Market Outlook

The realization of strategic investments targeted by the Turkey Wealth Fund, the tender procedures of firms transferred to the Savings Deposit Insurance Fund, and the launch of tender procedures for assets in the portfolio of the Privatization Administration were among the factors that could increase transaction volumes.

Although the main determinants of M&A activity are investors’ appetite and risk perception, foreign investors’ interest in Türkiye was increasing, especially in strategic industries.

The involvement of domestic firms seeking merger and acquisition opportunities could also contribute to higher transaction volumes.

The Valuation Problem

Challenges were also expected in determining the discount rate, selecting the valuation method, deciding the number of years to be included in cash-flow or dividend projections, calculating goodwill, addressing the status of employees and managing the information-room process.

During periods of high domestic inflation, corporate valuations may fail to reflect economic reality accurately.

Discount Rate

Prospective buyers may assess country risk as high because of ongoing systemic risks and may therefore apply a higher discount rate to cash flows or dividends.

The economic value of a company ultimately depends on the growth potential and risk profile of its future cash flows.

Valuation Period

The projection period is generally between four and seven years. However, uncertainty regarding future economic conditions may make long-term projections less reliable and increasingly disconnected from the current economic environment.

Reducing the number of projected years may also reduce the total estimated cash flows included in the valuation.

Share Price and Future Cash Flows

Financial statements resulting in losses can make the dividend discount model unusable. During price negotiations, the buyer may not trust projected future cash flows, while the seller may not wish to sell the company cheaply under negative market conditions.

In a market where comparable-company multiples are difficult to identify, future cash-flow assumptions may become subjective. The discounted cash-flow method may also create results that differ significantly from market expectations.

Appraisal Approaches

Valuation approaches may include book value, net asset value, discounted cash flows, dividend discounting and comparable-company multiples.

The discounted cash-flow method, which is widely used under normal conditions, may produce unreliable results when sales volumes are very low or future expectations are highly uncertain.

The dividend discount model may not generate meaningful results when there is no net profit. Book value may also fail to reflect fair value when historical costs have been significantly affected by inflation.

Under these circumstances, one of the central challenges is finding a valuation model that can be accepted by both the buyer and the seller.

Information Room and Due Diligence

The information room is a stage during which the buyer gains access to important information concerning the seller, including intangible assets such as customer lists, operational knowledge and know-how.

This process forms part of the buyer’s private review and due diligence activities. However, when negotiations do not result in a transaction, the seller may be concerned about the commercial use of information that has already been disclosed.

In an environment where completing a sale is difficult, companies may be reluctant to disclose trade secrets, customer portfolios and other strategically important information.

Status of Employees

Difficulties may arise during negotiations when the buyer views personnel costs as one of the first areas for potential savings, while the seller seeks to protect employees who have contributed to the company for many years.

Alternatives such as sharing severance-payment obligations or deducting part of these obligations from the purchase price may be considered under certain conditions.

Additional Valuation Considerations

In addition to the principal issues discussed above, the following matters may create further challenges during a company valuation or transaction process:

• Control ratio
• Profit-distribution ratio
• Valuation of intangible assets
• Copyrights, patents and licences
• Required fixed-capital investments
• Advances and orders received
• Relations between group companies
• Transfer-pricing practices
• Tax planning and tax risks
• Ongoing litigation
• Off-balance-sheet liabilities
• Sureties and guarantees
• Investment incentives