Cost of Capital and Valuation of Merging and Acquisition Operations

Most often, value analyses of companies involved in Merging and Acquisition operations have shown a strong divergence between the stand-alone theoretical value of the company object of acquisition and the price paid. This divergence (acquisition premium) is difficult to explain by theoretical analysis, even considering revenue and cost synergies. The general practice tends to relate the premium paid to intangible aspects that cannot be explained with a financial formula. In this article, however, I show how most of the effects of an acquisition can be evaluated by financial analysis, even if it implies a deeper analysis than a simple net present value of synergies cash flow. In particular, possible approaches with the use of cost of capital corrections that evaluate the effect on the value of the acquiring company, consequent to its risk profile variation, were considered.