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Definition: Merger and Acquisitions Method
Business Valuation is an exercise where the economic value of a business entity is determined, through a set of procedures and methods. Merger and Acquisitions method, also called the transactions method or the comparable transactions method, is a method where similar transactions that have taken place in the industry, are studied. A key valuation parameter is then identified, so that comparison of businesses is easier. This method is employed generally during a merger/ acquisition.
Whether the companies valued, are valued on basis of multiples of key ratios like EBIT, EBITDA, revenues or some other parameter is seen, and that is made as the key valuation parameter.
In quite a few cases, there aren’t enough transactions or valuations similar to the current deal, as required in the transactions method. In such cases, the multiples method is used. Price/earnings multiples (P/E ratios) are amongst the most commonly used multiples in this case, EBITDA multiple being another popular one.
When company X acquired company Y, M&A method was used where they looked at multiples of the EBITDA ratio of a similar deal to understand and value the agreement.