Merger motives and target valuation : A survey of evidence from CFOs

This study provides insights about the motives for mergers and acquisitions (M&As) as well as divestitures and the practices used to value targets during 1990-2001. The survey evidence shows that the primary motivation for M&As is to achieve operating synergies while the top-ranked reason for divestitures is to increase focus. The results also show that most firms believe diversification is a justifiable motive for acquisitions most notably as a means of reducing losses during economic downturns. Discounted cash flow methods dominate market multiples as the preferred approach for valuing both publicly-held and closely-held companies. Perhaps the most surprising finding is that although firms often define merger cash flows as the equity cash flows from the target, the discount rate used by acquiring firms is their own WACC rather than the targets’ cost of equity. This finding reflects one of the most persistent bad practices in valuing M&As and might lead to overpayment to targets. [G34]