Valuation of Firms in Mergers and Acquisitions Case Study

Valuation of Firms in Mergers and Acquisitions - Case Study Example Triumph is of the opinion that acquisition of Rustic, a competitor in the same industry but with a radically different market share, would significantly boost its market penetration, enhance quality in production, and give it immense benefits with regard to economies of scale. As of present, Triumph has a predominantly southern customer base while Rustic has a chiefly northern customer base. The premise for this presumption is the view by Triumph’s CEO that Rustic is underperforming and its shares are undervalued. Hopes regarding the merger and acquisition soar high, with the expectations that the deal will grow the combined business establishment by up to 10%. However, the operating costs will rise by an estimated 5% in the first year. The financing option under consideration involves the issuance of long-term bonds to buy out shareholders at Rustic. The bonds will be issued at the current borrowing rate of the two companies. This report analyses the merger and acquisition ca se for Triumph and Rustic Plc.  The first two valuation cases are highly similar, with the only difference being that the first method assumes a constant dividend in perpetuity while the other DVM option assumes a constant dividend growth in perpetuity. The slight difference, however, makes a considerable difference in the estimated value of the resultant business, 41,000,000 and 90,420,000 respectively. The use of DVM in valuation model is most relevant in cases where the dividend pattern for a company is predictable and highly estimable (Bayrak, 2010). The management at both companies can make use of the method since both companies are currently paying dividends to their shareholders.