Abstract: The so-called M&A is the abbreviation of M&A, which means to buy part or all of an enterprise. This paper mainly discusses the valuation of the target enterprise in the process of merger and acquisition. This paper first defines the enterprise merger and acquisition, and summarizes the related theories, then focuses on the target enterprise valuation based on discounted cash flow method, and finally summarizes the advantages and disadvantages of discounted cash flow method for target enterprise valuation. I. M&A of enterprises and its related theories 1. The definition of M&A is generally called the abbreviation of M&A, which means to buy part or all of an enterprise. Merger refers to the act that an enterprise obtains the property rights of other enterprises in cash, securities or other forms, so that other enterprises lose their legal personality or change their legal entities and gain decision-making control over these enterprises. Acquisition refers to the behavior of an enterprise buying another enterprise through cash, bonds or stocks. Because acquisitions often occur in the process of enterprise merger, western scholars often refer to enterprise merger as merger & acquisition. That is, m &；; Answer: Although M&A and M&A are different in definition: M&A is that the leading enterprise absorbs other enterprises. The absorbed enterprise finally loses its legal person status, and the leading enterprise continues to exist as a surviving enterprise. Its fundamental symbol is the loss and transfer of its legal person status. After the acquirer obtains the control right of the acquired enterprise, it may or may not dissolve the acquired enterprise. You can retain the legal person status and continue to exist as a subsidiary. Merger is the simultaneous transformation of assets, creditor's rights and debts. However, the acquiring enterprise only bears the risks of the acquired enterprise within the scope of acquisition capital contribution. However, in practice, M&A has many similarities. The most essential performance is that they are not only the external expansion strategy of enterprises to enhance their strength, but also the basic way of capital operation. At the same time, acquisition is an important means and operation mode of merger, and it is difficult to distinguish the difference between them in practice. Because the connection of M&A in operation far exceeds its difference, China usually regards M&A; M&A or M&A generally refers to the property right transaction activities carried out by enterprises to gain control over other enterprises under the action of market mechanism. 2 M&A( 1) efficiency theory. Efficiency theory explains the occurrence of M&A from the perspective of economics. It holds that M&A has potential benefits to the whole society and can improve the efficiency of all participants, which is mainly reflected in the improvement of management performance or some form of synergy. The application of efficiency theory needs certain preconditions. There are differences in the management efficiency of enterprises. M&A enterprises have excess management capacity, while the target enterprises have excess resources. The management efficiency of the target enterprise can be improved through the intervention of external forces. Efficiency theory is convincing in explaining M&A's motivation, but in what sense M&A is caused by efficiency improvement or synergy, further investigation and analysis are needed. (2) Agency problem and agency problem and managerialism. The low shareholding ratio of managers will lead to the agency problem that managers don't work hard or use management privileges to pursue private enjoyment. The agency problem is that shareholders entrust managers to manage the company's legal person property and need to pay a certain cost, that is, agency cost. There are two typical views on the agency problem in M&A. One view holds that the replacement of the board of directors brought by M&A and the re-appointment of senior executives brought by agency competition can provide an external mechanism to control the agency problem. Another view is that M&A is only a manifestation of agency problem, not a solution. (3) Free cash flow hypothesis. Free cash flow refers to cash flow that exceeds the net present value of all investments that can bring positive returns but are lower than the related cost of capital. Free cash flow should be completely handed over to shareholders, which can reduce the rights of managers and avoid agency problems. Through mergers and acquisitions, enterprises can appropriately increase the proportion of liabilities that must be paid in cash in the future, reduce agency costs and increase enterprise value. The free cash flow hypothesis is used to explain the conflict between shareholders and managers, and then explain the motivation of mergers and acquisitions, which makes the theoretical research further. But it is not suitable for analyzing growth companies that need a lot of capital investment. (4) Market power theory. The core view of market power theory is that increasing the scale of enterprises can increase the power of enterprises. Enterprise power is reflected in the control of the market by enterprises reflected by market share. M&A is the result of market competition. On the one hand, it can effectively lower the threshold for entering new industries. By taking advantage of the assets, sales channels and human resources of the target enterprise, the low-cost and low-risk expansion of the enterprise can be realized. On the other hand, it can reduce competitors, increase market share and gain long-term profit opportunities. (5) tax consideration)o Tax consideration holds that M&A is often taken by enterprises because they cannot afford high taxes. Some M&A enterprises decided to sell because they could not continue to operate because of heavy taxes. Some M&A enterprises implement M&A activities in order to obtain the benefits of tax relief. Tax incentives can partly explain the emergence of mergers and acquisitions. Enterprises with excessive book surplus can reduce annual tax expenditure by increasing the share of annual pre-tax losses through mergers and acquisitions. If the government encourages mergers and acquisitions through tax breaks, this benefit will be more obvious. However, whether tax considerations will lead to mergers and acquisitions depends on whether there are alternative methods to obtain the same tax benefits. II. Valuation Analysis of Target Enterprise Based on Discounted Cash Flow Method 1, Applicability and Assumptions The discounted cash flow evaluation method is also called DCF. The theory holds that the real or intrinsic value of an asset depends on its ability to create future cash flows, that is, the value of any asset is equal to the sum of the present values of all its expected future cash flows. Asset owners and potential investors only pay attention to cash flow, which determines everything. The discounted cash flow method is a theoretical method. It is the basic method of capital budgeting and widely used in investment project evaluation and securities valuation. Discounted cash flow method technology is not only suitable for internal growth investments, such as increasing existing production capacity, but also suitable for external growth investments, such as mergers and acquisitions. According to statistics, about half of the enterprises with acquisition intention mainly rely on discounted cash flow method technology to evaluate M&A.. Most of them show that the discounted cash flow method is the most mature value evaluation method, but the defect of this method is that it is too subjective and needs a series of assumptions as the premise. Its theoretical basis is based on three assumptions (1) that money has time value; (2) The future cash flow can be reasonably estimated. (3) The marginal capital cost of an enterprise's available capital is similar and predictable to the convertible income of its investment capital. 2. Basic principle analysis The discounted cash flow method examines the company's value from the perspective of cash and risk. Under certain risks, the more cash flow the assessed company can generate in the future, the higher the company value. The intrinsic value of a company is directly proportional to its cash flow. Cash flow is inversely proportional to the company's value and risk under certain circumstances. In practice, the discount rate is arbitrary. The discount rate is set to a small discount value and the discount rate is set to a large discount value. When using this method, we must first determine what the future cash flow includes, and then estimate the future cash flow, which can be obtained by estimating the future income growth rate, and then consider how high the discount rate should be to meet the future growth of the target enterprise. The decision to increase the discount rate by one percentage point may play a decisive role in M&A decision, so it is necessary to choose carefully. 3. Evaluation model types Among all enterprise value evaluation models based on cash flow, according to the different definitions of cash flow and discount rate, there are two basic ideas for enterprise value evaluation: one is to regard shareholders as the requester of the ultimate rights and interests of the enterprise, and the other is to regard the fund provider of the enterprise as the requester of enterprise rights and interests. Enterprise value is the whole enterprise value, including shareholder rights and interests, debt value and preferred stock value. The first way of thinking is called the equity method enterprise value evaluation model, which is an evaluation method to discount the dividends and stock price fluctuation income obtained by shareholders during their holding period. The second enterprise value evaluation model, called free cash flow, regards the investor as the requester of the ultimate rights and interests of the enterprise, and the free cash flow generated by the enterprise in the future belongs to the investor, and thinks that the present value of free cash flow is the value of the enterprise. 4. Steps to evaluate the value of the target enterprise Step 1: Predict the free cash flow that investors can get within a certain time range (usually 5 years-10 years). The last year of this time range is called "final year": Step 2: forecast the free cash flow generated after the final year; Step 3: Discount the expected free cash flow with the weighted cost of capital to get the present value, that is, the present value of the cash flow available to the creditors and equity holders of the company. Step 4: Sensitivity analysis of discounted cash flow valuation. Because of the uncertainty in the forecasting process, M&A enterprises should also check the sensitivity of the target enterprise's valuation to the predicted values of various variables. This analysis method can reveal the defects of cash flow forecast and some main problems that M&A enterprises need to pay attention to. Iii. Effect evaluation of cash flow discount method 1. Advantages of cash flow discount method The purpose of M&A is to gain value from synergy and future income of the target enterprise. As a method to evaluate the intrinsic value of an enterprise, the discounted cash flow method is more suitable for M&A evaluation than the asset value method. From the long-term trend, the application of this method should be encouraged, because it defines the enterprise value from the perspective of financial management and sustainable management. The definition of enterprise value as the present value of free cash flow is based on the following considerations: (1) According to the theory of capital structure, the main purpose of enterprise management is to create and maximize enterprise value. Enterprise value is composed of various factors that create value, and these factors can only be effective through integration: enterprise value is not a simple combination of individual assets, and the integration of individual assets can produce 1+ 1 >. The effect of 2 is that the enterprise value may be greater than the algebraic sum of all individual asset values. (2) The theory of going concern holds that the purpose of an enterprise's existence or merger is not the income it realized in the past, but the value of its assets now, but its ability to obtain cash flow in the future. As long as the future free cash flow of the enterprise is positive, the enterprise can continue to operate, have the value of existence, produce certain utility value and form enterprise value. It is precisely because of the above characteristics that modern enterprise value cannot accurately express the connotation of enterprise value through the concepts of profit, single asset value and income brought to investors. Only by using the present value of future free cash flow of various factors can the enterprise value be properly measured. 2. Disadvantages of the discounted cash flow method Under the discounted cash flow method, managers only passively estimate and accept the future market conditions, directly predict the future cash flow according to the judged capital cost to determine the scheme to be selected at the current moment, and then do not change the initial decision according to the development of the situation. However, in the real society, the market environment is constantly developing and changing due to factors such as competition. The real cash flow is likely to be very different from the value predicted by managers at the initial stage of investment. It is precisely because of the insufficient consideration of "variables" in the real environment that the calculation formula of cash flow discount method appears to be valued, and the accuracy of cash flow discount method depends on the accurate estimation of future events. Therefore, the main deficiency of cash flow discount method is that it can not flexibly deal with the difference between expected value and actual value.