing model and, on the other hand, the cost of debt. Finally, asset-based methods are based on the sum of the parts that represent the sum of assets. This method is used in particular by value holding companies and conglomerates for integrating unrealized capital gains and losses restated for hypothetical elements. For listed companies, market capitalization provides a fourth value, which cannot be ignored, regardless of the size of the floating business. When the valuation is undertaken in order to merge a target company with the company at the origin of the offer, the process is able to be undertaken, provided that funds can be raised to carry out the process and that the benefit of the initiator’s action is fully assessed in relation to the synergies that are envisaged from the merger.

In this context, it seems interesting to ponder over traditional valuation methods. In what circumstances are they relevant and reliable and, according to specific situations, to what extent is it more appropriate to favor certain methods over others? The term “relevant” justifies why various methods must be evaluated, as they aim to demonstrate equality when coming to the final value of a company.

Chapter 1aims to bring to light a theoretical framework regarding the possibility of optimizing the financial structure, the various methods of traditional valuations and the possibilities of applying them within the acquisition market, such as the structuring of financial arrangements with the leverage effect. Chapter 2is dedicated to a study of the financial literature that highlights the theoretical adjustments that can be made to improve the performance of these methods, how they are used according to specific empirical contexts and how value is created as a result of company mergers.

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