Analysis of the deviation between purchase price and valuation in distressed situations

Abstract

The role of valuation is a very critical one in the restructuring of a company. On the one hand valuations help to take a decision between the liquidation of the company and a going concern under a restructuring plan, on the other hand valuation is important for equity holders and creditors for establishing the value of their assets.<br />A restructuring process often requires creditors to make significant allowances concerning the amount of debt or the corresponding yields. Therefore restructuring processes do not only affect the value of the firm but also the wealth of creditors. Sometimes disputes over the allocation of value arise because the different claimholders disagree over the entire value of the company.<br />Distressed situations of companies often lead to M&A transactions. However the process frequently differs from regular M&A transactions because of the situational interests of the parties involved (e.g. banks, owners, investors, other creditors and employees) and the time constraints in such a process. Therefore the purchase price is not necessarily derivable from common valuation methods. The thesis includes an extensive description of distressed situations and the main parties involved as well as an overview on commonly used valuation methods. Furthermore, the analysis of the case studies gives insights in the rationale of the parties involved and the reasons for the deviation between purchase price and valuation.<br />