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How Valuations for Chemical Acquisitions Are Made

Aug 25 2011

Mergers and Acquisitions (The Sopranos)

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One of the most important steps in successful chemical acquisitions is coming to an accurate valuation of the target that leaves room for the buy-side firm to find the deal worthwhile and simultaneously puts the sell-side firm in a position where it wants to make a deal. Valuation is difficult in any industry, more so when it is for the purpose of chemical M&A activity, as there are pressures on those conducting the valuation to make a deal happen to the benefit of the senior partners and shareholders, as well as the company. Expert assistance from a team of chemicals M&A consultants can be invaluable in this situation, as such a team will have resources designated specifically for conducting the type of investigations necessary for an accurate valuation.

The first and most obvious strategy for valuation is looking at comparables in the industry. Because there are so many specific niches, experts during the chemicals acquisitions process may struggle to find enough relevant comps, and even when they do, the buyer will obviously look for lower valued comparisons while the seller higher. Two other common methods to determine valuation are based on the price to earnings ratio (P/E Ratio) and the enterprise value to sales ratio (EV/Sales Ratio). Each of these methods produces a number, which is a multiple of the income in the former method and of the revenue in the latter. This multiple directly suggests an offer value. It is usually based on other companies in the industry and uses current revenue flows as a basis to project future earnings and this the value of the company.

A more complex is the discounted cash flow (DCF), which uses estimated future cash flows to determine the target’s value before the chemical acquisitions process begins. The simple formula is to determine the present discounted value of forecasted free cash flows using the company’s weighted average costs of capital. Assuming decent estimates and close attention to detail, this formula offers the most concrete suggestion of how much value the buyer will get from the target. This is an important and leverage-able piece of data because if accurately calculated it can be used to set a floor or ceiling for the final price, depending on who has more power in the deal.

The last component to consider is that a seller is unlikely to sell for a price less than the value that could be derived from the company or wing in the near term unless it needs cash immediately. So chemicals acquisition consultants often have to evaluate and suggest a reasonable synergy value. This is where they have to collaborate more closely with the buyer to determine where the synergy value lies and to effectively evaluate how this will impact future earnings. With all these different options at just the basic level, it is clear that both buy-side and sell-side companies will often need an M&A specialist to help them conduct the deal.

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