Company Valuation Under IFRS : Interpreting and Forecasting ...

Company valuation under IFRS
Well, actually, the answer is no. To see why, it is necessary to split the acquisition
into its component parts: an investment decision and a financing decision. Taking
the second one first, is it a good idea, if your share price is high, to use shares to
buy things, or even to use the opportunity to accumulate some cash? Answer, yes.
Taking the first one, is it a good idea, as a result of your being able to raise equity
capital on good terms, to throw away half of this benefit by purchasing something
at twice its fair value? Answer, no. Countless managements have made bad
acquisitions through confusing investment with financing decisions, and this is a
similar argument to the one we have already addressed regarding the appropriate
discount rate for appraising targets.
It is always essential to separate investment from financing decisions and it is
usually wrong to make a bad investment decision merely on the basis of
arguments about financing. The gain created by tax shelters, for example, should
also not be used to justify otherwise expensive acquisitions.
9.3 Bidding for Metro
Metro is the company that we have modelled in greatest detail, and we shall
analyse it as a potential acquisition target for the US giant, Wal-Mart. As already
discussed, detailed consolidations come later. The first question for Wal-Mart
would be, ‘What would we be prepared to pay?’
Our earlier valuation of Metro in Exhibit 5.2 generated a value per share of
€46.06 per share, on the important assumption that we held market gearing stable
into the future. Let us return to it and begin with some assumptions about what
the change of ownership could plausibly do to the Metro business.
Cross-selling opportunities would be limited in this case, so we would be reduced
to an estimate of what a possibly more aggressive management could achieve
with the existing business. We shall assume that an uplift to projected revenues
of 1 per cent is projected.
More might plausibly be done with costs, especially fixed costs. In reality, there
are three lines of fixed cost that could be attacked, but to keep the modelling
down we shall ascribe all the benefits to general administrative expenses, and
shall assume that these could be halved. We assume no change to cost of goods
sold through lower procurement costs.
Exhibit 7.15 contains two additional pages of Metro model. The first (page 15)
shows the effect of the synergies described above on after-tax profits and cash
flows. The second (Page 16) shows a reworking of the valuation table from
Exhibit 5.2, but this time with NOPAT reflecting the synergies form the merger.
Our value per share has risen by 50 per cent from €46.06 to €68.90.
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