Abstract
This chapter discusses methods of evaluation of firms; in simple terms, how to determine the price of a target firm. It will be shown that several methods exist such as the book value method, the market value method and the discounted cash flow value method. It will be seen that the market value method is the most popular to use and the discounted cash flow value method is the scientifically most rigorous one to determine the price of a Japanese target firm.
As a secondary topic, market concentration will also be discussed in this chapter. This concerns bigger acquisitions, in which the acquisition will restrain competition because of too much market power. In the case of these “big” acquisitions, the Japanese Fair Trade Commission may prohibit deals from being completed. The mathematical approach of how to define whether a deal will lead to market concentration is the Herfindahl Index, which will also be introduced.
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Notes
- 1.
It is important to mention that value is not equal the price for a firm. We will see later that a price depends on certain characteristics not always directly connected to a target firm, but external influences which may change the price of the firm but not it’s value.
- 2.
Cash flow means the outflow minus the inflow of cash of a firm. Under cash flow there exist three different streams. The first stream is the operational cash flow: Cash out of the company’s core business activities (e.g. Toyota: cars). The second stream is the investment cash flow: Cash or costs out of investments or acquisitions. The third stream is the finance cash flow: Cash out of financial activities, such as receiving or paying loans, issuing or repurchasing stock, or paying dividends.
- 3.
This example is chosen for simplicity to introduce the concept of the present value. In reality, Japanese citizens hardly receive any interest from their banks because the Bank of Japan has maintained a zero interest rate policy for many years.
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Bebenroth, R. (2015). Evaluation Methods and Market Concentration. In: International Business Mergers and Acquisitions in Japan. Springer, Tokyo. https://doi.org/10.1007/978-4-431-54989-5_10
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