Cost of Merger and Acquisition

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Mergers and acquisitions are strategic business deals that are executed only after comparing its cost with the potential benefits to know the viability of the proposition. In an acquisition deal, the acquiring company estimates the cost of acquiring the other company to gauge how profitable will be the takeover in the long-run.

Many methods are available to calculate the cost of mergers and acquisitions. However, the common ones are the Replacement Cost Method and the Discounted Cash Flow Method.

Replacement Cost Method is ideally used for manufacturing firms that have a number of by-products. These by-products like machinery, furnaces, tools, etc. can be re-used by the acquiring company in the course of business. Therefore, the total cost of the by-products is compared with the cost of replacing them with the new ones at market price to determine the profitability of the deal. However, this method is unsuitable for human resource-intensive firms.

Discounted Cash Flow Method involves discounting future cash flow projections, from the newly formed company, to its present value. If the present value is higher than the actual cost of merger, then the merger is viable. The present value is calculated using the weighted average cost of capital.

All these methods are different approaches to determine the value of the target company. Both the buyers and the sellers bid their own valuation. The buyers tend to bid a lower price whereas the sellers give a higher valuation. After negotiations, a final price is decided and finalized.


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Types of Mergers and Acquisitions
Joint Venture
Merger and Acquisition in India
Difference Between Merger and
Investment Banking
Due Diligence
Problems of Merger and
          Acquisition in India
Process of Merger and Acquisition