Overpriced mergers and acquisitions in the chemical industry



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Mergers and acquisitions within the chemical industry is a common practice to increase market presence and customer base. Common justifications for M&A include synergy, business growth and competitive advantages, and management reasoning. Synergies are benefits a combined firm is able to receive through cost reductions, market expansion, and efficiencies in processes. As a result, firms are able to grow and position themselves competitively. To prevent an overpriced acquisition, numerous valuation techniques exist. The discount cash flow examines the value of a firm based on future cash flow. The market multiple compares target firms to similar firms in the industry. Lastly, the asset valuation determines the value of a firm based on the liquidation of the firm.

To maximize the return on an acquisition, proper due diligence should be conducted based on the needs and goals of the purchaser, and the value added by the target firm. The premium paid for an acquisition should be based on the valued added through the synergies identified. Current business cycles and future outlook should also factor into the pricing of the acquisition. Having a thorough analysis of a target firm can help the acquirer to clearly understand what is being purchased and hence, determine an appropriate price for the acquisition.