A stand alone company, or stand alone entity, is a firm that is not a subsidiary of another company. Occasionally, a parent firm with diversified businesses, may choose to spinoff a subsidiary as part of its corporate focus and it becomes a stand alone entity. This may also lead to a higher profit potential that independence may bring or a higher price earnings ratio. Alternatively, an independent firm, which was previously a stand alone company may be acquired and absorbed into the parent firm.
Stand Alone Company in Mergers and Acquisitions
In mergers and acquisitions it is important to understand how to value the acquisition target as a stand alone company. Stand-alone value is used to determine if a merger or acquisition is a suitable strategic decision. Calculating the synergistic effect that the transaction will bring to the acquirer may include (but not be limited to) the following elements
- assets owned
- personnel
- business relationships
- distribution channels
- current production or service structure
- operating cost structure
This type of analysis will also help gauge the value of the stand alone company in relation to its peers in the same industry.
Valuation in Merger Arbitrage
In merger arbitrage however the stand alone value can help the trader analyse whether or not there is the possibility of a higher bid. This is frequently done using peer analysis as mentioned above.
What is of greatest importance to the trader however is the stand alone company value should the deal fail. In this case, the trader attempts to calculate the floor price, the price to which the stock will return should the deal be abandoned. This method of calculating the stand alone value allows the trader to assess the downside risk in the trade. Which in turn gives the trader the necessary information to assess the risk / reward profile.
