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Table 1 Case summary: deals, uncertainty and controversy, evaluation purpose, and evaluation methods

From: Constructing M&A valuation: how do merger evaluation methods differ as uncertainty and controversy vary?

1. Potential deals 2a. Uncertainty 2b. Controversy 3a. Purpose of evaluation activities 3b. Evaluation method
Portal: Internet portal with search engine (seller); Internet affiliate (buyer) [2006; executed] LOW: straightforward business model; substantial data about users (page views and size of data). LOW: complemented buyer’s existing Internet business activities, clear post-integration roadmap. Identify range of target values and construct sophisticated deal structures that meet the interests of multiple parties involved in the deals. DESKTOP VALUATION: buyer computed target value using five financial techniques to obtain a range of target values that provide the initial bidding price and upper limit.
SmallEnergy: small domestic energy provider (seller); energy affiliate (buyer) [2006; executed] LOW: buyer familiar with sector. LOW: deal was consistent with accepted strategic goal of expanding the existing utility business, while supporting operations and preventing foreign competitors from using the target to enter the market; small target facilitated funding. Identify the financial impact of two outcomes: (1) if SmallEnergy becomes one of the buyer’s many plants and (2) if a Chinese competitor acquires and leverages the target to enter the domestic market. DESKTOP VALUATION: buyer used multiple financial evaluation methods, concluding that EBITDA multiples provided the most reliable valuation. Although projected NPV was negative, evaluators believed that they could disassemble plants and build apartments on the site if the target was unprofitable.
BigMedia: chain of movie theaters (seller); telecom affiliate (buyer) [2009; not completed] LOW: straightforward business model; historical data about customers and their characteristics. HIGH: unrelated to buyer’s traditional businesses; diverse stakeholder views in firm and target. Create consensus about the buyer’s long-term strategic goals and how the deal might contribute to ongoing search for expansion opportunities. ISSUE LISTS: buyer finalized value of a deal only after powerful managers with conflicting views met and negotiated, based on their prior assessments of strategic and political potential.
BigEnergy: major foreign energy provider (seller); energy affiliate (buyer) [2009; not completed] LOW: buyer familiar with sector. HIGH: prior failures in global expansion; many stakeholders affected by deal (e.g., foreign employees, local communities, foreign governments, consumer groups). (1) Supporters: proposed using internal capital to create joint value among stakeholders and attempted convincing stakeholders that a large investment enhances value more than paying dividends, (2) Opponents: created strong coalitions to oppose the deal by focusing on issues about implementation and social complexity. ISSUE LISTS: two opposing coalitions engaged in bargaining to pass or block the deal; one coalition focused on proposing a deal in line with the CEO’s strategic goals.
Chip: global leader in semiconductors (seller); telecom affiliate (buyer) [2012, executed] LOW: clear pros and cons of the deal, monitoring by creditors and government; well-established business-to-business sales model; clear strategy of being a smart follower. HIGH: regarded as one of the most important managerial decisions in the chaebol’s history; large unrelated diversification could reorient the chaebol significantly; need to determine whether deal offers synergy or new opportunity. Assess whether target contributes to the vision of the entire chaebol; analyze and integrate different opinions of managers—those supporting the deal brought very positive NPV while those opposing it brought very negative valuation indicators. ISSUE LISTS: creating a spreadsheet that balances the models of supporting and opposing managers; legitimizing by reaching neither too low nor too high a valuation—too low would generate external controversy about the preferential treatment by government while too high would produce internal controversy; developing communication strategy to external stakeholders.
Apparel: small fashion company (seller); trading affiliate (buyer) [2008; executed] HIGH: buyer had limited experience in couture design. The value and future of couture design capabilities are not quantifiable. LOW: viewed as consistent with goal of building buyer’s presence in the fashion industry value chain and gaining a key design capability to compete in the growing Chinese market. Advance the buyer’s goal to become a global player in the fashion industry. CAPABILITY DESIGN: scenario planning assessed how to use acquired design capabilities; scenario-based strategies projected how much the buyer could pay for the target. Financial analysis assisted scenarios with goal setting plus performance indexes and compensation systems for creative talent.
SNS: early social network service (seller); Internet affiliate (buyer) [2003; executed] HIGH: unfamiliar with social network services. LOW: legitimate solution to internal pressure to add services to parent’s newly launched portal and help expand its user base; sufficient internal capital. Create and assess strategic opportunities, using scenarios in which Target value = Constant × (# of customers)2; “Constant” was a parameter based on qualitative assessments of the opportunity. CAPABILITY DESIGN: buyer concentrated on understanding the target’s business model, how to create synergy, and what business model to design for combined firm.
Card: domestic credit card business (seller); telecom affiliate (buyer) [2010; executed] HIGH: uncertainty in the global financial sector; lack of experience in target business; potential backlash from competitors. LOW: fit with long-term goals; viewed as reinforcing strategies for existing customers (e.g., belief that the knowledge about target’s card users would enhance returns from the buyer’s customers for other services). Develop opportunities to gain synergy by creating two databases about wireless and credit card customers and cross-selling credit cards and wireless services to the target’s and buyer’s customers. CAPABILITY DESIGN: buyer investigated resources and capabilities they needed to deal with technical and market convergence then assessed the cost of acquiring the resources and capabilities. The buyer would invest if the cost was within a pre-determined budget; otherwise, the buyer would wait.
BigMobile: major US wireless operator (seller); telecom affiliate (buyer) [2008; not completed] HIGH: global financial crisis; technology transition. HIGH: substantial debate about whether this was appropriate expansion opportunity; funding/digestion issues (target > buyer); turnaround strategy for target; past failures in foreign investments. Assess potential to expand the buyer’s wireless network business by moving from being a mobile virtual network operator (MVNO) to a mobile network operator (MVO) player. Develop and discuss turnaround opportunities regarding the target: How to cut losses, how to reduce churn rate, and where to find synergies. STORYTELLING: buyer focused on building consensus about the operating and strategic opportunities from the deal, using financial analyses to facilitate discussion even though no one believed the specific numbers that the quantitative tools generated.
SmallMedia: media content specialist (seller); telecom affiliate (buyer) [2005; executed] HIGH: high competition in the target sector, no experience with producing movies and managing artists. HIGH: concern about cultural conflicts with artists and potential for partners to become competitors. Assess content as complement to existing wireless network business. Create a concise deal summary, with detailed operational plans and articulated relationship to the firm’s vision and strategies. STORYTELLING: buyer used financial valuation as a framework to tell convincing and plausible stories rather than to assess the deal.
  1. We classified uncertainty and controversy (columns 2a and 2b) while identifying cases during Stage 1 of research; we classified evaluation activities and methods (columns 3a and 3b) based on information that respondents provided during Stage 2 of the research, after identifying target cases with different combinations of uncertainty and controversy