VALUATIONS – NEW PERSPECTIVES
Global economies have witnessed a series of unprecedented economic backwardations and a whole host of trial attempts toward financial resolution recently. The deepest impact of this conundrum has been on the worldwide investment and consumption cycles at the corporate and consumer levels respectively. As the world order is once again beginning to adapt to the new found cautious optimism, there appears to be light at the end of the tunnel at least for some of the developed countries to regain their pre-crisis supremacy and for some emerging/developing countries to try and become forces of reckoning during these thinner times. UAE has recently been granted an upgraded status of an “Emerging Market” from the erstwhile “Frontier Market” by MSCI and Dubai has won the hosting rights for the EXPO 2020, which in our opinion are likely to be mid-long term positives for the country in general and for Dubai in particular. In this backdrop, it becomes a rather imperative that we take a step back, and revisit some of the long followed principles of enduring ‘Value Paradigm’ and the resultant implications upon Business Valuation concepts. This article endeavors to reflect upon some such paradigm shifts.
Enterprise Value: Debt levels have recently ballooned out of proportions globally primarily owing to increased borrowings in the developed markets and adverse currency fluctuations in the emerging markets. Macro impacts of this high-gearing scenario is being felt on the economies’ unserviceable net account balances, while at the micro level, the corporate balance sheets are getting more and more indebted. Enterprise valuation approach as opposed to a pure Equity valuation is hence gaining in prominence to make a more meaningful assessment of Business Value.
P/E Ratio: One of the most widely followed valuation tools – the ‘P/E ratio’ has all of a sudden become not applicable for a whole host of companies, primarily functioning with high levels of operating and/or financial leverages, as more and more corporate bottom-lines have turned red recently in the aftermath of the global crisis.
Book Value: The traditional ‘Net Book Value’ approach based on the Historical Cost convention is giving way to current replacement cost value metrics or fair value assessments.
Franchise Value: Sustainable competitive advantages built after years of weathering systemic shifts in consumer demands and preferences have been the underlying success mantra for some of the leading corporations today to generate incremental economic benefits compared to their respective competition(s), thereby creating massive brand values across the globe.
Innovation Value: New age innovation and technology led corporations have created humongous value for investors in the last 2 decades. In the words of Bill Gates, “never before in the history of mankind has innovation offered so much, to so many, in so short a time”.
Growth Value: Widely accepted as the most predominant value determining factor, the ‘growth rate’ of earnings and related cash flows, have taken away the limelight from the erstwhile valuation harbinger offered by highly capitalized brick and mortar businesses.
Liquidity Value: Capital markets across the world have risen sharply recently on the back of benign monetary policies and incessant liquidity flows in the form of Quantitative Easing(QE) in the U.S.A and Long Term Refinancing Option(LTRO) in Europe, thereby raising the market capitalizations of companies. Given that the developed economies will soon be incapacitated from maintaining such ostensibly loose monetary policies in perpetuity (which has already started taking shape in the form of USA’s QE Tapering measures), the marginal value derived from liquidity from here on may decline, yet there is no denying the fact that at least in the immediate past and for now, liquidity has offered the world a significant cushion of value reservoir.
Contingency Value: Under the premise of ‘Contingency Claims’ approach based on contingent new territory scalability models adopted by corporates thriving upon large investments in Research and Development year after year, the Binomial model, the Black Scholes Option Pricing model, and the Decision Tree Analysis model have gained in popularity in recent times allowing the value of flexibility to be factored whilst orchestrating strategic decisions in corporate boardrooms.
Intangibles & IPRs Value: Lastly, but perhaps most importantly, the growing prominence coupled with the alarming absence of one of the greatest value propositions – Intangibles(Brand name, Human Resources, Franchise etc.) & Intellectual Properties(Patents, Trademarks, Copyrights etc.) in the standard frameworks and reporting structures is getting bridged with more and more professionals and corporate decision makers across the globe admitting to the recognition/disclosure of intangibles in the financial reports and ascribing bigger allocations of deal values toward the qualitative intangible values.