Corporate Valuation

Art of Valuation: Experience sharing

Tehmasp Minoo Rustomjee
August 6, 2016
IIM Kozhikode

Valuation A Perspective
Valuation is relative to a
specific point in time

Premium
control,
efficiency
synergy

What is being valued

Why it is being valued

Going concern
vis--vis
liquidation

Context

for
and

Timing

Basis

Forward looking
and cash flows key

Extent of
control

Premise
Asset
Method

Earning
Method

Market
Method
2

Revenues / Earnings

Valuation in Real life

Start-up or
Idea
Companies

Rapid
Expansion

High Growth

Mature Growth

Decline

Revenues
Earnings

Time
Revenue in high
Revenue/Current Non-existent or low Revenue
increasing/Operating growth/Operating
revenue/negative
Operations
Income still low or
income also growing
Operating income

Revenue growth
slows/Operating
income still growing

Revenue and
Operating income
growth drop

negative

Operating
History

None

Very limited

Some operating
history

Operating history
can be used in
valuation

Substantial
operating history

Comparable
Firms

None

Some, but in same

stage of growth

More comparables,
at different stages

Large number of
comparables, at
different stages

Declining number of
comparables,
mostly mature

Source of
Value

Entirely future
growth

Mostly future
growth

Portion from existing

assets/Growth still
dominates

More from existing

assets than growth

Entirely from
existing assets

Asset Approach Some key points

Net worth (book value) sometimes do not reflect

Assets which are of enduring nature but have been expensed as

revenue,
Assets of which the historical cost does not capture the real cost,
Replacement value of assets
-Cost of new asset
-Similar condition
-Same utility
-Life of assets total and balance
-Technical life
-Economic life

Asset Approach
Liquidation value based NAV Method

Realisable value of all assets

Cost of disposal

Tax on sale (normal tax, LT/ST capital gain, sales tax)

Time required (discounting)
Retrenchment cost
Outstanding liabilities
Environment liabilities (eg. Mining. Oil companies, shipping, etc.)
Tax on distributed profit

Income Approach (DCF) Some key points

Cash flow projections
Constant prices vs Inflation

Length of discrete period - cyclical business

Assumptions related to :
growth in market, sales volume, etc.
increase in sales price, RM cost, manpower, etc.
changes (expectation) in direct and in-direct taxation
Working capital
Capex

CAPM : Rf, Rm, Beta, Company Specific Risk Premium

Continuity / Terminal Value
Terminal Growth Rate
Check implied multiples and exit multiples

Market Approach - Generally used multiples

Earnings based
Equity Value

PE multiple
EV / EBIT multiple
EV / EBITDA multiple

Business Value

Asset based
Price / Book multiple

EV / Total Assets multiple

Equity Value
Business Value

Others
Sales multiple
Customer multiple
EV / Room, EV / Bed, EV / Subscriber

Business Value

Market Approach (CCM OR CTM) Some key

points
Selection of listed companies / transactions for apple to apple comparison
Time frame
Check for speculative element shareholding pattern, volumes, etc.
Adjustments (Discounts / Premiums) for differences with the comparable
company / transaction

Business level size, margins, growth, etc.

Equity level control, minority discount, etc.
Industry specific appropriate multiples

Valuation Range

Income based

Rs. ___ to ___

DCF

Rs. __ to __

CCM

Rs. __ to __

Asset based

Rs. ___ to ___

NAV - book

Rs. ___

NAV - adjusted

Rs. ___

Market based

Rs. ___ to ___

Market Price

Rs. ___ to __

CTM

Rs. ___ to __

Value

weightages

Rs. ___ to ___

weightages

Weightage will vary on a case to case basis

The final test is common sense and reasonableness
Numbers tell a story

Intangible Assets Types

Marketing related intangible assets

Brand / Trademark / trade name

Internet domain name
Newspaper mastheads
Commercial agreement

Customer related intangible assets

Customer list
Customer contract and related
customer relationships
Non-contracted customer
relationships

Artistic related intangible assets

Plays, operas, ballets

Books, magazines, newspapers,
other literary work
Pictures, photographs, videos

Technology based intangible

assets
Patented technology
Unpatented technology
Computer software
Trade secret
R&D expense acquired

Contract based intangible assets

License, royalty based,

franchising, supplier, advertising
contract
Concession, planning permission
Operating and broadcasting rights
Lease rights
Supply contract
Non compete agreements

Valuation approaches Intangible Assets

Cost
Approach

Based on the cost to reproduce or

replace the asset
Historical Cost
Replacement Cost

Based on the PV of
future earnings / cash
flows to be derived from
ownership of the asset
Excess Earnings
Relief from Royalty

Income /
Economic
Value
approach

Discounted Cash Flow

Incremental Profits /
Price Premium
Based on transactions
involving the sale or license of
similar intangible assets in the
marketplace

What is Valuation and Price?

Value

Sellers subjective value line

Buyers subjective value line

Perspective (set of assumptions)

Area in which
a market exists

3 key points to remember:

Valuation involves informed subjectivity
Price is different from value
Deal is made at a Negotiated Price
"Price is what you pay. Value is what you get."
- Warren Buffett

Value, Investment & Price

Investment
Negotiated price will depend
on buyers willingness and
sellers desirability

Value

Efficiency premium : acquirers ability to

extract better performance from the
business than what has been factored into
the market price or standalone value
Financial leverage and cost
Improvement in consumption norms
Reduction in operating cost
Synergy premium : savings or
performance enhancement emerging from
integration of the two businesses
Improving
stranglehold
in
the
marketplace
Purchase volume discounts
Sourcing logistics (reduction in octroi)
Savings in tax (elimination of a tax
layer)
Control premium : an allowance that
control of target company will add/protect
acquirers worth
Competition blocking
Entry advantage
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Key Issues
Most research findings indicate that the desired anticipated
results do not necessarily fructify
Overestimation of efficiency and synergy benefits
Critically examine (cross-examine) items of such benefits. Develop
quantitative basis for benefit analysis
Run what if scenarios [benefit analysis, sensitivity analysis, return
analysis (tax sensitivity)]

Be wary of un-quantifiable benefits

Check for consequential cost / liability
Loss of benefit (carried forward loss, EOU tax benefit)
Increase in operating cost (labour cost - wage parity)
Increase in tax (eg; sales tax)
Increase in capital cost (stamp duty / lease charges)

14

Key Issues (contd.)

Be vary of unintended consequences
Culture clash, corporate ethics

Loss of key managers

Greens Nth law of nature

anything inorganic is not easily digestible

15

In Summary
Of late, valuations have been soft targets for dispute / litigation of
listed companies
Valuer to keep in mind fairness to all stakeholders

Instances of minority shareholders delaying the merger process

Balance needs to be achieved through transparency, fairness and
best Corporate Governance practices

All in all, its hard to build assets competitively , but its harder to
value them...