In general, what do Mergers and Acquisitions professionals prefer when valuing targets?

Mergers and Acquisitions professionals generally prefer using cash flow projections when valuing targets because these projections offer a forward-looking perspective on a company's financial performance. Cash flow projections help to estimate the future cash flows that a target company is expected to generate, which are crucial for assessing the company's profitability and financial health.

This approach allows M&A professionals to consider various scenarios, including potential growth rates, changes in operating expenses, and other variables that may impact future performance. The intrinsic value derived from these projections tends to be more relevant for strategic decision-making, as it aligns the valuation with the actual cash generation capability of the business, an essential factor for investors and stakeholders when evaluating potential returns.

While asset valuations, historical trends, and market comparisons are useful in specific contexts, they may not provide as robust a view of future potential as cash flow projections. Asset valuations can sometimes overlook the earning power of intangible assets, historical trends rely heavily on past performance, and market comparisons can be misleading if the market is not accurately reflecting the valuation of similar companies. Thus, cash flow projections are favored for their ability to provide a clearer picture of future value creation.