The M&A valuation practices of investment banks have undergone a notable shift in recent years with respect to synergies and strategic opportunities, according to a study published in the Journal of Applied Finance.

More scrutiny: All but one of the 11 major investment banks interviewed say they take specific steps to deal with synergies rather than just folding them into the company’s cash flows and discounting all at the same rate. In a similar study done in 1998, only half of the advisors said they made special adjustments to value synergies differently. The authors of the study believe that this trend is due to the increased recognition that planned synergies often don’t pan out.

The purpose of the study was to examine how leading practitioners apply discounted cash flow (DCF) techniques to value companies in an M&A context. The authors found that the application of DCF is far from “routine” and a complex set of judgments is used. The authors write: “Our results serve as yet another reminder that analytic techniques such as DCF do not make decisions but only inform them.”

More details on the study will be in the September issue of Business Valuation Update.