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Corporate Restructuring: Valuation Techniques

Published on Thu, Nov 17,2011 | 15:51, Updated at Thu, Nov 17 at 16:04Source : 

By: Vishal Saraogi, CA Student

In the present era of globalisation the area of operation is not limited and so is the desire of the corporate to grow. Corporate restructuring is thus another methodology to grow or expand the business. One of the major aspects of a corporate restructuring deal is to determine the correct value of the organization. There are various techniques to determine the correct value of the organization.  

The different techniques used for valuation of shares in case of mergers and acquisition can be presented as under –










1.      Absolute Valuation:

·        Dividend Discount Model: This model of valuation of share is more predominantly used in valuation of shares from the retail prospective. However in certain mergers this model is used to derive the intrinsic value of shares.

According to this model the intrinsic value of shares is the present value of all the cash flow or dividend derived from the share in its life time at the required rate of return. This can be presented as under -




·        Free cash flow approach: This approach of equity valuation is more frequently used when valuing a share from a controlled prospective (i.e. Mergers and acquisition). This is also used when dividends cannot be realistically forecasted or the company doesn’t have a track record of dividend. Under this approach the value of the equity is derived by discounting the cash flow for each year by the weighted average cost of capital and making adjustment for value of debt. Cash flow for each year shall be presented as under –

Particulars Amount 
Revenue from operation XXX
Less: Operating Expense  XXX
EBDITA                                                   XXX
Less: Depreciation XXX
Add: Depreciation XXX
Cash flow after tax XXX
Less: Gross Investment XXX
Free cash flow for Firm XXX








2.      Relative or Comparable valuation approach:

Relative valuation involves valuing a firm on the basis of how similar firms are valued. Similarity should be in terms of nature and skill of operation. Relative valuation makes the use of price multiples. A price multiple is any ratio with market value in the numerator and the value driver in the denominator. There are four popular value drivers – Earnings, Sales, Book Value, and Free cash flow for equity.

Accordingly there are four types of price multiplier – P/E Ratio, P/S Ratio, P/BV Ratio, P/CF Ratio.

For loss making firms such as airline industry in India P/E Ratio will be negative and has no meaning. So we use the other multiples. Similarly for banking companies its main asset is the book debts thus most important multiple is P/BV Ratio.

3.      Residual Valuation: This involves the use of Economic Value Added (EVA) means to value an organisation. This is used to look into the true profit earning potential of the organisation. EVA is the excess of net operating profit after tax earned over and above cost of capital employed. This can be presented as under –

Economic Profit        =              NOPAT – (Invested Capital x WACC)

All these valuation methodology are sometimes used simultaneously to value an organization. However each valuation technique provides a different value of the organization, in order to synchronize all the technique and in order to determine a range in which the acquiring company will bid for the shares of the acquired company “Football Ground Approach” is widely used.

This approach cannot be regarded as a valuation technique as it does not provide any specific value of the organization however it is widely used to fix a range within which the acquiring company can bid for the acquired company.

When the value derived with the help of different valuation techniques are plotted on the graph it gives the shape of a football ground and thus the model is popular with the name of the "FOOTBALL GROUND MODEL".  

This model is used by almost all the analyst working with the Investment Banking team in order to derive a range of value which is used in order to bargain with the target company. The rationale behind this model is as the different valuation technique uses different variables for their determination one technique will always contradict other and thus the optimal synergy benefit may not be derived.

The following diagram represents the football ground approach-









This is a simple diagram which shows the presentation of valuation derived under different techniques of valuation.


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