The Appraisal Foundation’s forthcoming VFR Valuation Advisory #3, The Measurement and Application of Market Participant Acquisition Premiums (“Advisory #3”) sets forth best practices for measuring and evaluating the reasonableness of valuation premiums applied in (or implied by) fair value measurements of controlling interests in business enterprises. Among other factors, Advisory #3 suggests that, in supporting such premiums, valuation specialists should evaluate cash flows enhancements expected from the combination. The central insight undergirding Advisory #3 is not that control of a business enterprise has value for its own sake; the value of control is correlated to the expectation for enhanced economic benefits from exercising such control. Recently published research from McKinsey & Company confirms this insight.
On the basis of their research, summarized in an article entitled “Making M&A Deal Synergies Count”, McKinsey concludes that investors view acquisitions more favorably when specific synergies are identified and quantified at the announcement date. According to McKinsey, only 20% of transaction announcements disclose the specific synergies acquirers intend to capture. Such companies exhibited superior stock returns both at the time of the deal announcement and over the following two-year period. The McKinsey study also concludes that investors react favorably when the present value of synergies exceeds the acquisition premium and when updates on achieving synergies are provided following the acquisition.
The data from this study confirms that, from a market participant perspective, enhanced economic benefits are important and that investors prefer greater clarity regarding such benefits. Corporate managers and valuation specialists would both do well to take heed.
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