Company Valuation Essay Example | Topics and Well Written Essays - 2000 words

Company Valuation - Essay Example On the other hand, non-merging firms had a strikingly better record than merging firms from the standpoint of the original shareholders. Further analysis suggested that firms engaging in pure conglomerate type mergers grew most rapidly, while firms engaging in pure internal growth grew most profitable, although growth by conglomerate type merger was more profitable than growth by other types of merger. Merger tends to be for growth, not for profitability. However, also merger is the result of the internal and external pressures and opportunities confronting the firm. Changes in the environment in which a firm has been operating may include merger by competitors and may cause the firm's managers to experience increased uncertainty. This increased uncertainty produces a desire to merge in order to reduce uncertainty. Merger occurs if the desire to merger is accompanied by managerial ability and willingness to carry through an actual merger. Two processes are at work. Mergers occur when the relationship between firms and their environment is disturbed by changes in latter. They have suggested that the amount of competition that is acceptable is limits. Aaronovitch and Sawyer have advocated an approach to merger that "the costs of rivalry" generated by the process of oligopolistic rivalry which fall on the firms involved and would be reduced if rivalry were reduced .The costs in question are those of undesired excess capacity, research and development and promotion and marketing. The major destabilising force to which Aaronovitch and Sawyer have drawn attention is the intensification of international competition. They have examined the relationship b-n indices of international competitiveness and merger activity. The expectation that there would be more mergers the worse the balance on current account and the higher the level of imports was confirmed. No generally agreed theory has been developed. The profit and growth maximisation hypotheses has been recast in terms of their effect on share prices and hence the probability of takeover. Interest on the effects of merger has for the most part been motivated by welfare considerations, although more recently their role in shaping the longer term evolution of the socioeconomic system. Cook and Cohen have pinpointed the general difficulty in the introduction to their detailed case studies: "mergers are a reaction to a changing situation. Judgement depends upon comparing the effects of what actually happened with the effects of what might have happened. Sensitivity analysis is the process of varying the assumptions underlying a decision to determine the decision's sensitivity to those assumptions. It enables managers to assess how responsive NPV is to changes in key variables that are used to calculate it (Drury 1996). Some of the factors that influence the NPV of multinationals are taxes, exchange rates, estimating the terminal value of a project using different methodologies, political risk and the real operating options (Buckley 2000). NPV is calculated using the estimated