Appraisal right in case of merger prevents investor from paying to the shareholders less than the company is worth. Minority shareholders have the right for an independent valuation of company value and fair stock price. Then investor has to pay fair price for shares.
There are multiple methods of determining the fair price, starting with value of shares on stock exchange and ending with asset-based methods or cash flows. The most popular methods are:
- asset-based valuation
- net asset value
- comparable markets data models
- income based methods
- cash flow based methods
- hybrid formulas
- price to earnings ratio (P/E)
- discounted cash flow
Each method will give slightly different results. The risk is that after the valuation the share price can be lower than the price proposed by the investor.
- Walsh, J. P. (1989). Doing a deal: Merger and acquisition negotiations and their impact upon target company top management turnover. Strategic Management Journal, 10(4), 307-322.
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