Barbara S. Petitt - Valuation for Mergers and Acquisitions

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Second Edition

Barbara S. Petitt, CFA
Kenneth R. Ferris

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2013 by Pearson Education, Inc.
Publishing as FT Press
Upper Saddle River, New Jersey 07458

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Printed in the United States of America

First Printing June 2013

ISBN-10: 0-13-337267-7
ISBN-13: 978-0-13-337267-0

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Library of Congress Control Number: 2013935801

Barbara S. Petitt, PhD, CFA, is Director, Curriculum Projects, EMEA at CFA Institute. She has an in-depth knowledge of equity valuation, mergers, acquisitions, and corporate restructurings. She has held academic positions at Thunderbird, School of Global Management in the U.S., Bournemouth University in the U.K., and SKEMA Business School in France, and consulted with corporate clients throughout Europe and North America. Petitt resides in Poole, U.K.

Kenneth R. Ferris, a valuation and acquisition consultant to small and mid-cap companies in Central America, served on the faculty at Northwesterns Kellogg School of Management; SMUs Cox School of Business; Thunderbird School of Global Management; Drucker School of Business at Claremont Graduate School, and Arizona States W.P. Carey School of Business. He was a director for three NYSE-listed firms. Ferris resides in Placencia, Belize.

Valuation is the essence of finance. It asks the question, What is the fair price to pay for an asset that has a set of uncertain future cash flows? This book presents a practitioner-oriented view of the fundamentals of valuation in the context of mergers and acquisitions. Valuation is considered to be an art, not a science. Thus, the reader will find that there are many rules of thumb and few inviolable principles to guide them.

The metrics used for valuing companies are not well-defined, varying according to the objectives of the valuation, the characteristics of the company and its industry, and the preferences and expertise of the individual performing the valuation. Consequently, corporate executives and valuation analysts face many choices and dilemmas as they try to assess a companys value. Throughout this book, we discuss a range of valuation methods, including multiples, discounted cash flow models, economic income models, and option pricing models. We offer practical solutions for helping the reader make informed choices and for dealing with common dilemmas. The valuation methods discussed are principally for use in non-financial companies; the topic of valuing financial companies is beyond the scope of this book.

To use this book effectively, the reader will need an understanding of the fundamentals of accounting and finance. Furthermore, a background in financial modeling with Excel is also beneficial.

Barbara S. Petitt and Kenneth R. Ferris
May 2013