Tag Archives: Company Valuation

Five reasons to ride the M&A wave today

If you miss this wave you will be devoured as the fate of individual companies has never been more uncertain, and the window of opportunity is closing for many companies unprepared or unable to adapt to the new market realities.

There are five reasons why you should ride the current M&A wave:

1. Companies are valued by estimating their future profits. When a company is in a very profitable stage, a promising future can be projected, which will maximize its price. When it´s going through a bad phase it´s much more difficult to make an exciting future credible.

2. The economy has cycles. The key is to sell during a buoyant economic cycle, not only because the company has a higher turnover and makes a better profit during this phase, but also because buyers are more optimistic and there´s a greater abundance of money.

3. In buoyant periods, companies listed on the stock market are willing to pay more because their shares also lists at higher multiples. In economic booms, it´s also easier for buyers to obtain financing for purchases, either through banks or by issuing corporate debt, which allows them to pay even more for your business.

4. Another external element which affects your company´s value is interest rates. When rates are high, companies are worth less and when they´re low, companies are worth more.

This is because value is estimated by discounting the cash flow that the company will generate during the rest of its existence. It´s discounted based on interest rates plus a prime that represents the risk of the company not meeting its expectations. If interest rates are low, it´s discounted at a lower rate. Due to the denominator being lower, the resulting figure in the valuation is higher. This is why companies are worth more at lower interest rates than at higher ones.

5. Today money is abundant, the value of companies in the stock market have never been higher, interest rates worldwide are at the lowest level ever seen, and there is a huge M&A wave. Ride the wave before it goes.