Dean’s View on Key Determinants in M&A Pricing

Lin Lin-Dean, Professor

Merger and Acquisition (M&A) is a complicated business activity. Companies use M&A as a tool to penetrate new market, enhance operational effectiveness, and gain taxational advantages. However, some managers could emphasize more on personal interests than company’s ones, thereby leading to M&A failure and the high transactional costs. Statistics showed that the majority of the M&A cases failed rather than succeeded. According to the professional and academic experiences within M&A field, I can thus propose three key elements each company needs to consider before any M&A deal:

1. Next-stage planning:

M&A could be a state-contingent investment influencing by an uncertain environment rather than a stand-alone deal. The main purpose of M&A is not always to have financial gains. For example, Facebook spent $21.8bn to acquire WhatsApp, which means, Facebook has to earn $2bn more annually in order to make profits. It does not seem to be a good deal from perspective of profits. However, it is a milestone as a key step towards global market. The fair value of this deal can only be measured using concept of real option rather than Net Present Value (NPV), taking environmental uncertainties and multi-stage strategy feasibilities into consideration.

2. Pricing is not just a number:

Within a single M&A deal, acquirer wants to purchase with minimum cost whereas acquiree wants to sell at a highest possible price. Hence, both would have to assess whether the price is within the acceptable range. However, to establish a reasonable range, companies will have to consider the possible gains and losses generate by changes and uncertainties in strategies and environments. Therefore, if the final price falls outside the range, companies should not continue to make the deal.

3. Price estimation is not simply an analysis on financial statement.

The same acquiree operated by various acquirers can generated different financial outcomes and effectiveness. Hence, it is unwise to perceive one single company in a M&A case as a product with fixed price. Instead, the pricing of this product should consider all aspects of management and operational environments.

It is hard to make a successful M&A deal, and even experienced acquirer could make mistakes. However, acquirers can prevent huge losses due to strategic mistakes during pre and post M&A period by accumulating M&A experiences and consulting with M&A experts.

Extracted from Harvard Business Review, June, 2016 (pp. 49-51)