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    3.1 Valuation of A Business

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    mollymitra
    Valuation is needed for mergers, acquisitions, and other transactions to determine the value of shares being exchanged or the consideration being paid. There are various circumstances that require valuation, including mergers/demergers, public offerings, private investments, buybacks, and as required by law. The method of valuation depends on the motives for acquisition, such as expansion, diversification, financial gains from tax benefits or asset stripping, or personal ambitions. Non-financial factors can also impact the price agreed upon.

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    3.1 Valuation of A Business

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    mollymitra
    42 views3 pages
    Valuation is needed for mergers, acquisitions, and other transactions to determine the value of shares being exchanged or the consideration being paid. There are various circumstances that require valuation, including mergers/demergers, public offerings, private investments, buybacks, and as required by law. The method of valuation depends on the motives for acquisition, such as expansion, diversification, financial gains from tax benefits or asset stripping, or personal ambitions. Non-financial factors can also impact the price agreed upon.

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    3.1 Valuation of a Business

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    Valuation is needed for mergers, acquisitions, and other transactions to determine the value of shares being exchanged or the consideration being paid. There are various circumstances that require valuation, including mergers/demergers, public offerings, private investments, buybacks, and as required by law. The method of valuation depends on the motives for acquisition, such as expansion, diversification, financial gains from tax benefits or asset stripping, or personal ambitions. Non-financial factors can also impact the price agreed upon.

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    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    42 views3 pages

    3.1 Valuation of A Business

    Uploaded by

    mollymitra
    Valuation is needed for mergers, acquisitions, and other transactions to determine the value of shares being exchanged or the consideration being paid. There are various circumstances that require valuation, including mergers/demergers, public offerings, private investments, buybacks, and as required by law. The method of valuation depends on the motives for acquisition, such as expansion, diversification, financial gains from tax benefits or asset stripping, or personal ambitions. Non-financial factors can also impact the price agreed upon.

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    Valuation of a Business

    Valuation is an exercise to assess the worth of an enterprise or a property. In a merger or amalgamation or demerger or acquisition, valuation is certainly needed. It is essential to fix the value of the shares to be exchanged in a merger or the consideration payable for an acquisition. As per Section 82 of the Companies Act, 1956, the shares or debentures or other interest of any member in a company shall be movable property. A share carries with itself a bundle of rights such as the right to elect directors, the right to vote on resolutions in general meetings of a the company, the right to share in the surplus, if any, on liquidation etc. NEED AND PURPOSE There are a number of situations in which a business or a share or any other property may be required to be valued. Valuation is essential for (i) strategic partnerships, (ii) mergers or acquisitions of shares of a company and/or acquisition of a business. (iii) Valuation is also necessary for introducing employee stock option plans (ESOPs) and joint ventures. From the perspective of a valuer, a business owner, or an interested party, a valuation provides a useful base to establish a price for the property or the business or to help determine ways and means of enhancing the value of his firm or enterprise. The main objective in carrying out a valuation is conclude a transaction in a reasonable manner without any room for any doubt or controversy about the value obtained by any party to the transaction. Acquisition of Business or Investment in the Equity of an enterprise could be understand by the following two illustrations in this regard. A Party who enters into a transaction with another for acquiring a business would like to acquire a business as a going concern for the purpose of continuing to carry the same business, he might compute the valuation of the target company on a going concern basis. On the other hand if the intention of the acquirer is to acquire any property such as land, rights, or brands, the valuation would be closely connected to the market price for such property or linked to the possible future revenue generation likely to arise from such acquisition. In every such transaction, therefore the predominant objective in carrying out a valuation is to put parties to a transaction in a comfortable position so that no one feels aggrieved.

    When Valuation is required? The following are some of the usual circumstances when valuation of shares or enterprise becomes essential: 1. When issuing shares to public either through an initial public offer or by offer shares of promoters or for further issue of shares to public. for sale of

    2. When promoters want to invite strategic investors or for pricing a first issue or a further issue, whether a preferential allotment or rights issue. 3. In making investment in a joint venture by subscription or acquisition of shares or other securities convertible into shares. 4. For making an open offer for acquisition of shares. 5. When company intends to introduce a buy back or delisting of share. 6. If the scheme of merger or demerger involve issue of shares. In Schemes involving Mergers/Demergers, share valuation is resorted to in order to determine the consideration for the purpose of issue of shares or any other consideration to shareholders of transferor or demerged companies. 7. On Directions of Company Law Board or any other Tribunal or Authority or Arbitration Tribunals directs. 8. For determining fair price for effecting sale or transfer of shares as per Articles of Association of the Company. 9. As required by the agreements between two parties. 10. For purposes of arriving of Value of Shares for purposes o assessments under the Wealth Tax Act. 11. To determine purchase price of a block of shares, which may or may not give the holder thereof a controlling interest in the company. 12. To value the interest of dissenting shareholders under a scheme of Amalgamation merger or reconstruction. 13. Conversion of Debt Instruments into Shares.

    14. Advancing a loan against the security of shares of the company by the Bank/Financial Institution. 15. As required by provisions of law such the Companies Act, 1956 or Foreign Exchange Management Act, 1999 or Income Tax Act, 1961 or the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 [the Takeover Code] or SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 or SEBI (Buy Back of Securities) Regulations, 1998 or Delisting Guidelines. Valuation/Acquisition Motives An important aspect in the merger/amalgamation/takeover activity is the valuation aspect. The method of valuation of business, however, depends to a grant extent on the acquisition motives. The acquisition activity is usually guided by strategic behavioural motives. The reasons could be (a) either purely financial (taxation, asset-stripping, financial restructuring involving an attempt to augment the resources base and portfolio-investment) or (b) business related (expansion or diversification). The (c) behavioural reasons have more to do with the personnel ambitions or objectives (desire to grow big) of the top management. The expansion and diversification objectives are achievable either by building capacities on ones own or by buying the existing capacities. (d0 a make (build) or buy decision of capital nature. The decision criteria in such a situation would be the present value of the differential cash flows. These differential cash flows would, therefore, be the limit on the premium which the acquirer would be willing to pay. On the other hand, if the acquisition is motivated by financial considerations (specifically taxation and asset- stripping), the expected financial gains would form the limit on the premium, over and above the price of physical assets in the company. The cash flow from operations may not be the main consideration in such situations. Similarly, a merger with financial restructuring as its objective will have to be valued mainly in terms of financial gains. It would, however, not be easy to determine the level of financial gains because the financial gains would be a function of the use of which these resources are put. The acquisitions are not really the market driven transactions, a set of non-financial considerations will also affect the price. The price could be affected by the motives of other bidders. The value of a target gets affected not only by the motive of the acquirer, but also by the target companys own objectives.

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