The distinction between a merger, an acquisition, a divestiture, and other types of restructurings warrants some clarification. Transactions can come in a multitude of forms, can be a hybrid of several classifications, or in new markets can create a brand new classification all together. Often some of the definitions are used interchangeably or are categorized differently.

There has really been no set standard for these definitions, but we will attempt to simplify and clarify ahead. It is important to understand these core structures to better classify any individual transaction explored.

Merger: A merger is fundamentally the combination of two or more business entities in which only one entity remains. The firms are typically similar in size. (Company A + Company B = Company A).

Consolidation: A consolidation is a combination of more than one business entity; however, an entirely new entity is created. (Company A + Company B = Company C).

Acquisition: An acquisition is the purchase of a business entity, entities, an asset, or assets. Although often used interchangeably, an acquisition differs from a merger in that the acquiring company (the acquirer) is typically significantly larger than the asset or entity being purchased (the target). Acquisitions can take several forms, including the following:

  • Acquisition of assets: An acquisition of assets is the purchase of an asset or group of assets, and the direct liabilities associated with those assets.

  • Acquisition of equity: An acquisition of equity is the purchase of equity interest in a business entity. The differences between an acquisition of assets and an acquisition of equity are important from a legal, regulatory, accounting, and modeling perspective.

  • Leveraged buyout: A leveraged buyout (LBO) is an acquisition using a significant amount of debt to meet the cost of acquisition.

  • Management buyout: A management buyout (MBO) is a form of acquisition where a company’s existing managers acquire a large part or all of the business entity. Acquisitions can be considered hostile or friendly, depending on the assertive nature of the process.

  • Friendly acquisition: An acquisition accomplished in agreement with the target company’s management and board of directors; a public offer of stock or cash for example is made by the acquiring firm, and the board of the target firm will publicly approve the terms.

  • Hostile acquisition: An acquisition that is accomplished not by coming to an agreement with the target company’s management or board of directors, but by going through other means to get acquisition approval, such as directly to the company’s shareholders; a tender offer, and a proxy fight are ways to solicit support from shareholders without direct approval from company management.

Mergers, consolidations, and acquisitions can be categorized further:

  • Horizontal: A horizontal transaction is between business entities within the same industry. Such a combination would potentially increase market share of a business in that particular industry.

  • Vertical: A vertical transaction is between business entities operating at different levels within an industry’s supply chain. Synergies created by merging such firms would benefit both. A good example is within the oil and gas industry. In the oil and gas industry, you have exploration and production (E&P) companies that drill for oil. Once oil is found, the wells are producing, and the energy is refined, distribution companies or pipeline companies transport the product to retail for access to the customer, such as a gas station. So in this example, an E&P company purchasing a pipeline company or a gas station would represent vertical integration—a vertical merger. In contrast, an E&P company purchasing another E&P company is a horizontal merger.

  • Conglomerate: A transaction between two or more unrelated business entities—entities that basically have no business activity in common; there are two major types of conglomerate transactions: pure and mixed. Pure conglomerate transactions involve business entities that are completely unrelated, while mixed conglomerate transactions involve firms that are looking for product extensions or market extensions.

Divestiture: A divestiture is the sale of an interest of a business entity, an asset, or group of assets. Divestitures can be delineated further:

  • Asset divestiture: An asset divestiture is the sale of an asset or group of assets.

  • Spin-off: A spin-off occurs when a parent company creates a separate entity and distributes shares in that entity to its shareholders as a dividend.

  • Equity carve-out: An equity carve-out occurs when a parent company sells a percentage of the equity of a subsidiary to the public. This is also known as a partial IPO.

Other restructurings: Mergers, consolidations, acquisitions, and divestitures can all be considered types of business restructurings as they all involve some level of reorganization aimed to increase business profitability. Although the foregoing are just major categories, other types of business restructurings can be considered to help fuel growth. A share buyback, for example, is when a company buys back shares in the open market. This creates an anti-dilutive effect, hopefully fueling an increase in company stock price. A workforce reduction is another example of a way to reduce costs and improve earnings performance.

Each of these strategies represents other restructuring ways aimed at improving business value.

Achille Ekeu, MBA, CVA

President & CEO

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Updated: Mar 22

The Minister of Secondary Education of Cameroon, Professor Nalova Lyonga Pauline, received The "Special ADEAN AWARD for Leadership, Excellence and Transparency in Management" by the Association of former students of ENSET ANNEXE of Nkolbisson, best known under the French acronym as ADEAN. The ceremony took place on Wednesday, 19 January 2022 at the Distance Education Centre in Yaounde.

Achille Ekeu, the President and CEO of The Washington Valuation Group is the Founder & Chairman of The ADEAN AWARDS program that he created in 2017 in Washington as part of the employee engagement and retention program he offers in his consulting firm to businesses with high attrition rates. This annual AWARDS program focuses on recognizing people in organizations at every level for their accomplishments and devotion to their professions. It also encourages and rewards people who go above and beyond their call of duty to publish a book, create a company to provide jobs to unemployed people, pursue and obtain a Doctorate Degree, and give back to their communities through caritative actions of significance.

During the official ceremony, Pr. Nalova Lyonga Pauline was represented by the Secretary-General of her Ministry, Pr. Fabien Nkot, with all the leaders and stakeholders of the Education family of Cameroon present to witness this Special AWARD ceremony. In Cameroon, the Chairman was represented by a delegation of four former honorees, under the leadership of Ajah Peter Tamasang, assisted by Simon Mairo, Laurence Tchantchou, and Fritz Bell. The Chairman, Achille Ekeu delivered a powerful and strong speech through zoom from Washington during this solemn ceremony. He mentioned that the organizing committee based on public data and facts obtained on the ground decided to offer this Special Award to the Minister of Secondary Education for her actions taken to improve the educational system in Cameroon.

As a reminder, Achille Ekeu is a US citizen of Cameroonian descent, resident of Maryland who graduated in 1992 from ENSET Annex of Nkolbisson in Yaounde, the Capital of Cameroon with a Bachelor's Degree in Mechanical Engineering and a Technical High School Teaching Degree (DIPET1). ENSET is a High School Teachers and Engineering School that is part of the University of Douala, previously known as the University Center of Douala.

For more about this special event, here is the link to the Ministry of Secondary Education's press release. Click Here!

To watch the video of the event, click here.

Here are some pictures of the Special ADEAN Award Ceremony.

From left to right: Ajah Peter Tamasang (Delegation Leader), Simon Mairo, Chairman Achille Ekeu, SG Fabien Nkot, a view of the education leadership of Cameroon, Laurence Tchantchou giving the Special Award to the SG Fabien Nkot, representing the Minister of Secondary Education; and the family picture of the participants at the Award ceremony.

Thank You!

Achille Ekeu, MBA, CVA

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  • Achille Ekeu, MBA, CVA

Generally Accepted Accounting Principles (“GAAP”) follow the rule Current Assets minus Current Liabilities equals Working Capital. This is NOT the working capital formula that should be utilized in business valuation.

As we know, working capital is an integral part of calculating a company’s equity cash flow or the invested capital cash flow. Instead of leaving the calculation to guesswork, the valuator must perform statistical testing of the historical balance sheet and income statement to test for correlation of the working capital in a business valuation context.

James R. Hitchner was one of the first to define Net Cash Flow in his book Financial Valuation, Application, and Models in the following manner.

Net income after tax

Plus: depreciation, amortization, and other non-cash charges

Less: incremental working capital needs

Less: incremental capital expenditure needs

Plus: new debt principal in

Less: repayment of debt principal

Equals: net cash flow direct to equity

The word incremental is extremely important when determining the company’s working capital for each future period.

For example, if a company has $2,000,000 in sales and has earned a profit of $75,000 it is natural to assume (and important to understand) that it has performed well enough to cover all of its fixed and variable costs and overhead. If the company is expected to increase its sales in the next year by $500,000, it is reasonable to understand that it would be necessary to consider what will it cost the company to attain this new level of revenue. What would it take to go from $2,000,000 in sales to $2,500,000 in sales? Remember, it performed well enough to attain a profit at the $2,000,000 sales level so it must only NEED what amount of working capital to attain the next additional $500,000 in sales NOT for next year’s $2,500,000 in sales. Therefore, this additional (incremental) amount of revenue requires what amount of incremental working capital.

You may not have available to you (yet) the forecasted financial statements so you must perform tests of the working capital in order to properly detail and provide support for the change in working capital required in the cash flow calculation. This process WILL provide you cogent support for the percentage of incremental working capital when forecasting the future periods.

Therefore, for business valuation purposes we will follow Aswath Damodaran, Ph.D. (“Damodaran”) who is the Professor of Finance at the Stern School of Business at New York University, where he teaches corporate finance and equity valuation. In his book Investment Valuation, Tools and Techniques for Determining Value of Any Asset, Second Edition on page 261 he defines working capital in the following manner.

Working capital is usually defined to be the difference between current assets and current liabilities. However, we will modify that definition when we measure working capital for valuation purposes.

We will back out cash and investments in marketable securities from current assets. This is because firms invest cash in Treasury bills, short-term government securities, or commercial paper, especially in large amounts. While the return on these investments may be lower than what the firm may make on its real investments, they represent a fair return for riskless investments. Unlike inventory, accounts receivable, and other current assets, cash then earns a fair return and should not be included in measures of working capital. Are there exceptions to this rule? When valuing a firm that has to maintain a large cash balance for day-to-day operations of a firm that operates in a market in a poorly developed banking system, you could consider the cash needed for operations as a part of working capital.

We will also back out all interest-bearing debt – short-term and the portion of the long-term debt that is due in the current period – from the current liabilities. This debt will be considered when computing the cost of capital and it would be inappropriate to count it twice.

Think of it this way even though Damodaran does not explicitly say it. The Net Income is a proxy for the cash build-up within the business. By starting the cash flow analysis with net income, it includes an amount that will inure to the cash balance. Therefore, by excluding cash in the BV-Working Capital calculation it will not be counted twice.

Stated again more simply, Damodaran teaches that the BV-WC (business valuation-working capital) is the result of (Current Assets less Cash), minus (Current Liabilities plus the Current Portion of the Long-Term Debt). The reason for this analysis is that Net Income is a proxy for cash and secondly debt principal payments are made from net income. To “exclude” them from the calculation eliminates the double-counting effect.

Therefore, consider the following when calculating the changes (Delta) in the BV-WC.

Thank You,

Achille Ekeu, MBA, CVA

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