Valuation in cross-border M&A: A critical analysis of the valuation accuracy of European target companies in acquisitions made by American companies

Abstract

Almost all companies are under continuous pressure to increase sales, reduce costs, and thereby generate higher profits. This is especially evident on the stock exchange where publicly listed companies are aiming for higher profits as quickly as possible in order to fulfil the demands and wishes of their investors.

Companies have a lot of strategic options they can use when trying to find new ways to generate profit. Two of them are expanding to new markets and merging with or acquiring other companies. Conducting mergers and acquisitions (M&A) has gained a lot of popularity in recent years, especially since international business has been disrupted by COVID-19. Therefore, the significance of M&A in business has increased greatly in the past few years. The same goes also for M&A conducted across borders as the business world continues to become even more international than it already has been.

This research aims to examine why companies engage in mergers and acquisitions, especially in cross-border deals. Moreover, the main part of the research consists of a quantitative analysis in which 60 cross-border acquisitions from the past are analyzed by conducting a multiples analysis for each deal to determine the value of the target company in each deal. The results are compared with the actual purchase prices to determine valuation accuracy in cross-border M&A.

Reactions on the stock market to these deals are taken into account as well in order to draw reliable conclusions on whether these cross-border acquisitions have been accurately valued or not. Aside from determining valuation accuracy, the analysis also aims to investigate whether it is possible to use the multiples analysis as the sole valuation method in cross-border acquisitions, instead of resorting to other valuation methods in addition to that method.

The results show that it is possible to accurately determine the value of a target company by only using a multiples analysis. For a multiples analysis to be reliable, though, several conditions related to the target company must be fulfilled, namely that the target should be operating in its industry for an extended period of time and should preferably be of a certain minimum size.

The analysis also shows that companies and their managers who engage in cross-border M&A must be prepared for different kinds of imponderables that can massively influence an acquisition and its parameters. The most important example is the purchase price that can be driven up massively when other companies show interest in the same target company. Bidding wars are one of the main reasons for companies overpaying in acquisitions.