The kind of financial analysis the acquirer conducts—multiples from comparable companies or transactions, discounted cash flow (DCF), a combination of these, or another approach entirely—will depend in part on the strategic reason for buying the company. Revisiting the list of acquisition reasons provided in Strategy, here are some valuation prompts:  

• Bargain hunting. To “buy low”—for example, to take advantage of a price that is low in comparison to current stock prices, or in relation to the cost the buyer would incur if it built the company from scratch. Regarding current stock prices, this is clearly a candidate for multiples (e.g., price/earnings, earnings per share) to the extent that the business has steady, predictable, consistent earnings and cash flows with minimal variability from items such as seasonality and systemic shocks. As for the cost to build, this is a cost-based approach unrelated to multiples and DCF. This is not so much valuation as appraisal, because its focus is on assets, especially tangible assets. Cost-based appraisals can be useful in fire sales due to impending bankruptcy.
• Control. To seek control over an underperforming company with dispersed ownership by waging a tender offer or proxy fight. In such cases, the would-be controller typically seeks to increase total shareholder return (TSR) and may use that ratio to point out underperformance.
• Cost savings. To reduce the cost of operations of the acquiring and/or target company by combining both companies’ operations and eliminating redundancies. Ratios related to profits will be key here.
• Diversification. To hedge against risk in current industries by investing in others. A diversification-oriented acquirer may choose DCF or an earnings multiple as a valuation model because it lends itself to comparability across industries.
• Financial offset. To smooth financial performance by combining companies with different cash flow cycles, tax profiles, and/or debt capacities. Here, the emphasis is not as much on the amount of cash flow in the future, as on its timing and allocation, so multiples may be the natural choice.
• Growth and scale. To lessen economic vulnerability and/or increase latitude for strategic choices  and major investments (e.g., technology) by increasing the size of the company and thus potential revenues and/or profits (also called margins). A growth-oriented acquirer may consider valuation multiples focusing on ratios that involve sales or earnings.
• Horizontal synergy. To increase market share or reduce competition by buying an actual or potential competitor. Since this kind of acquisition involves a company similar to the acquirer, both comparative multiples and DCF are relevant modes of valuation.
• Management efficiency. To realize a return on investment by buying a company with less-efficient managers and making them more efficient or replacing them. This is a natural candidate for DCF analysis; since the acquirer is relying on a new and different scenario, current and historical multiples will be meaningless.
• Market share. Increase market share by gaining more customers and reducing competitive threats (market power). One valuation metric to include here will of course be market share of the target (but make sure no antitrust alarms are triggered).
• Strategic progress. Accomplish strategic goals more quickly and more successfully. A progressive acquirer will rarely value the target company by itself but will value the future combined company—typically with DCF, using postcombination scenarios. 
• Talent or treasure acquisition. To obtain specialized talent that might be otherwise difficult to attract via recruiting. Here the valuation metrics will depend on the type of talent/treasure sought.
• New resource/capability combinations. Combine specific resources and/or capabilities to create new value, often in a unique, unprecedented way.
• Vertical synergy. To achieve price efficiencies or other economic benefits by buying a supplier or customer. An acquirer interested in this kind of financial synergy will recast the financial statements showing a different cost structure postmerger and then create a DCF statement from that.

With these types of goals in mind, let’s take a deeper look at the two valuation approaches emphasized in this book: comparable companies and transactions, and DCF. (Note: Many of the valuation techniques that follow will also prove useful in the case of a buyout fund or management group purchasing a company or a company subsidiary.)