26.08.2017

Since mergers and acquisitions (m&a) have been popular and driven intense interest of the public for the last 10 years in Turkey, there have been a lot of news, analysis and comments on it both in general finance sector and financial media. On the other hand, the main subjects were valuation of a company that is acquired, sold, merged. This subject is of interest to public because it is a matter of monetary greatness and appreciation of company’s value. In this process, both businessmen and public concerning about this issue have been discussing the details of m&a. As a result of that, people have become familiar with some concepts like earnings before interest taxes depreciation and amortization (EBITDA) and discounted cash flow (DCF).

It is highly efficient to know the concepts and roughly get an idea about value of a company. Furthermore, it is very important that one must realize the benefits provided to bosses and directors. In case of an acquisition or a merging, it is required to know company’s value in detail. Eventually, negotiations will be carried out with potential buyers on the basis of company’s value; so it is quite essential to have an idea about it. Besides, some points are always important: if one knows how to determine company’s value and its methodology, he/she may increase the value of company by applying these concepts to all of the procedures and processes of the company. The duty of company management is providing maximum profit to shareholders. That profit should be maximization of a company’s normal profit rate rather than a normal profit rate earned every year. Under these circumstances, company’s valuation procedures should be turned into Key Performance Indicators (KPI). Aims of each employee in the company also should be turned into performance indicators. Thus, it will be a good management example to follow these indicators and try to make them stable.

One may find a lot of results about company valuation in Google; however, there are only 2 main procedures applied to non-public companies:

 

  • Discounted Cash Flow:it is the present value of free cash flow that company will create in the future.
  • EBITDA factor:it is a factor determined by multiplying EBITDA created by the company with its sector and a factor determined according to its position in sector.

Consequently, even though the concepts are different, these two procedures focuses on making profit (Actually company’s value does not depend on its assets, it depends on its performance/profit made by using its assets). Therefore, directors will both try to maximize company’s value and manage it “well” with Key Performance Indicators that they create according to these factors.

In line with this, Key Performance Indicators may include these followings: (These are listed as an example. It does not mean that they are complete/total/faultless in no sense. They vary because of company structure and culture and the situation they are in.)

  • Increase its profitability
  • Decrease capital requirements
  • Regulation of records and independent audit of financial tables
  • Systematization of transactions (Regulation of work-flow)
  • Prepare a growth plan and create a rota for growth plan
  • Paralleling key personnel with company’s rota
  • Conditioning relationships between external stakeholders with laws/customs

As it can be seen, some subjects are directly numeral and the others are for quality. I will share data about why I write these aforementioned subjects in this text.

Source: Alper UYAR,
İstanbul