Strategic Financial

Management
Task A
Three Types of Valuation Methods
Firm valuation is generally a technique and a collection of processes used to evaluate the
economic worth of an owner’s stake in a business. The worth of a firm varies widely
depending on the buyer's perspective. Due to various factors, it may be different for the buyer
and seller as well (Adali & Kizil, 2017).

Income Approaches
An income statement-based approach attempts to estimate the worth of a firm by looking at
its revenue, profit margins, or other metrics. Cement firms may be valued quickly by
multiplying their yearly production capacity (or sales) in metric tonnes by a ratio (multiple)
such as the price/earnings ratio, price/sales ratio, or other multiples. For example, different
ways under this approach use a discount or capitalization rate to arrive at a fair market value
for the subject firm. The discount or capitalization rate turns future advantages into current
value by discounting or capitalising. As a result of the risks involved with a specific
investment, the discount or capitalization rate is the return required to entice investors.
Differentiation between the two rates may be summarised by the fact that. In contrast, the
discount rate is only used in discounted cash flow (DCF) appraisals. A capitalization rate is
only used in techniques of company valuation that use historical business data for one period
of time (Achim & Chis, 2014).

Asset-Based Approaches
According to the asset-based approach to business valuation, a company is worth its
fundamental value. Substitution is the basic premise because it argues that no sensible
investor would pay more than the cost of purchasing assets of equal economic utility. In
contrast to the income-based techniques, the adjusted net book value method is more
objective regarding discount or capitalization rates. According to accounting norms, most
assets are presented in the company's financial statements at their purchase value, adjusted for
depreciation where required. As discussed in the article, these values should constantly be
recalculated to reflect their true market worth (Schaltegger & Burritt, 2010). Goodwill and
trademarks are examples of intangible assets that cannot be valued apart from the company's
total worth. For this reason, the asset-based approach isn't regarded as the most probative way
to determine the worth of continuing company concerns. Using this method, a lower value
than the firm's fair market value is often obtained. This value is flawed because of the
subjectivity of accounting standards, which vary from market criteria. Consequently, the
book value seldom corresponds to the market value, which is a severe flaw in this approach.
The appraiser must examine whether the shareholder whose stake is being assessed is
controlling or non-controlling, meaning whether or not he has the power to have direct access
to the value of the assets while utilising this technique of company valuation. As a result, the
asset worth of the firm is not the most meaningful measure of value for him if he cannot use
that value personally (Agriyanto, Rohman, Ratmono, & Ghozali, 2016).

Market Approaches
This strategy focuses on the free market to bring the price of corporate assets to a level
playing field, where demand and supply balance each other out. To determine a fair price for
a company, buyers and sellers should compare it to a similar firm that has recently sold for
the same amount of money. It is common for real estate appraisers to employ the
"comparable sales" technique. However, this can only be done with public firms if the stock
transactions and other characteristics are comparable enough to enable this comparison
between the market prices of other listed companies in similar sectors or enterprises (Yadav,
Kumar, & Bhatia, 2014). This strategy has a flaw in that it might be difficult to find publicly
traded firms identical to the subject company. An example of the drawback of comparison is
the East Asian financial industry, where a study found that the announcement of bank
closure, which precedes liquidation and results in the complete loss of ties with the main
creditor, leads to discounts in the market value for related firms. In contrast, the
announcement of a foreign sale is associated with initial value discounts but longer-term
market premiums as investors revise their expectations of the effect of the sale. Market trends
often follow a pattern, although they may also be vulnerable to fast adjustments (Srivastava
& Lognathan, 2016).

Task B
Value Creation
Investors in both firms may stand to gain from a merger. The value of a combined company
is often increased due to synergies. The combined value of two organisations is greater than
the sum of each organization's values. The power of the firm to generate revenue is boosted
as a result of synergies. Market growth, product diversification, and research and
development initiatives are examples of synergies that reduce costs. When companies
combine their operations, one potential benefit is the realisation of economies of scale, which
may lead to cost savings and the acquisition of innovative technology. These technological
improvements could be beneficial to the cost structure of a corporation (Adali & Kizil, 2017).

Diversification
Diversification is often a goal of mergers. A corporation may be able to get access to new
consumers or deliver new goods and services after completing a merger. When management
wants to diversify a company's operational risks, they may often arrange for a merger. Even
when a risk reduction is an impetus for a merger, shareholders may not be happy. It is riskier
for shareholders to diversify their investment portfolios than for a company to combine with
another. Market expansion, product growth, and the formation of new conglomerates are all
driven by diversification (Agriyanto, Rohman, Ratmono, & Ghozali, 2016).

Acquisition of Assets
Some businesses join forces to acquire more valuable assets. Companies often engage in
merger and acquisition activity to access assets that can either only be developed via M &
M&A or require a significant amount of time to develop internally. A considerable number of
mergers focus on emerging technology.

Incentives for managers

The personal interests of senior management are often the driving force for mergers. The
increased authority and status that results from a merger may appeal to managers. It's possible
that ego and the desire to become the most successful company in the industry were also
considerations. When the management of a corporation emphasizes scale rather than
performance, this is an example of "empire-building." There is empirical data that ties the
firm's size to managerial compensation. The base salary is still a component of a
contemporary compensation package, which may also contain incentives based on
performance, stock options, and other benefits. Large corporations have the financial
resources to pay their managers more and provide them with better help (Schaltegger &
Burritt, 2010).

Recommendation
Sohar Foods must acquire Barka distribution by using diversification motive because
diversification is a broader consumer base, and better efficiency is among the benefits that
conglomerate mergers may provide. The likelihood of a financial setback is reduced via the
practice of diversification. If one company sector is underperforming, the losses might be
offset by the success of other, better-performing businesses (Srivastava & Lognathan, 2016).

MOOC Reflection
Many institutional investors are only investing in firms that report on their environmental,
social and governance (ESG) performance. Analysts and investors, customers, and workers
all have a stake in a company's ESG performance, making it an essential subject of debate on
the Board. In this course, you'll learn about an ESG framework and how it may help a firm
manage its entire risk. It studies each component in-depth and sheds light on how they come
together to affect a business and the people who are involved in it. The influence of corporate
demands and stakeholder expectations on risk assessment and business performance is also
addressed in the course. Besides that, in a final case study, I bring theory to real-world
practice by examining critical aspects from both a corporate and investor standpoint.
Analyzers who want to learn more about how a firm handles the risks and opportunities that
today's altering market and non-market environments bring should take this Environmental
Social Governance (ESG) course.
Bibliography
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