To the world at large, the price for a given acquisition often seems like the simplest part of the story. The number in the press release may be big, it may look high or low, but it's still a number, tidy and unambiguous. Company A is buying Company B for, say, $1 billion in cash. Right, got it. Now what about strategy, integration, market share, new products, the selling CEO's pay package and all that other interesting stuff?

Trends in acquisition prices also get the shorthand treatment. A year ago the discussion was about the way abundant credit was, surprisingly, enabling private equity firms to outbid strategic buyers for some targets. After the credit crunch largely sidelined those financial buyers, talk turned to the prospect of lower prices and the opportunities ahead for strategic buyers.

But on both of these levels, there's a lot more going on.

For a corporate dealmaker closing a transaction, the price is anything but simple. That nice, precise number in the deal announcement is actually a complicated bundle of predictions and promises, the product of many long hours of research, analysis and debate by a varied cast of characters on the buy side, adjusted in negotiations with a seller who was probably doing his best to gauge what was going into all that work in his counterparty's shop.

As for overall trends in the prices paid for acquisitions -- well, it's useful to know the lay of the land, to the extent possible. Statistical evidence in this realm tends to be thin, however, and anyway it's retrospective; we'll have a good fix on what's happening now by, say, the end of the year. Meanwhile, the important thing to remember is that the old saw about valuation for portfolio investors -- that it's not a stock market, but a market of individual stocks -- applies doubly when you're talking about buying whole companies.

The key question for any acquirer isn't "What's the target worth?" It is, rather, "What is the target worth to us?" It sounds obvious, but then so do many other important insights into how to succeed at corporate development that have been widely embraced in recent years. And as with other best practices -- say, focusing due diligence more on the business case for a deal and linking it to integration -- it's not so simple to implement.

Implemented it has been, though. For evidence, reconsider last year's phenomenon of PE firms outbidding strategics for targets. The oft-cited reason why this was news (it's not supposed to happen because strategic acquirers have synergies and financial ones typically don't) told just part of the story. Here's the rest: Not only do strategics have synergies, but they've gotten better at mapping them and more disciplined about not bidding into them. So when things get frothy, they are more likely to bide their time.

Which is once more at hand, by many accounts. One corporate dealmaker interviewed for this article said that his company made no acquisitions in 2007 but has already made four this year. Several others said that in general, they think multiples of Ebitda have fallen by a turn or so over the past year. Executives at several acquisitive companies, including IBM Corp. chief financial officer Mark Loughridge, have said recently that they think valuations in their industries have become more reasonable.

But for strategic buyers, the most important metrics are the ones that calibrate the value of the asset in terms of their own plans for it. True, many researchers like to investigate other measures, particularly the relationship between the premium to market value buyers pay and the success or failure of the deals. But while that kind of data is easier to come by, it isn't that illuminating, observes Jeff Gell, global sector coleader of M&A at the Boston Consulting Group.

It isn't just that premium to market value only applies when acquirers are buying all of a public company, which leaves out the majority of deals. "The premium you pay is irrelevant to whether you create value," says Gell, co-author of a recent report on acquisition opportunities for strategic buyers in a downturn. Indeed, BCG's research (presented in "Return of the Strategist") shows that many acquirers succeed when paying a good premium for a financially sound target that has lower profitability than its own (so there's room to improve).

The ability to make these company-specific calls has been developing for many years. First came the tools, most notably discounted cash flow analysis, which arrived in the more financially savvy corners of the deal world along with personal computers and electronic spreadsheets in the 1980s. At that time, companies still tended to rely on the market-based approaches to valuation being offered by the investment banks.

"You'd say, look, here's the 10 other companies in this industry that are public or have transacted, here's the multiples that have been paid for those," recalls Tony Aaron, Americas leader of the valuation and business modeling practice for Ernst & Young Transaction Advisory Services. "You weren't necessarily being acquirer specific."

As the leveraged buyout folks used financial modeling to build their powerful but stripped-down dealmaking engines, the corporate world, a couple of laps behind, began figuring out how to put the tools to work in more complex settings. Part of the impetus, says Aaron, came from acquisition blunders resulting from over-?reliance on market-based valuation approaches.

Over time, the corporate modelers have gotten much better at incorporating the many anticipated details of a future operating business into their analyses -- including those synergies. "Prior to being able to develop these sophisticated DCF-type models, it was very difficult if not impossible to model that in," says Aaron. "It was hard to get a value impact of losing a customer or getting a revenue synergy or a cost synergy."

Today some form of discounted cash flow analysis is used by the majority of corporate acquirers, according to Aaron and other observers, though DCF use isn't universal. Some companies use even more sophisticated tools such as real options analysis, favored by pharma and biotech dealmakers in particular as a way of incorporating multiple, risk-adjusted probabilities into their models. Comparables remain an important reality check for everyone; if your modeling yields a value that's way out of line with what other buyers are paying for similar assets, maybe you're missing something.

Nobody thinks that simply embracing these tools is enough to win a company a gold medal in valuation, however. The tools have limitations, which inevitably come into play in the team sport of corporate acquisitions. When the corporate development team works alongside business unit leaders, corporate allocators of capital and such groups as research and development, people don't always see things the same way -- sometimes on purpose. "A model is no better than the inputs that go into it," says Aaron. Those inputs have to be firmly grounded in strategic detail and owned by the business people who will have to deliver on the strategy. "Without that," says Aaron, "it's just a bunch of numbers.

It's rare to hear corporate dealmakers describe how they model valuation at their companies without quickly getting to the vital question of who owns the inputs. "The business teams develop the assumptions about growth rates, synergies and so forth," says Kevin Coleman, director of corporate development at Ametek Inc., a $2.1 billion-sales manufacturer of electronic and electromechanical gear in Paoli, Pa.

"The businesses own the inputs and forecasts," says Tom Macphee, vice president and director of corporate strategic planning and M&A at Rohm and Haas Co., a Philadelphia-based specialty materials company with $8.9 billion in sales. "We never do a deal that the business doesn't own."

Macphee and his team work with business units serving nine different industries, including electronics, pharma and medical, and building and construction. He describes the valuation process at Rohm and Haas as a triangulation, with three main elements: the discounted cash flow analysis; an accretion-dilution analysis to look at the deal's impact on corporate earnings over the next three years; and an examination of comparable companies.

The DCF is the purest measure of an acquisition's value to the company, says Macphee. The weakness here is that for all its apparent precision, the model is dependent on forecasts of cash flows based on events that may or may not unfold as expected. Running multiple scenarios to get a range of values is part of the solution. Still, setting the crucial risk component of the discount rate is an art, not a science. In January Rohm and Haas bought a Finnish business with some operations in Russia, where the uncertainties of doing business are greater than in more developed markets. Those uncertainties were reflected in a discount rate that was a bit higher and a valuation that was a bit lower. "The valuation becomes the mechanism for capturing the risk," he says.

Ametek does a lot of deals in the $30 million to $80 million range, buying small companies it folds into divisions operating in aerospace and defense, measurement and calibration technologies, materials analysis and other areas. An internally developed DCF-based model is the main tool, used to look at a target first on a standalone basis and then as part of Ametek. "We don't get into intricate modeling exercises," says Coleman.

Accretion-dilution analysis, while as much an accounting and investor relations issue as a valuation exercise, is an important step for Rohm and Haas, as it is for most public-company acquirers. The question, says Macphee, is "When will this acquisition be accretive? Eighteen months is usually as far out as we want to go." An exception calling for a bit more patience, he says, might be a bolt-on acquisition in a high-growth area. Such a deal would be on the small side, however.

Ametek cares about earnings accretion too, but there the solution is even simpler. "We don't do dilutive deals," says Coleman.

Finding comparables is a multidimensional exercise, and often a difficult one, for both these corporate dealmakers. It isn't only the industry sector, of course, that might make the value of one company a relevant benchmark for another. It's also things like the growth rate of the market, the company's position in that market, its margins and the durability of its competitive advantage. Gathering and parsing this kind of data across sectors and geographies is tough, says Macphee -- the more so when in a single transaction the seller might report a higher multiple and the buyer a lower one, with the difference lying in the way the overhead is allocated.

Along with the more formal search for comparables, both companies also benefit simply from being active in their respective markets. Coleman sums up the situation at Ametek this way: "We see so many companies; we have a good feel for where they're trading."

Most fundamentally, what this mix of tools, technique and market knowledge accomplishes -- whether at Ametek, Rohm and Haas or any of a thousand other companies with their own wrinkles on the valuation process -- is to give the different participants in a proposed transaction a language to use in their discussion about whether and how to go forward. That language can be especially helpful for corporate development executives when they face their perennial challenge of serving as the voice of reason while working with business leaders who may be in the throes of deal heat.

Even as they're building the valuation model for a target, everyone on the company team is also thinking about how to use it. The overriding issue becomes: How conservative or optimistic is the model, and how much of the value you expect to create are you willing to share with the seller in order to beat out other bidders and get the deal done?

The anticipated synergies -- both cost and revenue -- are the key. Cost synergies from things like consolidating headquarters or HR departments are easier to achieve and are routinely included in valuation models. It's not unusual for sellers to expect to share in them; private equity firms, for example, will often present a target's multiples to a corporate buyer with the overheads conveniently stripped out.

Revenue synergies, on the other hand, are more speculative. It may be plausible that the target's product will triple in sales when sold through the acquirer's global channels, but it's not a lock. The acquirer might just be surprised by a patent suit in Japan or an objection from a joint-venture partner in Brazil.

Boston Consulting Group's Gell says he sees companies putting revenue synergies into their models but "keeping them in their back pockets." Bidding into them, or even too close to them, is very risky. "You have to think hard before paying the standalone valuation plus all of the cost synergies," he says.

What a well-run valuation exercise does is clarify these issues for the acquirer's entire team. A business manager who signs off on the synergies and other inputs up front and is then held accountable for delivering on them is bound to be more realistic about those inputs. The rationale for a higher bid can be discussed in quantitative and practical terms. The existence of a familiar framework at practiced acquirers such as General Electric Co. makes it easier for upper management or the board to understand and judge a project.

Of course, not even the cleverest companies have processes that enable them to consider every contingency. Some important strategic issues -- for example, the value of a first-to-market advantage that a target might enjoy -- don't lend themselves to modeling. And making the transition from a market with one set of valuation characteristics to a new one (as some technology companies are now doing by entering the consumer products world) can be tricky. Where a key input was previously technological capability, now it's consumer preference and brand awareness. "You start changing your metrics," says E&Y's Aaron.

Nor is DCF in particular without some hazy areas. Kenneth Myers, New York-based vice president of corporate development for Siemens Corp., noted a few in a recent e-mail. One is the acceptable weight of the terminal value component -- what you could sell the target for -- in the model. "Will you proceed as a buyer if more than 50%, 60% or 75% of the value comes from terminal value?" he asks.

And does the weighted average cost of capital piece of the discount rate sometimes inject a bias? If a big company targets a small one and uses its own, lower cost of capital, producing a higher valuation, does it pay too much of the synergy value to the target?

It's also true that all this participation and precision and prudence takes time -- one reason that financial buyers can move faster than strategics and, conversely, why the corporate crowd finds the mergers and acquisitions scene so much more congenial with the PE firms on the sidelines.

Layer in some other big issues not even touched upon here, notably tax considerations, and you start to see the world of complexity corporate dealmakers are learning to tame. You also begin to see just what went into that figure on the press release announcing the deal. It's a number, all right. But if the deal team was doing its job, there's quite a story behind it -- and also in front of it. CD

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