Critical Evaluation of Investment Banking's Role in Valuation and M&A

This report critically evaluates the role of valuation models in shaping a seller's price expectations within mergers and acquisitions (M&A) and examines the functions of investment banks as sell-side and buy-side advisors. The report begins by defining valuation methods, including the liquidation and going concern approaches, and discusses various valuation techniques such as price-to-earnings ratio, enterprise value to sales ratio, book value, liquidation value, market value, replacement method, and discounted cash flow. It then explores the roles of investment banks, highlighting their advisory services to both the sell side (corporations seeking funds or involved in M&A) and the buy side (investors). The report details the differences in advisory services, including advice on transactions, fund-raising, valuation, and market positioning. Responsibilities for both sides are discussed, including industry research, portfolio management, and risk assessment. The conclusion emphasizes the efficiency of valuation methods and the essential role of investment banks in the financial market.

Running head: INVESTMENT BANKING
Investment Banking
Name of the Student:
Name of the University:
Author Note

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Table of Contents
Introduction 2
Valuation method 2
Investment banks as the sell side and the buy side advisors 2
Discussion 3
Valuation method 3
Investment banks as the sell side and the buy side advisors 5
Conclusion 9
Reference 10

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Introduction
Valuation method
The valuation method is the method of understanding the value of a company for
merging with that company or for the acquisition of the company. There are two methods
under the valuation technique; these are the liquidation technique and the technique of going
concern. In going concern method the business of the company is given high importance. If
the acquiring company is interested in the acquisition for a superior position in the market or
to remove the company from the market, then the business of the company does not matter.
This study will discuss the various methods for understanding the value of a company for
merger and acquisition of a company and provide a conclusion based on them.
Investment banks as the sell side and the buy side advisors
Investment banks plays the most important role for both the sides of a corporate
entities and the investors or the commoners that looking to invest in the corporate entity. The
corporates are looking to issue share to get investment for their business and the commoners
are looking to invest their money in the shares of the corporate entities to increase their
money. Investment banks are the ones that come into place here. Here, the investment banks
advice both the sides on what will be best for both for each of them. This study will examine
the various ways in which the investment banks advises the two side that are the sell side and
the buy side.

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Discussion
Valuation method
The various approaches for understanding the value of a company for merger and
acquisition of a company is as follows:
1) The first way for understanding the cost of a company is to consider the price to
earnings ratio of the company. The Price to Earnings ratio helps in understanding
whether the stock is expensive concerning the earnings that the share provides. For
understanding the value of a company, the price to earnings ratio of the next four
quarters is taken into consideration (Sha 2017). If the price to earnings ratio is high,
the shareholders of a company will expect that the share will yield a high return. The
high price to earnings ratio also indicates that the company is in a good position as its
shares are expensive as the shareholders are willing to invest more.
2) Enterprise value to the sales (EV/Sales) ratio is another ratio that is to be taken into
consideration for understanding the cost of a company. If the EV/Sales ratio is low
then it is attractive for the company looking for acquiring as the company’s sales are
high and it can be used to pay the debts and the equity of the company. If this ratio is
negative, then it indicates that the cash of the company is enough to pay off its
investments and liabilities (Chen and Jiang 2019). EV/Sales ratio is one of the most
proper techniques for evaluating a company. But an EV/sales ratio does not show
whether the company is in a good position or not.
3) The book value of a company is another method for evaluating a company for the
merger and acquisition purposes. The book value of a company is the value of a
company without considering the intangible assets of a company (Maulina and Dewi
2018). In the book value method, the intellectual properties of the company are also
not taken into consideration. The efficiency of the management and its employees are

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not taken into account (Setiyorini and Kartika 2018). The book value of the company
considers whether the company uses different accounting techniques or not.
Liabilities of a company might also be considered while understanding the cost of a
company for merger and acquisition. So, the book value is a method computes the
value of a company based on the tangible assets of the company.
4) The liquidation value is another method by which the company’s value can be
assessed. The liquidation value of the company considers the amount that can be
retrieved if the company sales the assets of the company that is to be acquired. For
selling the assets of a company, the appraiser method is used. The liquidation method
is generally used for firms that are facing distress in its financial condition. There are
certain inside factors relating to the appraiser method these are that the liquidation
value of a company fluctuates now and then (Cheng, Wang and Fan 2016). Also, the
element like the actual condition of the assets of a company that is to be acquired is
considered.
5) The market value of the share of the company is another method that is to be
considered while evaluating a company. For calculation, the market value of a
company the acquiring company must multiply the number of shares of the company
to be acquired with the total outstanding shares (Anifowose et al. 2018). Also, the
market value of the company to be obtained is by multiplying the price of each bond
with the number of bonds. The book value of a company is often regarded with the
market price of the bonds issued by the company (Gouveia et al. 2018). The market
value of a company is an excellent method for getting the cost of a company. But this
method can only be used for companies that are listed and are analyzed.
6) The replacement method is another way of evaluating a company for merger and
acquisition. This method takes into consideration the amount of money that will be

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required to replace the company that is to be acquired. But this method is not used
currently for estimating the value of a company. In this method, the acquiring
company forces the company to be acquired to sell, or it will provide high
competition to the target company so that it fails to continue operations and get
removed from the market (Hung, Chiu and Wu 2017). This method of forcing the
target company to sell is done until it is found that the company will not sell. If the
company does not sell, then the acquiring company will compete and then remove the
target company to sell.
7) Discounted cash flow method is another method used by companies for acquiring
another company. This method is based on the cash flow of the company
(Schumacher, and Klönne 2018). The target company’s cash inflow and outflow and
their growth are taken into consideration. The value of the cash at the end of the
financial period and the future cash flows are used to calculate the Discounted
cashflow. The free cash flows to the target company in the final period is considered.
Investment banks as the sell side and the buy side advisors
There are three steps through which a corporate entity get advice from Investment
banks. These are as follows:
1. A corporate entity that has to increase the funds in the company can ask for
advice from investment banks for advice on how to increase funds. These
funds can come through two sources that are through the use of debt or
through the issue of shares (Loh and Stulz 2018).
2. The investment bank then examines the various financial factors of the firm
and then sets a net value of the firm (Kadan et al. 2017). This analysis
involves the financial analysis of the firm like the financial performance of the
firm like its ability to generate profits.

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3. The investment bank then creates several financial assets for the corporate
entity like stocks, bonds, etc. and then makes them available to the ones that
are looking to invest their money (Merkley, Michaely and Pacelli 2017).
There are several differences between advices that are provided by
investment banks to the sell side and the buy side. These are as follows:
For the Sell side:
1. The investment banks may advice the corporate entities regarding the different
major transactions in the organisation (Lawrence, Ryans and Sun 2017).
2. The investment banks may advice the corporate entities regarding the ways it
can increase the funds in the company.
3. When a corporate entity is looking for merger and acquisition then the
company may ask for analysis and other advices from the investment banks
regarding the valuation of the firm and other reasons.
4. The corporate entities are always looking to get into new businesses and also
to build a well-established relationship with the different organisation.
Investment banks help these firms in doing so.
5. The investment banks make the securities of the companies available to the
ones that are looking to invest in such securities and also sell those securities
to them
6. The investment banks advices the corporate entities for the creation of
liquidity.
7. The investment banks help the corporate entities to gain a position in the
market.

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8. The investment banks provide certain services to its corporate clients like
cover for their equity research.
9. Also, the investment banks help in evaluating the net worth of the firm.
For the buy side:
1. The investment banks take responsibility of the money provided by the
various clients or the investors and invest them in various securities (Jung,
Wong and Zhang 2018).
2. The investment banks are the ones that take the decision to buy or sell the
securities that are held by the clients (Brown et al. 2016).
3. The investment banks also asses and manage the risk relating to the securities
bought or to be bought by the client (Crawford et al. 2018).
4. The investment banks also help its clients to research the financial market and
find the best securities that best suit them and also meet their risk limits.
5. The investment banks also create the model of the corporate entities and
evaluate them to find the best corporate entity for the clients to invest in.
6. The investment banks are responsible to find the interested investors and
invest their money in the securities that are available in the market.
7. The investment banks responsible to invest the assets of the clients in such
securities so that their assets increase.
There are various responsibilities that are required to be met by the
investment banks to advice both the clients that is on the sell side and the buy
side. These are as follows:
On the sell side:

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1. The investment banks must be able to do proper research on the industry that
the client company is working on.
2. Proper modeling and valuation of the firm must be done.
3. The investment banks must be able the manage the relationship of the client
firm with the other companies.
On the buy side:
1. The investment banks are responsible for managing the portfolio of its clients.
2. The investment banks are responsible for investing the wealth of the clients in
securities and gain returns for them.
3. The investment banks invest in the equities of different companies.
4. The investment banks also use the money provided by the clients and invest
them in the various startup companies that invest in venture capital.
5. Also, the investment banks hedge the funds provided by the investors to gain
high returns.
Conclusion
This study concludes that the valuation method for getting an understanding of a
company is very efficient. The valuation method uses several ratios and other techniques to
evaluate a company. It can be said that a valuation method is a quantitative approach. If the
valuation method is operated correctly, then this method will give proper results regarding the
value of a company. This method also reduces the dependence of companies on the record of
the target company. This study also concludes on the basis of the advising role of the
investment banks to the various investment banks that both the sell side and the buy side of
the financial market need the investment bank for their needs. These needs vary based on the
type of business the sell side is running and the amount risk and return the buy side is

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expecting. For assessing the value of a firm an investment bank does uses many techniques
like the ratio analysis of the firm, assets of the firm, intellectual property of the firm, etc.
Also, for the buy side the investment bank researches the market and finds the best ways for
them to get their expected level of return and then invest their money. After investment of the
client’s money the investment banks decides on when to sell those securities to get the best
returns.

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