In following way we can Choose a target firm for the acquisition:
|
If motive is …… |
Target firm ….. |
|
Undervaluation |
trades at a price below the estimated value |
|
Diversification |
is in a business which is different from the acquiring firm’s business |
|
Operating Synergy |
have the characteristics that create the operating synergy Cost Savings: in same business to create economies of scale. Higher growth: should have potential for higher growth |
|
Financial Synergy |
Tax Savings: provides a tax benefit to acquirer Debt Capacity: is unable to borrow money or pay high rates Cash slack: has great projects/ no funds |
|
Control |
badly managed firm whose stock has underperformed the Market. |
|
Manager’s Interests |
has characteristics that best meet CEO’s ego and power Needs. |
To know what are the steps involved in an Acquisition Valuation, you can read here.
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