Asset Valuations:
Buying and selling companies: what Corporate Counsel
should understand
Yves Heijmans, Lead European Counsel, Chevron Phillips Chemicals Int NV
Alessandro Macri, Legal Counsel, GMAC Financial Services
Mathias Schulze Steinen, Partner, K&L Gates LLP
Introduction / Scope of session
Asset Based Valuation
Income Based Valuation
Market Based Valuation
Case Study
Value & Valuation
Value is
• an economic concept,
• an estimate of likely prices to be concluded by a buyer and
a seller,
• not a fact.
Valuation is the process of determining the “Economic
Worth” of an asset or company under certain assumptions
and limiting conditions and subject to the data available on
the valuation date.
Purposes for Valuation
Strategic Planning Dispute Resolution
Regulatory Mandate Public Offerings
Compensation schemes Mergers & Acquisitions
Objectives of Valuation
Mediation: results in arbitration award value (e.g., stock
swap)
Reasoning: argument is backed up by value (e.g., in
unfriendly takeover)
Counseling: decision is based on value (e.g., minimum /
maximum price for seller / buyer)
Key facts of Value & Valuation
• Price is not the same as value
• Value varies with person, purpose and objective
• Valuation is hybrid of art & science
• Transaction concludes at negotiated prices
Main Valuation Methods
Asset based /
Balance Sheet
Income based
Market based
Others
Book Value
Capitalization of
Earning
Comparable
Companies
Market Multiples
Contingent Claim
Valuation
Liquidation Value
Discounted Free
Cash Flow
Comparable
Transaction
Multiples
Price of Recent
Investment
Replacement
Value
Market Value (for
Quoted Securities)
Rule of Thumb
Asset Based Methods
Commonalities:
• Companies' value lies basically in its balance sheet.
• Business is a set of assets and liabilities that are used as
building blocks to construct the picture of business value.
The difference of these assets and liabilities is the
business value.
Different Approaches:
• (adjusted) book value
• liquidation value
• replacement value
Critics to Asset Based Methods (1/2)
Viable method for
• companies having reached the mature or declining growth
cycle,
• property and investment companies having strong asset
base,
• evaluation of entry barrier that exists in a business.
Critics to Asset Based Methods (2/2)
Method not a true indicator of the fair business value, as
• value reflected in books is historical in nature and does
not usually include intangible assets and earning
potential,
• static viewpoint that does not take into account temporary
effects such as evolution of the company, money’s
temporary value, industry’s current situation, human
resources, organizational problems,
• it does not cover impact by accounting policies which may
be discretionary at times.
Main Valuation Methods
Asset based /
Balance Sheet
Income based
Market based
Others
Book Value
Capitalization of
Earning
Comparable
Companies
Market Multiples
Contingent Claim
Valuation
Liquidation Value
Discounted Free
Cash Flow
Comparable
Transaction
Multiples
Price of Recent
Investment
Replacement
Value
Market Value (for
Quoted Securities)
Rule of Thumb
Asset Based Methods: Book Value (1/2)
Form of valuation that is based on company’s book value
(i.e., net worth) = shareholders’ equity stated in the balance
sheet (capital and reserves).
• It is also the difference between total assets and liabilities,
i.e., the surplus of the company’s total goods and rights
over its total debts with third parties.
Asset Based Methods: Book Value (2/2) Example (Beta Inc. Official Balance Sheet in Million Euros):
• Method entirely dependent on the accounting criteria
which are subject to a certain degree of subjectivity and
differ from “market” criteria.
• Book value almost never matches the “market” or “fair”
value.
Assets Liabilities
Cash 5 Accounts payable 40
Accounts receivable 10 Bank debt 10
Inventories 45 Long-term debt 30
Fixed assets 100 Shareholders' equity 80
Total assets 160 Total liabilities 160
Adjusted Book Value (1/2)
Assets Liabilities
Cash 5 Accounts payable 40
Accounts receivable 8 Bank debt 10
Inventories 52 Long-term debt 30
Fixed assets 150 Shareholders' equity 135
Total assets 215 Total liabilities 215
Net worth is obtained when the values of assets and
liabilities match their market value.
Example (Beta Inc. Official Balance Sheet in Million Euros):
Adjusted Book Value (2/2)
• Method seeks to overcome the shortcomings that appear
when purely accounting criteria are applied in valuation.
• To be factored in also contingent liability, tax shields on
accumulated losses, impact of auditors qualification and
due diligence, money to be received from warrants, stock
options, impact of corresponding shares.
Main Valuation Methods
Asset based /
Balance Sheet
Income based
Market based
Others
Book Value
Capitalization of
Earning
Comparable
Companies
Market Multiples
Contingent Claim
Valuation
Liquidation Value
Discounted Free
Cash Flow
Comparable
Transaction
Multiples
Price of Recent
Investment
Replacement
Value
Market Value (for
Quoted Securities)
Rule of Thumb
Liquidation Value
Company’s value if it is liquidated = its assets are sold and
its debts are paid off
• Value is calculated by deducting the business’s liquidation
expenses (redundancy payments to employees, tax
expenses and other typical liquidation expenses) from the
adjusted net worth.
• Method’s usefulness limited to a highly specific situation.
BUT: Always represents the company’s minimum value as a
company’s value, assuming it continues to operate, is
greater than its liquidation value.
Main Valuation Methods
Asset based /
Balance Sheet
Income based
Market based
Others
Book Value
Capitalization of
Earning
Comparable
Companies
Market Multiples
Contingent Claim
Valuation
Liquidation Value
Discounted Free
Cash Flow
Comparable
Transaction
Multiples
Price of Recent
Investment
Replacement
Value
Market Value (for
Quoted Securities)
Rule of Thumb
Replacement Value
Investment that must be made to form a company having
identical conditions as those of the company being valued.
• Does not include assets that are not used for the com-
pany’s operations, e.g. unused land, holdings in other
companies.
• Three types of replacement value are usually defined:
- gross substantial value: asset’s value at market price,
- net substantial value: gross subst. value less liabilities,
- reduced gross substantial value: gross substantial
value reduced only by value of the cost-free debt.
• Not relevant in case of a valuation for a going concern.
Main Valuation Methods
Asset based /
Balance Sheet
Income based
Market based
Others
Book Value
Capitalization of
Earning
Comparable
Companies
Market Multiples
Contingent Claim
Valuation
Liquidation Value
Discounted Free
Cash Flow
Comparable
Transaction
Multiples
Price of Recent
Investment
Replacement
Value
Market Value (for
Quoted Securities)
Rule of Thumb
Value is determined by comparing the subject, company or
assets with its peers or transactions happening in the same
industry and preferably of the same size and region.
• This method is easiest to use when
- large number of assets comparable to the one being
valued,
- assets are priced in the market,
- there exist some common variable that can be used to
standardize the price.
Market Based Methods (1/2)
Market Based Methods (2/2)
• Whereas no publicly traded companies provides an identi-
cal match to the operations of a given company, important
information can be drawn from the way similar enterprises
are valued by public markets.
Main Valuation Methods
Asset based /
Balance Sheet
Income based
Market based
Others
Book Value
Capitalization of
Earning
Comparable
Companies
Market Multiples
Contingent Claim
Valuation
Liquidation Value
Discounted Free
Cash Flow
Comparable
Transaction
Multiples
Price of Recent
Investment
Replacement
Value
Market Value (for
Quoted Securities)
Rule of Thumb
Market Multiples of Comparable Listed Companies are
computed and applied to the Company being valued to
arrive at a multiple based valuation.
• Most valuations in stock markets are market based.
• The difficulty is the selection of a comparable company,
since it is rare to find two or more companies with the
same product portfolio, size, capital structure, business
strategy, profitability and accounting practices.
Comparable Companies Market Multiples
Method
Understanding the CC Method (1/2)
Identify comparable firms and determine values
from market data (peer)
Adjust values for different accounting methods
Calculate the multiple based on the peer group's
base and values
Estimate the base of the multiple for the subject
business unit or company
Apply the multiple from the peer group to the
subject business unit or company
Understanding the CC Method (2/2)
Identifying relevant comparables (examples):
• Price / Earnings ratio: market value of equity on the
basis of net income of the company
• Price / Book ratio: market value of equity on the basis of
book value of the company
• EV / Sales ratio: enterprise value on the basis of compa-
ny's net sales
• EV / EBITDA ratio: enterprise value on the basis of
operating efficiency
Main Valuation Methods
Asset based /
Balance Sheet
Income based
Market based
Others
Book Value
Capitalization of
Earning
Comparable
Companies
Market Multiples
Contingent Claim
Valuation
Liquidation Value
Discounted Free
Cash Flow
Comparable
Transaction
Multiples
Price of Recent
Investment
Replacement
Value
Market Value (for
Quoted Securities)
Rule of Thumb
Mostly used for valuing a company for M&A: acquisitions or
divestitures are identified that have taken place in the
industry which are similar to the transaction under
consideration. The multiples implied by their purchase prices
are used to assess the subject company’s value.
• Greatest impediment in finding truly comparable trans-
actions: absence of available information on private trans-
actions based on which such transactions took place.
• The more recent the transaction, the better this technique.
Comparable Transaction Multiples Method
Comparable Transaction Multiples Method:
Market Data for 2012
Main Valuation Methods
Asset based /
Balance Sheet
Income based
Market based
Others
Book Value
Capitalization of
Earning
Comparable
Companies
Market Multiples
Contingent Claim
Valuation
Liquidation Value
Discounted Free
Cash Flow
Comparable
Transaction
Multiples
Price of Recent
Investment
Replacement
Value
Market Value (for
Quoted Securities)
Rule of Thumb
Market Value Method (for Quoted Securities)
Most preferred method in case of frequently traded shares
of companies listed on Stock Exchanges having nationwide
trading.
Reconciliation and Value Conclusion
• Different methods show different range of values.
• Valuer has to consider relevance of each method depen-
ding upon the purpose and premise of each valuation.
• While selecting the final value:
- Mathematical weighting assigns specific weights to
each approach and weighted average is calculated.
- Conclusion is based on experience and judgment given
the quality of information and the approaches applied.
