Summary and Conclusions

Having illustrated the methodologies for a number of different share valuation models and evaluated their relative strengths and weaknesses, it is important to emphasize that it is unwise to depend on any one method. Indeed, the juxtaposition of share prices using different models not only provides benchmarks for a bid strategy, but also room for maneuver post-acquisition.

For example, we observed in CVT (Chapter Ten) that if a takeover is not part of a carefully conceived corporate plan, reflecting factors other than earnings (for example a net tangible asset "break-up" valuation) the predator may inherit a negligible return on investment that is not dissimilar to takeovers premised upon subjective managerial goals of growth, prestige and security.

Prospective mergers may also elicit rising expectations on the part of existing shareholders and all other stakeholders of the target company (including, employees, customers, creditors and other financiers) as well as potential investors. And if their ambitions are not fulfilled after the event, any serious demonization will detract from goodwill. Confidence may evaporate rapidly and the equity price of the acquiring company in its new form will tumble.

At a macro level, the volatility of today's global capital markets and their individual shares, created by serial financial crises, economic recession and political instability, all mean that investors (private, institutional, or corporate) can no longer rely on simple "number crunching".

Every stock market constituent needs a thorough understanding of theoretical share valuation models (whether they be asset, earnings, dividend and cash based) to comprehend the underlying factors that determine their future investment and financial decisions.

Selected References

1. Hill, R.A., Corporate Valuation and Takeover (2011).

Portfolio Theory and Financial Analyses, 2010. Portfolio Theory and Financial Analyses: Exercises, 2010. Portfolio Theory and Investment Analysis, 2010. The Capital Asset Pricing Model, 2010.