10
M& A transactions are also considered to be the most prominent profile part of investment
banking activities. The act of buying, selling or combining with another company is usually
a transformational event for not only involving companies’ key executives, but also other
major stakeholders such as shareholders, employees, clients and regulators. Both of the
party sides – the buyer and seller always enter the transaction with purpose of reaching
optimal results in term of value, deal terms, timing, structure, stability and many other
important considerations. The process demands wide-ranging analysis, planning,
resources, expense, and expertise as well as requires the involvement of many
intermediary parties such as investment banks, accountants, lawyers, advisors and even
regulators.
In view of the above facts, the success of any merger or acquisition depends on many
factors, the most critical of which is appropriate and correct valuation. In a typical M&A
transaction, valuation is often regarded as a key deal issue, along with financing, deal
structuring, timing and tactics .
For the buying side, improper valuation can result in overpaying for the target and vice
versa, improper valuation can also cause the target to accept a price that is lower than one
expected by shareholders. Both of the cases will make a bad impact, not only on
shareholders, but also employees, clients and others related parties, whose interest is
directly affected by loss of value generated from the deal’s strategic objectives and synergy.
However, valuation is a challenging process because each company is different and there is
currently no single best way to value a company. Especially in the context of M&A, the
valuation of a company might be subjected to many external factors, depending on the
nature of each M&A deal. Proper valuation also comes with experience and involves
perhaps in numerous assumptions, whose changes even in small quantity can result greatly
on the valuation themselves.
Question 3
How valuation plays a pivotal role in fund raising?
Answer
Raising money is a complex task and involves several processes that successful
entrepreneurs needs to master. Determining a valuation is one of most significant steps for
raising funds. Aim too high and investors will look the other way. Aim too low and one will
leave money on the table, or worse, one will lose investors who think you lack ambition.
One bizarre fact about the fundraising process is that the more it is raised, the higher the
valuation tends to be. This seemingly illogical link between round size and share price
comes because investors want to make sure founders retain enough equity to keep them
motivated, even after multiple rounds of financing.
The first thing to do is to work out how much capital is required. In this regard, it is
advisable that sufficient funds should be raised in order to reach to the next valuation
milestone and then have time left to go out and find the next round.