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Definition: Acquisition Value
Acquisition Value is different from Acquisition Cost. Acquisition Cost is the cost that a company records on it’s books for property or equipment after adjusting for discounts, incentives, closing costs & other expenditures but before sales tax. The Acquisition Value on the other hand is much holistic than Acquisition Cost & contains the measure of terms like Synergy & Control. It also takes into account how much value the company is creating by a particular acquisition for itself & also to it’s customers.
Acquisition valuation today is very complex as it involves issues like Synergy & Control measuring them is a tough task. There are various steps involved in Acquisition Valuation. These are:
Establish a motive for the acquisition
Choose a target
Value the target with the acquisition motive built in.
Mode of payment decision to be taken
Selection of the accounting method.
All these are important steps in Acquisition Valuation which go on to determine the Acquisition value. Motives can be-
Synergy- It refers to the potential additional value from combining two firms either from operational or from financial sources.
Operating Synergy- It can result from Higher Growth or Lower Costs.
Financial Synergy- It can come from increased debt capacity, tax savings etc
Then comes Choosing a target & Valuation. Valuation can be done keeping in mind various scenarios like synergy scenario, Control Premium & Status Quo Valuation etc. Then comes deciding on the payment option i.e whether to pay in cash or in stock. There is dilemma in this, both the options have their pros & cons, it largely depends on the individual firm. Then comes the last step of choosing an accounting method. There are various methods like:
Real Estate Value
Discounted Cash Flow
IPO Valuation etc.
Coming on to control, the value of control depends a lot on how the firm is managed.
Value of Control= Value of Firm, with restructuring – Value of Firm, without restructuring