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Technology Stocks : Ascend Communications (ASND) -- Ignore unavailable to you. Want to Upgrade?

To: john dodson who wrote (26732)	12/6/1997 8:46:00 PM
From: Chuzzlewit	Read Replies (1) \| Respond to of 61433

John, if you were going through the excercise of actually calculating the PV of future cash flows you would of course need to include an infinite number of cash flows. This is the theoretical underpinning of any valuation methodology. But there is a much simpler way to approach the issue. Assume that the market has properly valued each company. Now, calculate the synergies that can be forseen. Finally, assume all of the synergies are assets of the acquired company, and place a valuation on the company based on current market conditions. For example (purely hypothetical), a merger of two companies is expected to result in annual after tax savings in G&A of $60 million, and the merger is expected to increase sales productivity by 15%(thereby decreasing variable costs). Furthermore, because of the opportunities presented by cross selling and excellent product fit, we see sales increasing immediately by 5%. Now, all that the acquirer needs to do is to put all of these numbers into the model for the acquired company (including the 5% increase in sales that the acquirer sees for it's own products, and the selling expense savings that it also sees for the parent company). Since the growth rate is assumed to be unchanged, the ratio of the incremental earnings to the forecasted earnings times the current stock price of the acquired company gives a pretty decent approximation of the value of the acquired company. Whew! That is the two-bit tour of how to value a merger. Regards. Paul