Sparrow Advisory

Valuations for M&A

In M&A deals valuation (the price one party will pay another for a business in an M&A transaction) is based on how well you can negotiate. And, as with most negotiations, valuation is more art than science.During M&A deal negotiations knowing the value of business you are going to purchase or sale is key to avoid any dominance by the other party.

Valuation is really the intersection of cash flow and time. In other words, how long will the Buyer take to recover the cost of the investment? And how many years’ worth of profits is the Seller willing to take today in exchange for giving up an infinite flow of profits from that business?

Swap Ratio

Swap ratio is the ratio at which an acquiring company will offer its own shares in exchange for the target company’s shares during a merger or acquisition. To calculate the swap ratio, companies analyze financial ratios such as book value, earnings per share, profits after tax, and dividends paid, as well as other factors, such as the reasons for the merger or acquisition. The current market prices of the target and acquiring company’s stock are compared along with their respective financial situations. A ratio is when configured which states the rate at which the target company’s shareholders will receive acquiring company shares of stock for every one share of target company stock they currently hold. The concept of a swap ratio can also be applied to a debt/equity swap. A debut equity swap occurs when a company wants investors to trade their bonds issued by the target company for the acquiring company’s shares of stock. The same process is applied and a swap ratio is given which tells the target company’s bond investors how many shares of stock of the acquiring company they will receive for each bond they trade in.

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