The Research On The Valuation Approaches Of Target Businesses In Merger And Acquisition

Merger and Acquisitions (M&A) occurred latterly from the year 1984 in China, and most cases were led by the China government between the year 1984 and 2001 which were not real M&A. China open itself to the whole word totally after the year 2001 when China becomes one member of the WTO, then Many enterprises carry out M&A to face the competition brought by enterprises from other countries and areas and to grow up. From then on, M&A cases in China become more and more, people pay more attentions on the approaches of valuation which is the basis of making M&A decision. So it is indispensable to study on the theory and approaches of valuation.There are four main valuation approaches in use: the valuation approach based on assets, the relative comparison valuation approach, the income present value valuation approach and the real option valuation approach. All those approaches were invented during the history of M&A in developing countries. But the use of those valuation approaches is limited in China, the reasons of which are partly in the low development level of valuation industry and mostly in the limitations of those approaches. The limitations of those approaches limit valuators to value properly.The goal of study in my paper is to create one approach to help enterprises decide whether to carry out one M&A or not through theory study on the advantage and disadvantage and empirical study.Firstly, this paper tells and evaluates the current study situation of the valuation approaches, and tells systematically the ideas, contents, advantages and disadvantages. The main disadvantage of the valuation approach based on assets is ignoring the entirety of one enterprise and takes it as one simple combination of all assets. So this approach is not a real valuation approach. The biggest difficulty met in using the relative comparison valuation approach is how to choose comparable enterprises and variables, but the relative comparison valuation approach is the approach orienting toward the market compared to other approaches. The main disadvantage of the income present value valuation approach comes from it's hypothesizes that enterprises are eternal and future income is predicable, but these hypothesizes are different from the real world, especially that it is hard to predicate the future income after the definite period. The real option valuation approach is one new emerging approach which pays attentions to the option value of enterprise operating, but the theory of this approach is too complicated to understand. And it is needed to use the real option valuation approach that good capital market. The conclusion study method is used in this part of the paper.Secondly, this paper studies on the improvements of the relative comparison valuation approach and the income present value valuation approach which made by former researchers, basing on comparing those four valuation approaches, to point out the predominance of the relative comparison valuation approach. The scholar Zhao Wei point out one new opinion that the intrinsic quality of enterprises is the growth of uncertain value in her book the Uncertain Value and Asymmetric Constructer of Enterprise. The asymmetric construction of enterprises depends on the uncertain value, and the enterprises rely on the asymmetric to realize growth. She point out that there are three basic elements --- creativity of enterpriser, constructer and market competition to realize enterprises'growth. Basing on the above theory, I think that it is hard to solve the limitation of the income present value valuation approach and I choose to improve the relative comparison valuation approach. So, one new approach is founded in this paper.Thirdly, I found one useful and objective valuation approach, basing on the mind of the relative comparison valuation approach. And this valuation approach is constituted with three parts: the first part is using statistical software to find out several financial transactions which shows the change of stock price, and there are many financial transactions listed in this paper; the second part is to choose several comparable enterprises accord the chosen financial transactions above; the last part is to use fuzzy mathematic method to calculate the target enterprise's market value in M&A.Finally, I take one M&A case happening recently in China to test the approach founded in this paper. And the consult shows the affectivity of the approach and this paper can give some direction to the enterprise valuation's work.