Risk-Return Analysis of M&A Investments. A Theoretical Equity Cost Framework for the Valuation Process of Private Companies Acquisitions

M&A deals often have private companies as the target. One of the main concerns of this investment type is how to evaluate the target when the target is a private firm. In fact, traditional Capital Budgeting metrics are at least even inconsistent when it comes to define the target value of a private company because such measures are mostly made for public companies. As the negative outcome of this practice, the quality of the evaluation might be poor because of the imprecise discount factor used for the overtime estimate of the target's free cash flows. Building on such cues, the paper proposes a theoretical framework aimed to reinterpret the risk-return analysis of equity by re-calibrating the evaluation process on the firm's fundamental.