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http://mytoday.com/u/1846 : Mergers & Valuations.

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Plenty of merger deals should never happen: Buyers are too often attracted to "false positives" in targets that are overvalued. Less noticed are the deals that get away, but shouldn't, because of "false negatives" -- an undervaluation based on outdated methodologies that leads to a losing bid. The true value of a target company can be determined only if the buyer looks beyond current core operations to include future potential, argue three M&A experts.

What are often overlooked, though, are the deals that could have been big wins but didn't happen, because of false negatives. By that we mean instances, such as the one faced by Bank X, in which a much-needed acquisition was lost due to analytical and valuation methodologies that we think are outdated.

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The problem that we hope to mitigate stems from the pressure to make deals pay off quickly in terms of earnings per share, a goal that creates a systematic bias to discount value creation that is tied to future time horizons.

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necessitate a valuation methodology that takes into account more than the net present value (NPV) of the target. We call this the Opportunity Value (OV) of an asset. OV allows us to consider the potential upside of an acquisition through a disciplined analysis that is based on range estimates relating to how the future might unfold. Because OV provides a positive view of uncertainty, itcomplements the NPV, which treats uncertainty negatively, and the two together provide an inclusive but not inflated valuation.

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