Company Valuation Under IFRS : Interpreting and Forecasting ...

Company valuation under IFRS
Had Metro been holding a large pile of cash in its balance sheet, and suffered
from a clearly inflated weighted average cost of capital then it would have been
appropriate to run a third valuation, using the synergies as in Exhibit 7.15 and a
reduced WACC, based on a more efficient balance sheet. In that instance, we end
up with three values: stand-alone, stand-alone plus synergies, and post-synergies
plus lower WACC. (We should be unlikely to value the company on the basis of
its balance sheet becoming steadily less efficient through time, as we did in the
stand-alone model in Chapter five. In fact, in addition to the synergies discussed
above, a complimentary shape to stand-alone cash flows is another desirable
when assessing the suitability of a target for acquisition.)
9.4 Consolidation of projections
The earlier part of this chapter addressed IFRS accounting treatment for
consolidation of acquisitions, when producing a post-merger balance sheet. We
need to do more than that, since we shall presumably start with integrated
forecasts for both companies, and want to be able to project integrated forecasts
for the post-merger consolidated group. For this purpose we shall assume the
acquisition of Metro by the US company Wal-Mart.
To keep the modelling under control, we have simplified our forecast of Metro
(and converted them into dollar figures), have produced an equally simplified
forecast of Wal-Mart, and have consolidated them. Exhibit 7.15 shows on
separate pages the stand-alone forecasts for each company, the mechanics of a
merger for cash undertaken at fair value, the synergies, and a consolidated five
year forecast for the group assuming completion of the deal on 31st December
2004, so the forecasts have been extended for one year to provide a five year
consolidation. Naturally, the value acquired should be slightly higher than that at
start 2004, on which our valuation was based. Clearly, deals do not generally
complete on balance sheet dates, and it is therefore necessary to consolidate
balance sheets on the date of completion, with the result that there will be two
part years (one for each company) ahead of the consolidation balance sheet and
one part year after it (for the consolidated entity), which makes the models larger
but does not fundamentally alter the difficulties of the process.
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