Forecasting of the cash flows
The most effective value driver for ALL is forecasting of the cash flows. It shows the effectiveness and efficiency of management to maintain the liquidity position and maintain its revenues. This will lead to the valuation of a company if it is sold and the available risk over it. There is inverse relationship between losing the risk of cash flows and the price paid for acquiring the target company.
Diversity in Customers:
It is necessary to evaluate the customer base of the target company as it helps in maximizing its revenues and benefits from the synergy. If the customers are contributing significantly in company’s revenue, then they should be given importance. If they are lost, then the company will lose its significant portion of sales. Moreover, with the change of ownership, they may lose confidence and trust in company and this may result in liquidity issues for the company.
Financial Information and estimation reliability:
The target company needs to present its past financial statements for the evaluation of its performance. It shows the true and fair picture of the company’s revenues and profitability for the aqua uirerand not merely on the basis of cost. However, company needs to evaluate the cost effectiveness of the target company. If there is misrepresentation in the financial statements of the target company, it will affect the decision of acquisition.
Growth potential of the company:
This shows credibility of the target company for forecasting the future cash flows and defending the growth rate of the cash flows, which is that showing correct value of the company will give the company leverage for getting high value from the acquirer. This needs to take into consideration all the possibilities and assumptions for such growth such as technological advancement, effective workforce, increasing profit margins etc.
Economies of Scale:
It is necessary to evaluate the position of the acquirer after the merger so that it may result in an effective solution for the company. ALL has shown consistency in its excessive cliental base and the expertise in technological advancement which will generate higher returns for the acquirer by enjoying economies of scale through effective and efficient production.
DCF Valuation Model:
DCF model was calculated by taking into account the above value drivers such as the growth potential for the company through increase in CAGR rate by incorporating the impact in EBIT of 2013 onwards. Moreover, the financial projections have been taken into consideration through changes in its working capital which impacts free cash flow of the company a lot. These factors have been developed through taking impact of taxation in the analysis. Infrastructure has been taken into consideration by steady moments in the earnings. However, non-financial variables cannot be incorporated in DCF Valuation model analysis because the costing effectiveness is measured by the increasing earnings which has already been incorporated so there lies an indirect impact of inventory costing and taxation on the company’s earnings. Hence, it results in the forecasting of its future cash flows effectively..........
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