Valuation of Company Merger from the Shareholders’ Point of View
Author:Christian Toll and Thomas Hering
JEL:C61, G31, G34
DOI:
Keywords:business valuation, company merger, decision function, shareholder, marginal
quota, maximization of wealth.
Abstract:
By means of a company merger formerly legally and economically independent companies
are tied up to an economic entity. To order the financial state of affairs after the merger, the
current shareholders must revalue their stake in the merged company. The interest is
focused on the valuation of shares and, consequently, on the allocation of the future
economic benefits of the merged company to each owner. Despite the apparent relevance of
company mergers in practice, the scientific literature deals with this topic only in an
unsatisfying manner. After some early simple model-oriented approaches with the aim to
define an ideal exchange ratio, the valuation problem of a merger was taken up again not
earlier than in Hering (2004). Based on his considerations, the aim of our paper is to extend
and generalize the valuation methods for a company merger and foremost to set the algebra
for the computation of the critical share by using maximization of wealth as target function
on a firm foundation.
We assign a certain marginal quota to the shareholders representing the minimum share in
the merged company which puts them in a financial position no worse than compared to the
going concern basis. For this reason, we introduce the state marginal quota model as an
innovative valuation approach that considers both existing market imperfections and
individual expectations of a specific shareholder. To pinpoint our key finding: If private
financial redistributions are available, our extended and generalized model shows that the
marginal quota * in question cannot be “trivially” obtained as a ratio of utilities. Instead, it
is essential to consider the private decision field of a shareholder to allow a restructuring of
the dividend payout stream offered by the merged company in order to reach at least a level
of utility which is comparable to the state before the merger.