In the textbook, we discuss how to value an acquisition. But what are
the some considerations in the valuation of the target? The recent acquisition
of Wells Fargo's retirement and trust business by Principal can give
you some insight. For example, Principal had to consider whether recent
problems at Wells Fargo had extended into the retirement area.
Additionally, future revenues from the acquisition depend on how many of
the current customers stay when the acquisition is complete. In this
case, a payment will be made in two years contingent on the percentage
of current customers of Wells Fargo remain at that time.
Finally,
an important consideration is the cultural fit between the two
companies. The value of the synergies, as well as the continuation of
the current cash flows of the target company into the future, often
depend on culture. If employees of the target company are thrust into a
new culture, it may lead to an exodus of employees, resulting in a
decrease in ongoing cash flows as well as reducing expected synergies. A
culture clash was allegedly a major cause of why the AOL-Time Warner
merger flopped so badly.
