Question

Why should a target company be valued as a stand-alone business? Give examples of the types of adjustments that might have to be made if the target is part of a larger company.

Answer 1

The target company should be valued at its stand alone value since only the Assets and liabilities of that particular business are being taken over. The influence of the acquiring company should be discarded for computing the standalone value and also the synergies should be discounted. The standalone value provides an estimate of the minimum fair price that should be paid for the target company.

For computing the standalone price adjustments must be made to the cash flows which correctly reflect costs and revenues associated with the target companies operations. Examples include administrative expenses and depreciation expenses which pertain only to the target company. Also the net book value of assets must be adjusted to reflect its current market price. Any reserves that have been over provided for must be reversed and if there is under provision the same must be provided for.