Valuation is a key component of the acquisition process that is widely misunderstood, because people tend to adopt a narrow financial perspective. Valuation should be anchored in your strategic rationale for buying another company in the first place. It all comes back to your business strategy and the synergies that will be created by the union of the two companies. When assessing an acquisition prospect, you should ask: “What will those synergies be worth in two, five, or even ten years?”
For example, recently, Flowers Food Inc, announced it would buy Wonder Bread and some other brands from Hostess Brands Inc for $360 million. Here, we see an example of a deal that may not make financial sense, considering Hostess has filed for bankruptcy. The value of this acquisition lies in the nonfinancial component Wonder Bread has to offer: the strength of the brand.
According to Reuters, “Wonder Bread…is an iconic American Brand that has been around for two decades.” This strategic acquisition would give Flowers, the number 2 baking company, more market share. Buying the famous Wonder Bread brand will strengthen Flowers position as a baking company. Flowers sees the synergy between the Wonder Bread brand and Flowers’ existing capabilities will bring increased value for years to come.
What other factors could influence your assessment of a company? Is it technology? Market reach? Brand equity? As you think about buying a company, I recommend you consider factors like these in addition to the all-important question of the actual dollar value.