What Does Stand-Alone Value Mean?
Stand-alone value is the value of a company in its present condition. This includes the assets owned, personnel, business relationships and other variables. This value determines the company's valuation in relation to other companies in the same industry.
Divestopedia Explains Stand-Alone Value
Stand-alone value is used as a valuation method to determine if a merger and acquisition is a suitable strategic decision. Company A may perform well in a specific industry, but a merger with company B that operates in a related field would greatly grow the value of the two companies. This newly created value is called a synergy effect. The acquirer undertakes the acquisition with the strategic goal that the new carve-out business will enhance the valuation of the parent company.
Due diligence must be performed during the merger and acquisition negotiation period in order to determine the true synergies created. For example, a software carve-out entity that is acquired without the human capital to create the software, endures a reduction in overall value as the company must incur additional costs to hire and train new employees.
Enterprise value is another valuation method for the acquirer to keep into consideration as it affects the bid price that a company will pay for a target firm. In determining the bid price, company A performs an analysis of the future cash flow of company B as a stand-alone business. A higher enterprise value for company B would raise the bid price and still project a positive net present value for shareholders. Stand-alone value, therefore, provides a benchmark for corporations and investors to use in the decision-making process of a company takeover.