Hafner / Wohlgemuth Corporate Valuation

2. Auflage 2025
ISBN: 978-3-381-13533-2
Verlag: UVK Verlag
Format: EPUB
Kopierschutz: 6 - ePub Watermark

E-Book, Englisch, 130 Seiten

This textbook provides readers with an interesting overview of the field of corporate valuation in a quick and easy way. For the second edition, the authors have added a new 9th chapter devoted to valuations and the use of argumentation values in negotiation situations. The book includes a number of self-test questions with answers. The contents: Introduction / Discounted Cash Flow Valuation (DCF Valuation) / Comparable Companies Analysis / Precedent Transactions Analysis / Further Valuation Methods / From Enterprise Value to Equity Value / The Tension between Principals, Evaluators, Objectives and Leeway in Corporate Valuations / Value and Price - a Tangent on Valuation Theory / Argumentation Values in Negotiation / Self-Test Questions - Proposal for Solutions.

Prof. Dr. Ralf Hafner has been Professor of International Business with a focus on Finance & Accounting at the HTW Berlin since 2013. Prior to that, he worked for 25 years as an M&A consultant in leading positions at various consulting firms and investment banks. Prof. Dr. Veit Wohlgemuth is Professor of Business Administration with a focus on Corporate Finance. He has been teaching at the HTW Berlin since 2014 in various programs that offer specialized classes for corporate valuations.

Autoren/Hrsg.

Hafner, Ralf

Wohlgemuth, Veit

Leseproben

1Introduction

Learning Objectives

Get an overview on the different occasions for corporate valuations.

Understand valuation as a complex, interdisciplinary, and comprehensive exercise that requires the application of the entire spectrum of management theory and practice.

Corporate Valuation is one of the most relevant subjects for management practice in business administration education. There are numerous occasions for the valuation of enterprises. The occasions listed below are not exhaustive.

Exhibit 1: Occasions for Corporate Valuations

Acquisition and Disposal of Companies (Mergers & Acquisitions; M&A)

In every M&A process, valuation plays a vital role. A potential seller should always investigate

the price range that can realistically be expected from purchase price offers,

how to back the own asking price with a valuation,

and, most importantly, what the minimum proceeds from the sale must be so that the seller does not end up in a worse position compared to omitting the sale and keeping the company.

Conversely, potential buyers will value a target company before submitting a bid. They will analyze

how to back their offer price with a valuation,

how to justify an acquisition with a valuation towards shareholders and supervisory boards,

how much other bidders would be willing to put on the table for the target company,

and, most importantly, what the maximum price is that they could pay so that they do not end up in a worse position compared to not realizing the acquisition and following alternative projects instead.

The same applies to mergers, MBOs (management buyouts), MBIs (management buy-ins), transactions between shareholders, IPOs (initial public offerings) and other partial sales of enterprises.

Value-Based Management

The mantra of modern corporate finance theory and practice is to align management decisions and actions with the value of the company. Decisions that enhance the value are good decisions and should be realized. Strategic decisions, capital budgeting decisions, financing decisions and company value are interrelated and depend on each other.

Investment Management

Private and institutional investors including their advisers, especially financial analysts, perform valuations to support their investment recommendations and portfolio management decisions.

Legal Requirements

Many legislations provide for regulations which require valuations at specified special occasions. One example is the so-called squeeze-out, a compulsory sale of the minority shareholders’ shares to the majority shareholder of a publicly traded company. The conclusion of certain agreements, mergers, spin-offs, split-ups will also lead to corporate valuations being required by law in many jurisdictions.

Contractual and Other Regulations

Corporate valuations may also occur in conjunction with the distribution of estate among heirs, the entry or the exit of partners in a partnership, the distribution of the surplus earned during a marriage in a divorce or in other family law matters.

Financial Reporting and Tax Matters

Valuations are also necessary when performing so-called purchase price allocations for the preparation of annual group accounts (allocation of the purchase price paid for a company to the various assets and liabilities including goodwill). The same applies to the necessary goodwill impairment testing in the subsequent years. Valuation occasions may also arise from tax laws.

Valuations of enterprises are ambitious, extensive and fascinating projects. They require the application of the entire spectrum of management theory and practice. Take any existing company as an example, Boeing or Siemens, TikTok or the mom-and-pop flower store just around the corner. What is necessary to be able to derive a value for these businesses?

Exhibit 2: Determinants of Value

The review of a company’s status is usually based on its financial statements. Hence, a profound knowledge of financial accounting and management accounting is required, so to say the ability to “read” financial statements.

The projection of the future development of a company necessitates an analysis of the entire value chain: research and development, design, sourcing/production, marketing, distribution, customer service and administration/information technology should be examined regarding competitive advantages, disadvantages and their sustainability.

In addition, forecasts on procurement and sales markets should be performed. Products or services of the company to be valued should be compared with those of its competitors and peers. Strategy and strategic management can be brought to the table here. Ideally coupled with the ability to transform the results of this analysis into hard figures, a budget of sales, margins, necessary investments in fixed assets and working capital and other balance sheet ratios. How will the profit and loss statement, the balance sheet, the cash flow statement look like in the next five years?

Finally, it should be explored how to factor in the uncertainty associated with any forecast. What is risk, what is opportunity in valuations, how can we measure them and how do we account for them in our analysis? This is one of the most ambitious endeavors in theory and in practice. There will be airplanes in five years, but what will Boeing’s market position be compared to their competitors? Are conglomerates like Tata or Samsung sustainable? How promising is TikTok’s business model? Will we buy our flowers on the web in five years and if so, what impact will this have on the mom-and-pop flower store just around the corner? Difficult questions? Yes, but the more ambitious the valuation, the more necessary it usually is. We will probably still drink Coke in 20 years from now. But will TikTok still be around then?

If you don’t feel comfortable with so many insecurities, you might be better advised to turn to other, more simply structured problems. Risks, uncertainties, subjective judgements on future developments that naturally come along with a high probability of being in error on them, are part of corporate valuation. Valuation is not a precise science. Despite the usage of quantitative models, the values derived are neither objective nor exact and above all not timeless. Valuations determine ranges for the values. And these ranges are subject to change. Every day.

The magnitude of the available literature on valuation also illustrates the depth of the topic. The list of the standard textbooks in English and in German alone is quite extensive, not even mentioning the numerous scientific papers, PhDs and post-doctoral theses on the topic.

Rosenbaum/Pearl’s book Investment Banking can still be considered “handy” at over 500 plus pages. Damodaran’s Investment Valuation and Koller/Goedhart/Wessel’s Valuation easily surpass this with nearly 1,000 pages, and Peemöller’s German Practice Handbook on Valuation comes in at nearly 2,000 pages. Some of the standard German textbooks on valuation are also quite lengthy: Matschke/Brösel/Toll is close to 1,000 pages, Drukarczyk/Schüler over 600. Ballwieser/Hachmeister, Hering, Spremann/Ernst and Hommel/Dehmel are commendable exceptions in terms of length. However, each of the books mentioned has at least a slightly different focus and approach to the topic, so that one might as well just add up all the pages to get a comprehensive overview of the state of the German textbook opinion on corporate valuation.

The variety of valuation methods is another characteristic of our topic. Also, the long and intensive discussion between academia and valuation practice (at least in Germany) on important aspects of valuation, and the pronouncedly critical and partly cold and distant position some prominent representatives of German valuation academia have towards international (i.e. Anglo-Saxon) valuation theory and practice.

As strong advocates of applied science, we will start our “valuation journey” by looking at those methods that are currently (late 2024) most prevalent in international valuation practice. These methods have developed more and more towards a valuation industry standard. Chapter 2 introduces the discounted cash flow method in the so-called "enterprise variant", which – although this view is not universally accepted – has become the mother of all corporate valuation methods, just like the net present value method for investment decisions.

Chapters 3 and 4 describe two methods which are by now usually also part of most valuations, the comparable companies analysis (“trading comps”) and the precedent transactions...