The ''Value of Control'' in Mergers and Acquisitions

 4
INTRODUCTION 
 
 
External growth is a way of development effected for a long time by the 
firms in the capitalistic advances economies. In fact, the operations of 
mergers and acquisitions, with which the control of a firm is acquired by 
another firm to give life to a single resultant entity or to a group of firms, 
has modified  the industrial structure of some countries from the end of last 
century. 
Consequently, the economic literature has studied the causes and the effects 
of these operations. Analysis concerns new models, and the greatest 
availability of data allows new empirical evidence to explain this diffused 
and complex phenomenon. 
The present work has the goal to describe, under the qualitative and 
quantitative profile, the advantages of the synergies and of the control value  
acquired through the operations of mergers and acquisitions. 
 
The first chapter provides the introductory concepts of the phenomenon of  
acquisitions and their evaluation, the principal phases in acquisition 
valuation and the benefits produced by these operations. 
 
The second chapter introduces an examination on the equity and firm 
valuation, and therefore, the fundamental methods to proceed to a coherent 
valuation of the synergies advantages and of the control value in the 
acquisitions. 
 
 
 5
Introduction 
 
 
Once analyzed the presuppositions, the third chapter enters in the heart of 
this work with the individualization, the classification and the evaluation of 
the synergies, which arouse particular interest in the transfer of business unit 
or business complexes. "The synergies between two or more systems, allow 
to produce combined effects superior to the simple sum of the effects that 
derive from independent operating of systems (stand alone)”1. 
 
The fourth chapter, logically connected to the preceding chapter, presents 
the effects of the control value following from the changing management, 
element that allows the passage from the economic capital to the strategic 
capital. The attention is paid to the determining factors of the changing 
control and the most important empirical evidence with the goal to have an 
idea of what it happens in the reality. 
 
Strong companies usually buy other companies to create a more 
competitive, cost-efficient company. The companies will come together 
hoping to gain a greater market share or to achieve greater efficiency. 
Because of these potential benefits, target companies will often agree to be 
purchased when they know they cannot survive alone.  
Valuing a firm for a takeover is not an easy task. In addition to all the 
complexities associated with standards valuation, there are other road-blocks 
that have to be negotiated before arriving at a final answer. 
                                               
1M. TALIENTO, La stima del valore delle "sinergie" nelle acquisizioni di aziende in esercizio. Note 
metodologiche e rilievi economico contabili, RIREA, n.23, Roma, 2004, p. 6. 
 
 6
CHAPTER 1 
ACQUISITION VALUATION 
 
SUMMARY: 1.1. Evaluation: introductory concepts. – 1.1.1. Italian and Anglo–Saxon evaluation. – 1.2. 
Acquisitions as a key for value creation. – 1.3. The value created from an acquisition. – 1.3.1. Premise. – 
1.3.2. The Differential Analysis. – 1.3.3. Potential benefits. – 1.4. Phases in acquisition valuation. – 1.5. 
The benefits produced by acquisitions.   
 
 
 
 
1.1.  EVALUATION: INTRODUCTORY CONCEPTS 
 
The evaluation of firms is a central theme in the economic-business 
disciplines. The measurement of the value of the enterprises is a problem 
known ever since the capitalistic enterprise exists but only in the last years it 
has acquired a considerable importance. 
The knowledge of the value of an activity is the premise to take correct 
decisions such as: the definition of the price of purchase or transfer in a 
takeover, the choice of an investment for a portfolio or the restructuring of 
an enterprise. 
In different contexts the respect of a rational and reliable value is important 
to give an equilibrium to the satisfaction of the business affairs; the 
operational moments can be described as  follows: 
the planning of "extraordinary" operations2, such as mergers, 
divisions, transformations, a partner's exit, contributions of capital, 
choice of the price of placement for the quotation in the Stock 
Exchange, determination of the ratios of conversion for issues of 
                                               
2See G. ZANDA, M. LACCHINI, T. ONESTI, La valutazione delle aziende, Giappichelli, Torino, 2005. 
  
 7
bonds and warrants, increases of capital in nature or with 
renouncement to rights of option, increases of capital with surcharge 
and so many others. It deals with particular operations which claim 
the check of a value  in a certain moment in order to protect in general 
all the stakeholders  and the financial markets; 
the preparation of the budget, with the adoption on the corporation 
behalf of the new international bookkeeping principles (Ias / Ifrs) in 
the editing of the budgets; 
the respect of the periodic economic enterprise performance, and, 
in this context, the respect of the value is significant especially in the 
activity of strategic planning. 
In theory a  valuation process is founded on three "pillars": 
absolute evaluations – substantially income method, financial 
method and mixed approach - which express a measure founded upon 
various principles, criteria and methods; from the operative point of 
view, such absolute judgment on the value can produce both 
“economic” and “potential” values of the capital, according to the 
degree of aggressiveness of the assumptions to the base of the 
effected forecasts; 
relative evaluations, which are criteria of evaluation that, through the 
multiples of comparable firms, utilize the evaluations conducted by 
the market; 
informative base and fundamental analysis, where the informative 
base is necessary so that to translate, through the fundamental 
analysis, the models, the formulas and the multipliers in tools capable 
to capture the levers of the value (value drivers), so that it gets to a 
measure of a reliable value. These two components, always present in 
 8
any valuation process, have both a direct function and a role of 
support to the other two pillars (absolute and relative criteria). 
1.1.1. Italian and Anglo-Saxon approaches to evaluation  
In particular, it is useful to observe the models used  both in the Italian 
economic-business culture and in the Anglo-Saxon one. 
The Italian analysts use a vast range of models3, which can be classified 
into: 
direct methodologies, which are directly, to determine the value of 
the firm, based on the price of market of the valuing  firm  or of 
similar firms; 
indirect methodologies, which are based on the revaluation of certain 
quantities such as the business stock-elements, incomes, financial 
flows or dividends. 
a) The direct methods (based on the empirical multipliers) are 
distinguished into criteria based on the equity approach to 
valuation, that conduct to the estimation of the economic value 
of the capital  directly and immediately, and on the entity 
approach to valuation, that lead to the estimation of the 
economic value of the capital indirectly and mediately, by 
means of the difference between the firm value (economic 
value of the activity) and the market value of the financial 
debts. 
b) The indirect methods can have as a base of reference internal 
business variables, which are: 
- flow, dynamic variables; 
                                               
3See G. ZANDA, M. LACCHINI, T. ONESTI, La valutazione delle aziende, Giappichelli, Torino, 2005, p. 
23-30-53-62-154-155. 
 
 9
- stock , static elements; 
- mixture, partly dynamic and partly static ones. 
The criteria of valuation founded on the flows give birth to two 
groups of methodologies: fundamental theoretical methods of  
evaluation, which are the income method, the financial method 
and the method of the dividends; fundamental simplified 
methods of evaluation, which are the financial simple method 
and the income simple method, very often used in substitution 
of the theoretical methods for  facility of application. 
The methods of evaluation founded upon stock me estimates 
are usually defined “net assets” methods of evaluation based on 
the principles of analytical evaluation of each assets and  
liabilities elements which compose the capital; they are 
distinguished in pure or simple method and complex  method. 
Finally, the methodologies of evaluation based on mixed 
measures refer partly to the dynamic items and partly to the 
static ones. 
It is important to stress that for the choice of the methods of evaluation you 
need to respect some requirement, which are the rationality, the neutrality 
and the objectivity. 
Even the Anglo-Saxons analysts use a variety of models, but they can 
fundamentally be distinguished into three great approaches4 as follows: 
“discounted cash-flow valuation”, which has its own roots in the 
rule of the actual value, where the estimate of whichever element or 
                                               
4See A. DAMODARAN, Damodaran on valuation, Security Analysis for Investment and Corporate 
Finance, John Wiley & Sons, Inc., New York-Chichester-Brisbane-Toronto-Singapore, 1994, p. 10-15-16-
18. 
 
 10
system is represented by the net present value of the flows of cash that 
you expect from it; 
“relative valuation” or evaluation through multiples, in which the 
value of the business derives from the price of comparable activities, 
standardized on the base of a common variable such as the profits, the  
flows of cash, the bookkeeping value or the turnover; 
“contingent claim valuation”, according to which an activity that 
introduces similar characteristics to an option is valued using a 
financial model of definition of the price of the options. 
 
1.2. ACQUISITIONS AS A KEY FOR  VALUE CREATION 
 
Acquisitions have an  exceptional capability to transform and to contribute 
to the “renewal” of enterprises, to conquer a competitive position on the 
market and to get all the potential advantages of a combination of  activities 
and  business abilities. 
In the past5 there were  waves of acquisitions in different periods, but in the 
eighties they became all over the world  a more and more diffused 
phenomenon and the actual level of acquisitions introduces a various 
composition and a more international nature in comparison to the preceding 
periods. 
In the nineties the phenomenon of the acquisitions appeared wider and 
wider, fragmented and global: the great majority of the acquisitions in the 
United States and in the United Kingdom, in continental Europe and in 
                                               
5See P. C. HASPESLAGH, D. B. JEMISON, La gestione delle acquisizioni: successi e insuccessi nel 
rinnovamento delle imprese, introduction to italian edition of Sandro Sandri, traslation of Giovanni Baldi, 
ETAS books, Milan, 1992, p. 9-12. 
 
 11
Japan  were of strategic and friendly nature, among enterprises and 
managing groups. 
The aims6 to be reached in the management of the acquisitions can be 
varied. 
It is necessary to assure that acquisitions support the general strategy  
of renewal adopted by the companies; however, in order to succeed in 
making  decisions, related to the acquisitions, in line with strategy,  it 
seems a difficult assignment, despite the clarity of the management in 
subject of current strategy or the ability of the enterprise to conduct an 
orderly process of strategic planning. The opportunities of acquisition 
can rise some doubts on the strategy or  be perfectly coherent to it. 
A second aim can be, before  acquisition, the development of a 
decisional process that allows to appraise  what the correct 
acquisitions are and gives, for each ones, a specific justification in 
presence of limited information, needs of rapidity and secrecy. 
A third aim can be identified in the management of a process of 
integration in a following moment to the acquisition to create new 
value: it is important to say that a value is created only after the 
acquisition has been completed, when the transfer of the abilities 
occurs and the members of both  organizations collaborate to create 
the attended benefits. This collaboration is founded upon the wish and 
ability of the managers of both organizations to go together toward a 
new strategic goal and avoid all the obstacles which do not permit the 
economic integration, even of personal workforces.  
                                               
6See P. C. HASPESLAGH, D. B. JEMISON, La gestione delle acquisizioni: successi e insuccessi nel 
rinnovamento delle imprese,  cit., p. 15.