Understanding M&A Valuation: Key Methods and Why They Matter

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?

In the context of mergers and acquisitions (M&A), valuing a company involves various techniques designed to assess its worth accurately. These methods help determine a fair price for the company, ensuring that both buyers and sellers can make informed decisions. 
In Indonesia, as in other markets, several valuation methods are commonly employed, each with its strengths and suitability depending on the nature of the company and the specifics of the transaction.

Why M&A Valuation Matters

Valuation is a critical aspect of the M&A process as it provides a comprehensive understanding of a company's financial performance and potential. 

For instance, in Indonesia, a market with diverse sectors such as manufacturing, retail, and technology, understanding a company's value can highlight its strengths, including a strong balance sheet or robust cash flows, thus identifying potential risks. 

Take an example from Tokopedia, a major e-commerce player in the country. At one time, the company attracted significant investment due to its strong revenue growth and market position—underscoring the importance of accurate valuation in securing investment.

Furthermore, accurate valuation helps investors understand the fair value of a target company, ensuring that the price paid reflects its true worth. This is especially important in Indonesia markets , where economic conditions and regulatory frameworks can vary significantly from those in other countries. 

Hence, by using reliable M&A valuation techniques, investors can avoid overpaying for a target company, which can lead to a poor return on investment.

Read our in-depth coverage on divestment:
Divestment Done Right: Essential Insights for Stakeholders

How to Determine The Value of a Company for Acquisition

Determining a company's value involves various M&A valuation methods, each providing different insights into a company's worth. Then, a football field chart could be used as a visual chart that compares each methods. Here, we'll explore some common techniques and how they can be applied to the Indonesian market.

  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.
Read our thorough explanation on M&A mechanisms: Completion Mechanisms in M&A Transactions: Completion Accounts vs Locked Box

5 Factors to Consider When Valuing a Target Company

When valuing a target company, several factors need to be considered, especially in a diverse market like Indonesia. These factors include:
  1. Intangible Assets

    Intangible assets are non-physical elements that can substantially impact a company's valuation.

    Unlike tangible assets, such as machinery or real estate, intangible assets do not have a physical presence but can play a critical role in a company's financial performance and market position.

    In the Indonesian market, where brand reputation and intellectual property are highly valued, incorporating intangible assets into the valuation process ensures a comprehensive assessment of a company's worth. It acknowledges the significant role that non-physical assets play in driving profitability, market success, and long-term sustainability.

  2. Regulatory Environment

    Indonesia's regulatory landscape can significantly impact the valuation of a target company, especially for foreign investors. Acknowledging  local regulations and compliance requirements is essential for accurately assessing the risks and potential costs associated with an acquisition.

    For example, in the financial services sector—encompassing insurance, multifinance, fintech, and banking companies—the licensing requirements imposed by the Financial Services Authority (OJK) play a critical role.

    Companies operating in this sector must obtain and maintain licenses from the OJK, which govern their ability to operate and provide services. These licenses are not merely regulatory formalities; they hold intrinsic value and can significantly impact the valuation of a company.

  3. Market Conditions

    The economic environment and industry trends can affect a company's financial performance and valuation. In Indonesia, sectors like renewable energy and digital services are experiencing growth, making them attractive targets for investors.

  4. Competitive Landscape

    The competitive landscape refers to the dynamics and intensity of competition within an industry, which can significantly affect a company's valuation. Understanding how a company performs relative to its competitors provides insights into its market position, growth potential, and overall value.

    Evaluating the competitive landscape helps in understanding a company's relative position within its industry and its ability to compete effectively. Companies with strong competitive positions, unique advantages, and efficient operations are typically valued higher due to their potential for sustained performance and market leadership.

    Incorporating competitive landscape analysis into the valuation process ensures a thorough assessment of how a company’s competitive strengths and weaknesses impact its overall value.

  5. Financial Performance and Historical Growth

    Detailed analysis of the company’s financial statements, historical performance, revenue growth, profit margins, and return on investment provides insights into its financial health and operational efficiency.
Discover our insights on the thriving software industry: The Growing Importance of Business Software in Indonesia and Southeast Asia

Protemus Capital: Your Trusted Partner for M&A Valuation

Navigating the complexities of M&A valuation requires expertise and local market knowledge. Protemus Capital,  a leading financial advisory firm in Indonesia, offers comprehensive M&A valuation services. 

With a deep understanding of the Indonesian market and access to extensive industry data, Protemus Capital helps both foreign and local investors make informed decisions. Our team of experts utilizes advanced M&A valuation methods to provide accurate and reliable valuations tailored to your investment needs.

Investing in the Indonesian market  presents unique opportunities and challenges. With Protemus Capital by your side, you can confidently navigate the M&A landscape, secure in the knowledge that your investment decisions are backed by thorough and precise valuation analysis. 

Whether you're assessing the value of a public company or evaluating intangible assets, Protemus Capital is your trusted partner in  achieving successful M&A transactions.

Ready to explore how the right M&A valuation strategy can elevate your business? Reach out today and uncover how our strategies can help achieve your goals.


WRITTEN BY

Protemus Capital



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