The next meetings of the newly founded M&A working group are scheduled for October.
Based on feedback received to date, three “sub-working groups” have now been designed, whereby the first two working groups – still referred to as 1a and 1b – will possibly coordinate even more closely (“merging” possible). The groups will initially be named as follows:
1a Methods of risk analysis and recording of risk information in the assessment
Date: probably 11.10.2018
1b Insolvency risk, rating and duration of existence of companies
Date: 16.10.2018, 16:00 – 19:00
2 Guidelines and list of criteria for the selection of methods for M&A valuation
Date: 05.10.2018, 16:00 – 19:00
Re 1a – Contents:
- Methods for the structured identification and quantification of a company’s opportunities and threats (risks),
- Utilization and processing of the results from the risk analysis of the risk management of a company to be assessed (external and internal risk report from the early risk detection systems in accordance with Section 91 (2) AktG)
- Determination of the overall scope of risk using risk aggregation (Monte Carlo simulation)
- Preparation of results from risk analysis and risk aggregation for company valuation, in particular determination of
- plan values in line with expectations
- Earnings risk (and possibly resulting cost of capital)
- Insolvency risk (probability of insolvency, see link to 1B)
The most important methods for risk identification, risk quantification and risk aggregation as well as (typical and desirable) contents of risk analyses by companies are presented and explained. The possibilities (and limitations) of due diligence as an element of risk analysis are discussed separately (this is essentially risk identification without risk quantification and risk aggregation).
Existing checklist systems for risk identification, for example in the US valuation market, are also considered.
Re 1b – Contents:
- Measurement of insolvency risk (e.g. by deriving the probability of insolvency from a rating) and measurement of insolvency costs.
- Preparation of (synthetic) rating forecasts (insolvency probabilities based on key figures from corporate planning)
- Procedure for taking the insolvency risk into account in the valuation (e.g. when reconciling a going-concern business plan to plan values that are in line with expectations)
- Other causes of the finite life of a company (finite expected life) and their inclusion in the company valuation.
- The starting point for the discussion can be the existing EACVA guidelines on the consideration of insolvency risk/probability of insolvency.
Re 2 – Contents:
- Price versus company value (price estimate method versus company valuation method in the narrower sense: when is what relevant)
- Specification of the valuation subject and the implications for the valuation process (buyer,
- Seller, “neutral third party”)
- Possibility of operationalizing the “risk-free basic interest rate” (limits of the market interest rate method?)
- Relevance of possible (uncertain) exit prices (exit price estimate instead of infinite continuation phase)
- Significance of special features of (a) industry or (b) company size for the choice of valuation method
- General criteria for a “suitable” method (guideline)
- Special features in the evaluation of “digital” business models (with their particularly high opportunities and risks)
- Consideration of upper value limits through the reproduction value
- Application of a “stand-alone valuation” versus an integral valuation (target and acquisition subject)
As the guidelines we are looking for, which are obviously very important in practice, do not yet exist (and the literature also provides little), it makes sense to complete the above-mentioned criteria and initially specify their content. Ultimately, we are looking for a kind of “matrix” that implicitly contains “if-then rules”: If one finds the following facts, it is appropriate to do x, y or z (while A, B and C exclude themselves for reasons of consistency).
A special topic that may need to be dealt with separately, but which can be discussed in more detail in a separate aspect, is the handling of synergies (uncertain), uncertain integration costs and the implications of acquisition financing (the effects on rating and insolvency risk are discussed in 1B).
Contact: Prof. Dr.-Ing. Kai Lucks and Prof. Dr. Werner Gleißner
