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This article is written by Anushka Singhal, a student of Symbiosis Law School, Noida. This article tries to delve deeper into evaluation strategies in M&A and their significance. 


With an increase in technology and with a rise in globalization, the world has seen an increase in Mergers and Acquisitions (M&A). Corporate houses merge their companies with others or they tend to acquire a company to maximize their profits. M&A being an important decision for the company needs to be done after evaluating all the pros and cons. Thus, we need to have certain M&A evaluation strategies. 

M&A under Indian laws

The term Mergers is not defined under the Income Tax Act,1961 (ITA) or the Companies Act 2013. Section 230-234 of the Companies Act 2013, deals with schemes of M&A between various companies. There are various methods of amalgamation and some of them are also given under the Income Tax Act.  Section 2(42C) of the ITA defines slump sale as a “transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such  sales.” Companies opting for mergers should apply to the National Company Law Tribunal (NCLT) and when the application is approved, the company can go forward with the M&A deal. Along with the Companies Act, the securities law also governs mergers and acquisitions. The Securities and Exchange Board of India (SEBI) (Listing Regulations) 2015 has laid down conditions to be followed by a listed company while making an application before the NCLT, for approval of a merger or amalgamation. The Competition Act, 2002 ensures that the new mergers or acquisitions do not lead to anti-competitive agreements. Thus, while deciding which strategy to adopt when cracking an M&A deal, one also needs to abide by the above given Indian laws.  

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Accounting measures of performance: an overview

While going for mergers and acquisitions one needs to predict whether the M&A transaction would be beneficial or not for the company. The performance needs to be measured through appropriate accounting measures. Some of the important accounting measures of performance are-

Analysis of accretion/dilution and balance sheet impact 

This test answers the question that will a particular M&A deal increase the post-transaction earnings per share or will it decrease the same. Post-transaction earnings per share are also known as post-forma earnings per share and are calculated by the formula- Pro-forma EPS= (Acquirer’s net income + Target’s Net income +/- Incremental Adjustments) / (Acquirer’s shares outstanding + new shares issued). If the pro-forma-EPS is higher than the original EPS, then you are in a good position to acquire/merge with the company. This increase is called accreditation and reflects that the performance after M&A will be beneficial for the acquiring company.                                      

Analysis of synergies

Synergy allows for the enhanced cost efficiencies of the prospective business. The dictionary defines synergy as the interaction of two or more organizations to create a better effect. So, if the synergy is in favor of a company that is in favor of M&A, he should go forward with it. Synergies can take up various forms like-

  • Staff reductions 
  • Economies of sale 
  • By acquiring new technology 
  • By improved market reaches and market shares.     

Type of consideration offered (cash or stock) and its impact on results 

Cash considerations are useful where the transactions take place through bidding. A bidder would be more likely to accept the cash instead of going with the stock. Otherwise, it depends from situation to situation which type of consideration will help you crack a good deal.

Goodwill and other balance sheet adjustments 

A company with goodwill is always a good choice to go with. Acquiring or merging with a company that already has a name in a market will anyway boost the acquirer’s performance. The goodwill of a company can be calculated by the formula: 

Goodwill = (Consideration paid + Fair value of noncontrolling interest) – (Assets acquired – Liabilities assumed)

Transaction costs

They are the sunk costs resulting from economic trade in a market. They include direct and indirect costs. In M&A deals these costs play a substantial role and thus should be kept in mind. 

A look into the comparative evaluation strategies in Mergers and Acquisitions 

A strategic move is always better than an unplanned one. While taking over a company or while merging it with another company, a comparative evaluation needs to be done. The target company must be evaluated keeping all the pros and cons in mind. Following are some strategies in mergers and acquisitions-


In India an acquisition can be done in varied ways i.e. through merger, demerger, share purchase, slump sale, and asset sale. The Indian Income Tax Act, 1961 lays down provisions for different taxation for different types of mergers. One should analyze all the types and the taxes involved in them before opting for an M&A transaction. 

Discounted cash flows (D.C.F)

Free cash flows are discounted at the expected rate of return to arrive at the present value of the economic benefits that are expected from the entity. Also, when combined with the present value of the terminal valuation, they  help to ascertain the valuation of the target company. One must try to evaluate the sales and generation value of the targeted company for at least 5 years. The Free Cash Flow (FCF) technique is employed under this methodology and the free cash flow is calculated by the given formula-    

FCF = NOPAT(net operating profit after tax) + Non-Cash Charges +/ – Changes in Working Capital – Capital Expenditure

Comparative company analysis 

In this method, a comparative set of companies is formed, i.e., companies doing the same or similar work. These companies form a comparative set to the target companies. The most common valuation measures used in comparable company analysis are Enterprise Value to Sales (EV/S), Price to Earnings (P/E), Price to Book (P/B), and Price to Sales (P/S). Based on this one can find whether a company is overvalued or it is undervalued. 

Company transaction 

In this evaluation strategy, the cost of a merger is seen. It is much like the comparative company analysis, the difference is that in it, the details for the data are taken from recent transactions and acquisitions. 

Net asset value 

It is represented by the funds per share market value and is calculated by 

Net Asset value per share= NAV/ Outstanding Share, where NAV = assets-liabilities.

Mergers and acquisitions strategies also differ according to uncertainty and controversy. Certain categories of situations can be formed forming pairs like-

  1. low uncertainty and low risk
  2. high uncertainty and high risk
  3. low uncertainty and high risk
  4. high uncertainty and low risk.                                                                        

There is no straight-jacket formula for evaluation. The heterogeneity in the evaluation methodologies across the firms arises due to the uncertainties and risk factors. Also, both socio-political scenarios and evaluation methods affect mergers and acquisitions.

Porter’s test

If M&A transactions are carried out keeping in mind the following points then they will have to create a shareholder value and pass the three tests given below-

  1. The attractiveness test- The industry selected should be an attractive and growing industry.
  2. The cost of entry test – The dilemma a company faces during acquisition is whether it should acquire an already successful company at a high price or it should buy a company that is poorly working and then turn it into a successful one by investing resources. It depends on the condition of the acquiring company whether it is financially well-off or not. If the acquiring company is well-off and has money in hand then it should go with acquiring an already successful company.
  3. The better-off test- It says that together the two companies should perform better than an individual company.

S.W.O.T analysis

The strength, weaknesses, opportunities, and threats need to be identified. Both internal and external factors need to be considered while doing the S.W.O.T analysis. This analysis is quite subjective as two persons cannot have the same definition of strengths or weaknesses. While internal factors constitute our strengths and weaknesses, external factors include opportunities and threats. 

Boston Consulting Group (BCG) matrix

In the BCG matrix, a company should delve into its business portfolio before venturing into any merger or acquisition. Firstly, a company should analyze its current position and secondly, it should think of future ideas to improve its business. There are two best portfolio planning methods- the Boston Consulting Group method and the General Electric Shell method. 

In the first method, a BCG box is created and its strategic business units are classified into different groups. There can be four techniques to build a business strategic unit-

  1. Build share
  2. Hold
  3. Harvest
  4. Divest

A BCG box helps a company to classify its Business Support Units (BSUs) into two dimensions- on the horizontal axis (this tells about BSU strength in the market) and on the vertical axis (it provides for a measure of market attractiveness).

Due diligence

One must investigate and evaluate the assets that one is going to acquire. Early research needs to be conducted before acquiring a company. It has to be carried in a formulaic manner weighing all the pros and cons. One has to analyze well beforehand keeping in mind the time constraints and pressure and then acquire a company. 


One must not use a one size fits all approach while going for an M&A transaction. What might be successful in one country may not be successful in the other.

The role of strategies 

The strategies help us to chalk out our plan of action. They are essential for a successful valuation. The comparative company analysis helps us to find an approximate value of the target company vis a vis other companies in the market. This method helps us to analyze and access data more efficiently. The data involved in comparative company analysis is sourced originally and is not based on any assumptions unlike the data sourced for direct cash flows. The discounted cash flow analysis helps in arriving at the expected changes that a company may go through during the best or worst scenarios. The changes in estimations can also be modeled and this type of valuation is very intrinsic. The comparative transaction method is said to be an easy-to-use and understand method. The source data is original here, coming from the recent market values, and thus has more authenticity. When used wisely, these strategies are likely to lead to a beneficial deal.  

Scope for recommendation 

One has to be prudent while selecting a target company. Apart from the above-mentioned techniques, one should keep some general things in mind.    

  1. Understanding your own business- Understand the work you do and the work that the target company is engaged in. Having the same or similar work is always an essential thing.
  2. Know your culture- You should know about the culture at your firm. If the company that you are acquiring has a similar culture as yours, then it will be easier to adjust for your employees. Otherwise, disruptions might occur.
  3. Knowing the expected benefit- Having a good idea about the benefits that you will acquire after the merger is always a plus point. Consider how you and your target company will make two plus two a four.
  4. Money- Profits per Equity Partner (PEP) should be kept in mind. If your PEP does not match your partner’s PEP, i.e., it is either higher or lower than yours, then reconsider your decision of acquisitions and mergers. Also, a formulaic approach cannot be useful every time. One needs to see his condition, his surroundings, as well as the target company’s situation before acquiring a firm. 

There are certain things to be kept in mind while opting for an M&A transaction. One should not blindly trust the target company. Steps must be taken to verify whether everything is alright or not. The due diligence strategy is made for the same and one must employ this strategy while going for an acquisition. One can go for an onsite visit and see the target company himself before taking this crucial decision. Following the above recommendations will help a company in cracking a beneficial Merger and Acquisition deal.

Lessons from some failed M&A deals in the international market

  1. Pfizer and Allergen-The M&A transaction of both these countries could have led to the biggest takeover in the past 15 years but the deal failed. The reason for the same was tax regulation. If they would have known about the new regulations coming up and have forecasted the same with the help of professionals, the situation might have been better.
  2. Kraft Heinz and Unilever– The reason for the failure of this deal was a lack of communication and due diligence. One must try to match and cover the cultural gap to materialize the deal efficiently.
  3. Ant-Financial and MoneyGram– The failure of this deal alerts one about the geopolitical effects on M&A transactions. Country restrictions, relations with the country of the target company, national issues, etc. must be kept in mind while strategizing an M&A transaction.


M&A transactions have evolved as a popular concept. Acquisitions have become an important way for a company to progress. Therefore, before making this huge decision of acquiring a company, the acquirer must weigh all the things. The above-given strategies act as an apt method to guide the acquirer while going for a merger or acquisition. 


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