VALUATION STRATEGIES IN A MERGER

What Are Valuation Strategies in a Merger?

When companies decide to merge, one of the most critical—and often contentious—issues is determining the value being exchanged. While it may seem like a straightforward financial exercise, company valuation is rarely simple. Multiple valuation methodologies exist, and parties often disagree over which factors deserve the greatest weight.

Differences in assumptions, strategic objectives, and risk tolerance frequently lead to divergent views of value.

Identifying Valuable Company Assets

Tangible assets are generally the easiest to value. These assets are often assessed based on purchase price, adjusted for depreciation. However, a company’s true value extends well beyond its physical assets.

Intangible Assets and Internal Value Drivers

Key non-tangible components that significantly affect valuation include:

• Intangible assets
• Customer relationships
• Intellectual property
• Brand reputation
• Pending litigation
• Contingent liabilities

External Factors Affecting Valuation

A company’s value is also influenced by conditions outside the organization, including:

• Broader market conditions
• Regulatory changes
• Industry trends
• Macroeconomic factors

Common Valuation Methods in Mergers

Disputes often arise not because one party is “wrong,” but because different valuation methods reflect different strategic priorities. Common approaches and points of disagreement include:

• Overstating projected cost savings from combining operations
• Valuing intellectual property, patents, and brand equity
• Selecting accounting models such as comparable transaction analysis versus discounted cash flow analysis
• Assessing the negative impact of legal disputes, environmental exposure, or pension liabilities
• Valuing the company based solely on total assets minus liabilities
• Relying on valuations from comparable mergers within the same industry

Each approach can produce materially different outcomes.

Why Buyers and Sellers Value Companies Differently

Understanding valuation disagreements requires examining each party’s objectives.

Seller Perspectives

Sellers often emphasize future growth and recent performance trends. Their valuation typically reflects optimism about continued expansion and the realization of projected synergies.

Buyer Perspectives

Buyers, lacking deep historical insight into the target company, tend to adopt a more conservative posture. They focus on:

• Market volatility
• Competitive pressures
• Downside risk
• Integration challenges

Additional Factors Driving Divergent Valuations

Several structural issues also contribute to valuation differences:

• Discount rates: Higher perceived risk leads to higher discount rates and lower valuations
• Standalone vs. combined value: Determining a company’s standalone value is usually easier than estimating post-merger synergies
• Lack of perfect comparables: No two transactions are identical, and differing interpretations of market data often yield different results
• Tax treatment: Tax consequences vary depending on deal structure
– Earn-out payments are generally treated as ordinary income
– Asset purchases may qualify for capital gains treatment
– Buyers and sellers often benefit differently from each structure

Maximizing Value in a Merger

The ultimate goal of a merger is to create greater value than either company could achieve independently. Achieving that outcome requires realistic assumptions, disciplined analysis, and careful planning.

The attorneys at Corporate Securities Legal, LLP bring financial insight, industry knowledge, and strategic judgment to help clients achieve accurate valuations and informed decision-making. Our team actively identifies and mitigates risks that are frequently overlooked, including:

• Unrealistic cost-saving or revenue assumptions
• Rapid industry shifts
• Competitor responses
• Changing customer expectations
• Inadequate due diligence
• Post-merger operational integration challenges

With experienced legal and strategic guidance, companies can navigate valuation disputes effectively and position themselves for long-term success following a merger.