On the Models to Evaluate a Merger/Acquisition Project

Abstract

We compare and contrast the existing merger/acquisition evaluation models and based on the results, propose a model that is more complete. The model emphasizes on the need to value not only the target firm, but also the acquiring firm such that 1) the increase in debt capacity for each firm due to the coinsurance benefit that stems from the diversification effect by pooling two firms together can be considered and 2) the synergy gains accrued to each firm can be valued by the firm’s own discount rate. The model provides methods to account for the effect of the increased debt capacity on the valuations.