In the dynamic landscape of mergers and acquisitions (M&A), understanding the value of a company is crucial. This process, known as M&A valuation, is essential for both buyers and sellers to make informed decisions. 

In 2023 , Indonesia experienced a notable surge in investment. S&P Capital IQ reports that foreign/cross-border investment transactions totaled $2.069 billion (IDR 31.66 trillion) in 2022. This amount grew by 43% in 2023, reaching $2.965 billion (IDR 45.36 trillion).

Thus, whether you're a foreign investor looking to enter the Indonesian market or a local business seeking investment opportunities, knowing how to assess a company's worth can significantly impact the success of a deal.

What is The Valuation Method in M&A?

Why M&A Valuation Matters

How to Determine The Value of a Company for Acquisition

1. Discounted Cash Flow (DCF) Analysis
   
   DCF valuation is a fundamental method that estimates the value of a company based on its expected future cash flows.
   
   By discounting these cash flows to their present value using the company's weighted average cost of capital (WACC), investors can determine the intrinsic value of the business. This method is particularly useful for companies with stable and predictable cash flows, such as mature corporations.
   
   For instance, consider Astra International, Unilever, and Indofood. These companies have established, predictable revenue streams and stable growth prospects, making DCF an appropriate method for valuing them.
   
   Astra International, a leading conglomerate in Indonesia, benefits from its diversified portfolio and consistent cash flow generation. Similarly, Unilever and Indofood, as global and regional leaders in their respective sectors, provide stable and foreseeable cash flows, which DCF effectively captures.
   
   In contrast, DCF analysis is less suitable for startups or companies with significant uncertainties in their cash flow projections. For example, Gojek, before its merger with Tokopedia, was considered too volatile for a traditional DCF approach due to its dynamic growth and evolving business model.
   
   Startups and high-growth companies often rely on alternative valuation methods, such as the Venture Capital (VC) model, Berkoff approach, or market multiples, to account for their less predictable financial trajectories.
   
   This highlights the importance of selecting an appropriate valuation method based on a company's maturity and financial stability, ensuring a more accurate and relevant assessment of value.
   
   
2. Comparable Companies Analysis
   
   Comparable companies analysis involves comparing the target company with similar companies in the same industry.
   
   By analyzing metrics such as the revenue multiple and EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization), investors can benchmark the target company's value against others.
   
   We can see it from one of major players in the Indonesian retail sector: Matahari Department Store. They may compare themselves with other regional players to assess their market position and valuation. Thus, this method helps investors gauge the relative value of a target company in the context of its industry.
   
   
3. Precedent Transactions
   
   Precedent transactions analysis is a widely used valuation method that involves examining historical M&A transactions involving companies comparable to the target company.
   
   This approach estimates the value of the target by analyzing the multiples paid in similar deals, such as price-to-earnings (P/E) or enterprise value-to-EBITDA (EV/EBITDA). By leveraging these transaction multiples, it provides a market-based perspective on valuation, reflecting the premiums and discounts observed in real-world transactions.
   
   This method is particularly valuable because it incorporates market sentiment and the actual prices paid in recent deals, offering insights into what buyers have been willing to pay for companies with similar characteristics. It effectively benchmarks the target company's value against established market standards.
   
   In Indonesia,  recent transactions in the technology sector  illustrate the application of precedent transactions analysis. For example, the acquisition of local fintech startups has provided critical insights into current market trends and valuation benchmarks. These transactions reflect investor interest and pricing in the rapidly evolving tech landscape, where innovation and growth potential can significantly influence valuation.
   
   By analyzing these deals, stakeholders can gain a clearer understanding of prevailing valuation trends, deal structures, and market expectations—helping to inform more accurate and contextually relevant valuations for similar companies.
   
   
4. Asset-Based Valuation
   
   Asset-based valuation is another common method used, especially for companies with significant tangible assets.
   
   This method calculates a company’s value based on the total value of its assets minus its liabilities. It provides a clear and straightforward approach, especially useful in situations where tangible assets play a central role in the company’s operations.
   
   In Indonesia, this valuation method is particularly relevant for industries such as property development and financial services. For instance, property developers are often valued based on the market value of their land and buildings, reflecting the substantial tangible assets they hold. 
   
   Similarly, financial institutions like banks and insurance companies also benefit from asset-based valuation, as their value can be closely tied to their asset holdings, such as real estate investments and financial securities.
   
   Hence, this method provides a solid baseline for valuation, particularly when market conditions are volatile or when assessing companies with substantial physical assets. It offers a practical way to estimate value, ensuring that asset-heavy businesses are accurately represented in valuation analyses.
   
   
5. Earnings Multiple Approach
   
   The earnings multiple approach is frequently used in Indonesia to value companies based on their earnings. This method applies a multiple to the company's earnings, such as EBITDA or net income, to estimate its value. The multiple is derived from comparable companies or industry standards.
   
   This approach is particularly useful for businesses with steady and predictable earnings. For instance, established companies in the consumer goods sector, like Indofood, may be valued using this method, reflecting their consistent earnings performance.