The Study Of Evaluation Methods For Business Merger & Acquisition Based On Residual Income Model

Business merger and acquisition (M&A) activities increase much more popularin recent years with the continuous development of China market economy. Mergerand acquisition (M&A) is an inevitable result of market economy development,which plays a much more important role in China economy. Business M&A becomesan inevitable choice of China companies joining global severe competition throughrapidly gathering capital, enhancing enterprises' scale, and entering new market. InM&A market, appropriate value evaluation of target business is a key factor forbusiness successfully undertaking M&A activities. Presently, there are three methodsto calculate target business value, which are Income Method, Market Method, andCost Method. While these three methods have their inherit disadvantages separately:For Income Method, there is logic mistake for the presumption of the business'scontinuous operation, which deviates from the business's actual life; For MarketMethod, it's strict with the choice of reference business, it's very hard to findappropriate reference business, meanwhile it presumes that the transaction market isfully effective, which also deviates from actual operation condition; For cost method,it focus on reconstruction cost and neglects the future income of the company beingas an integrated body.Residual Income Evaluation Model is a model that closely connects the business rights and interests value with business accounting variable, which becomes one of the most popular study topic in present America financial academy. While this model is of same disadvantage with Income model to adopt business continuous operation presumption. The author hence upgraded the Residual Income Evaluation Model. Firstly, through importing the price to book value in forecasting period as key indexes to evaluate long term income after forecasting period while not complying with the consumption of continuous business operation, it effectively overcomes the Income Method and Residual Income Method's disadvantage of capitalizing to long term income; Secondly the author imported DuPont Financial model to upgrade Residual Income index, through which, the forecast for residual income of fiscal year with the forecast for the margin of sale which reflecting business profitability, and the equity multiplier which reflecting business debt redemption capability with the asset to operation which reflecting business asset operation capability are connected together. Through forecasting margin of sale, equity multiplier, and asset to operation, the difficulty to forecast Residual Income index in Residual Income Evaluation model is resolved. Through integrating the advantages of Income Method, Market Method, and Cost Method, the upgraded Residual Income Evaluation Model overcomes the main disadvantages of capitalizing for long term income of the forecast period of Income Method, of relatively large variance for target business value evaluation of Market Method, and of neglect to target business's future income of Cost Method, therefore it is an evaluation method with high operability. Adopting qualitative description and quantitative description, theory exploration and case application description, the author studied the application of the upgraded model of Residual Income Evaluation Model in the value evaluation in business M&A. In the last chapter, the author explored the synergy definition, content, and evaluation method and allocation.