Module Note | October 2007 (Revised February 2008)

Evaluating M&A Deals: Introduction to the Deal NPV

by Carliss Y. Baldwin

Abstract

Introduces a framework for evaluating mergers and acquisitions. Assumes that the criterion of a good deal is that it creates value for shareholders; i.e., has a positive deal NPV. Looks at the deal NPV from both the buyer's and seller's point of view. Explains how a positive deal NPV leads to positive predicted cumulation of abnormal returns. It then presents a framework for calculating deal NPVs based on the consideration paid, the work to be done, the value of the target, and the value created through restructuring or synergy. Concludes by introducing the concept of 'fragility risk,' which is basically the risk that the buyer's plans will go awry.

Keywords: Mergers and Acquisitions; Value Creation;

Citation:

Baldwin, Carliss Y. "Evaluating M&A Deals: Introduction to the Deal NPV." Harvard Business School Module Note 208-060, October 2007. (Revised February 2008.)