Practical Considerations in Share Valuation

The previous topics gave methods; this one deals with what happens when they are used. Different methods give different answers, a price must be agreed, and the same shares are worth different amounts to different people. A small shareholding with no say in the company is not worth the same per share as the controlling block that gives the right to direct the company’s cash flows.

A share in a company with a quoted market is worth more than an identical share that nobody can buy. A bidder that pays in cash gives the target’s shareholders certainty. One that pays in shares gives them a part of the combined company, the risk, and some of the synergy. And before any figure is agreed, someone must check the information it rests on.

This topic covers the practical side of valuation: reconciling the results of several methods into a range, the difference between valuing a minority and a controlling holding, the control premium and the marketability discount, how to choose and justify a price, cash and share offers and the exchange ratio (with the division of the gain from the merger), the role of due diligence and independent valuers, and the limitations of any valuation, with worked examples.

The next topic starts the study of foreign exchange.

The syllabus asks candidates to estimate the value of a business by several methods and to explain the assumptions of each. Read the efficient market hypothesis first.

Reconciling the methods into a range

A valuer who has applied several methods holds several figures. Suppose the figures for a target are: net assets ₦700m; price/earnings ₦980m; enterprise value multiple ₦1,078m; discounted cash flow ₦1,150m. They are not equally reliable and none is “true”. The valuer considers which fits the company and the purpose:

• Asset-based: the floor; most relevant for property or investment companies, or where liquidation is possible.
• Earnings multiples: a stable, profitable trading company with good comparables.
• Discounted cash flow: a company with a clear forecast of cash flows or heavy investment ahead; the method of the acquirer who will control the cash flows.
• Dividend model: a small, non-controlling holding.

One practical way to combine them is to weight them by reliability: with weights of 10% on assets and 30% each on the three going-concern methods, the weighted value is 0.1 × 700 + 0.3 × 980 + 0.3 × 1,078 + 0.3 × 1,150 = 70 + 294 + 323.4 + 345 = ₦1,032.4m. The weights are judgements, so the answer is a range (here, perhaps ₦980m to ₦1,150m, with the asset value of ₦700m as the floor), with a point recommended for negotiation and explained.

Always state the assumptions behind each figure: the earnings used, the multiple and its source, the discount rate and the growth rate, and any adjustments.

Minority and controlling holdings

• A controlling holding gives the right to appoint directors, set dividend and investment policy and change the business, so its value is based on the whole of the company’s cash flows and earning power, plus the value of the changes the controller can make. A bidder pays a control premium over the market price of a minority share (typically a premium of 20% to 40% on the price before the bid; for example a share priced at ₦100 might be bid at ₦125).
• A minority holding gives only the dividend and the price on sale, so its value is based on dividends (the dividend model or dividend yield) and may be discounted for the lack of any say.
• A marketability discount applies to unquoted shares, as they cannot be sold easily: if a quoted share is worth ₦100, an unquoted minority holding in the same business may be worth ₦80 (a 20% discount) or less.

For a controlling holding of an unquoted company, a bidder must weigh the discount for lack of marketability against the premium for control and often offsets them. The valuer should state which is used and why.

In Nigeria, a person who acquires 30% or more of the voting rights of a public company must make an offer to all shareholders, so the price of control is effectively shared with the remaining holders.

Cash and share offers: the exchange ratio

A bidder, Acquirer, has 100m shares at ₦20 (value ₦2,000m). The target has 40m shares at ₦12.50 (value ₦500m). The bidder estimates synergies of ₦120m and offers ₦15 a share, a premium of 20%.

• Share offer.
  The exchange ratio is the offer price ÷ the bidder’s share price = 15 ÷ 20 = 0.75 new shares for each target share, so 40m × 0.75 = 30m new shares are issued.
  The target’s holders then own 30 ÷ 130 = 23.1% of the combined company.
  The combined value is 2,000 + 500 + 120 = ₦2,620m over 130m shares, or ₦20.15 a share.
  The original holders of Acquirer have gained (20.15 − 20) × 100m = ₦15.4m and the target’s holders 30m × 20.15 − 500 = ₦104.6m; the total, ₦120m, is the synergy.
• Cash offer.
  The bidder pays 40m × 15 = ₦600m.
  The target’s holders gain 600 − 500 = ₦100m, with certainty and no further risk.
  The bidder’s holders have a company worth 2,000 + 500 + 120 − 600 = ₦2,020m, a gain of ₦20m.

In the cash offer the target’s holders take a fixed gain and the bidder carries the risk of the synergies not appearing; in the share offer the target’s holders share in both the gain and the risk and defer any tax on a sale. A cash offer must be financed (from cash or new borrowing, which changes gearing); a share offer dilutes the bidder’s existing holders’ control.

Whether the bidder’s shares are over-valued is also a consideration: a bidder with an overvalued share price prefers to pay in shares. The price should not exceed the target’s stand-alone value plus the synergies, or the bidder loses.

Information, due diligence and independent advice

• Due diligence checks the financial, legal, tax, commercial and operational information, and finds hidden liabilities and overstated earnings. The price may be adjusted, or the deal abandoned, on what it finds.
• Independent valuers and fairness opinions give shareholders and boards evidence that the price is fair. For public companies in Nigeria, schemes of arrangement under the Companies and Allied Matters Act 2020 need valuation reports and independent expert opinions to be given to shareholders, and takeover offers need the Securities and Exchange Commission’s authority to proceed.
• Conflicts of interest (directors who will gain from a deal, advisers paid on success) are managed by independent directors and disclosure.

Limitations of valuation

• Every method rests on estimates of earnings, growth, risk and the discount rate: small changes produce large changes in value.
• Market prices are volatile and may be affected by sentiment; in a thinly traded market the quoted price may not be a good guide to value.
• Comparable companies are never identical, and the market may be at a high or low point.
• Synergies are easy to overstate and hard to achieve; integration costs are often underestimated.
• Intangibles (brands, customer relationships, people) are hard to value and may leave after a deal.
• Economic conditions in Nigeria (high inflation and interest rates, exchange rate movements) affect the discount rate, growth rates and the value of foreign-currency assets and debts, so valuations should state the currency and the basis (nominal or real).

The ideas in more depth

Why the price is a negotiation

The target’s shareholders will not sell for less than the value they place on the company, which depends on what they could get elsewhere. The bidder will not pay more than the value to it, including synergies. The agreed price lies between, and where depends on bargaining strength, competing bidders, the availability of alternative targets and information.

Valuations set the limits of the negotiating range; they do not give the price.

Why a share offer shares the risk

If the synergies fail to appear, the value of the combined company falls and the target’s holders, who now own a part of it, bear their share of the loss; with a cash offer they have been paid. A share offer is therefore a way to share the uncertainty about the merger’s benefits, and bidders that are not sure about their own estimates often prefer it.

Sources and references

• The Investments and Securities Act 2025 and the Securities and Exchange Commission rules (takeover offers, mandatory offers at 30% of voting rights, prospectuses for shares issued as consideration); the Companies and Allied Matters Act 2020 (schemes of arrangement); the Federal Competition and Consumer Protection Act 2018. International Financial Reporting Standard (IFRS) 3 Business Combinations governs the accounting for an acquisition.

These points are stated as at 5 November 2026.

Worked examples

1. Ratio.
   15 ÷ 20 = 0.75.
2. New shares.
   40m × 0.75 = 30m.

1. Target.
   600 − 500 = ₦100m.
2. Bidder.
   120 − 100 = ₦20m.

1. Value.
   100 × 0.80 = ₦80.

How to answer in the exam

• Calculate each method and present the results together, with the assumptions.
• Identify the nature of the holding (control or minority) and the status (quoted or unquoted).
• Recommend a range and a price, with reasons, and say how the offer should be paid.
• State the limitations and the further information needed.

Common mistakes in the exam

• Giving one value without a range or assumptions.
• Using the dividend model to value a controlling stake.
• Forgetting the marketability discount for unquoted shares.
• Inverting the exchange ratio.
• Ignoring who gets the synergies.
• Recommending a price above the stand-alone value plus the synergies.

Quick revision

• Show a range from several methods; asset value is the floor.
• Control premium; minority and marketability discounts.
• Exchange ratio = offer price ÷ bidder’s share price.
• Cash: certainty for the target; shares: shared risk and gain; check with due diligence.

Practice questions

These are original questions written in the style of the Institute’s exams. Try each one before you open the answer. Section A is a recall check, because the paper itself is written.

Recall check: multiple choice

Section B style: written questions

A further written question

Model answers

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