Role of Valuation

Valuation is used for many purposes, and which method of valuation should be taken is important.

Valuation is used for many purposes, and which method of valuation should be taken is also an important issue. In this page, let’s see what valuation is used for.

■ M&A Analysis

Valuation is vital in M​​&A activities for both Buy-side and Sell-side. It also plays a decisive role in determining the merger value between the two companies.

1. ‘Buyside’ must determine the fair value of the target company to buy.

  • You can price the target company at a reasonable base when you know its appropriate value.
  • They are very optimistic in valuation for themselves, especially when they do public sale-off or get a hostile takeover. In this case, your independent and sober judgment is required from the pressure of the competitive atmosphere. Because of it, you could buy at a higher price than its value.
  • In the case of a merger, the main thing to consider before bidding is the synergy effect created by the merger. This synergy must prove to be a plus(+) effect. However, you do not have to pay for the additional value that it could create because it is the ‘Buyside’ own profit.
  • You should also consider the effect of management changes, new business plan and restructuring on cash flow after you take over the company in valuation. You do not have to pay for the effect as well because that is the estimation of ‘Buyside’ own profits from the acquisition.

‘Buyside’ should use valuation to estimate the fair value and offer the price lower than that value.

2. ‘Sellside’ should judge the fair value of the company to sell it.

  • When selling off a company, you need to know its value to determine a reasonable price.
  • At this time, whether ‘Buyside’ offers the price first or you offer it first depends on the strategy.
  • The common thing is that you need to know your corporate value internally so that you can judge whether the price offered by ‘Buyside’ is high or low.

Valuation for Investment

  • Investing in a company also requires valuation. The type of the target company can be various; venture companies, growth companies, mature companies, distressed companies, pre-IPO stocks, or listed stocks depending on the size of the company or whether it is listed.
  • As their types are various, the choice of valuation methodology is essential.
  • For investment, valuation plays a vitally important role in determining the investment price as well.

Value > Price ☞ Buy
Value < Price ☞ Hold or Sell

■ Development Capital

1. Equity financing

  • For sales growth or any other reasons, you need to raise equity-type funds. At this time, you can decide or accept investors’ share ratio based on the value of your company.

From the perspective of you, who raise external fund, it is advantageous to allocate a low stake compared to the amount raised through high valuation.

2. M&A financing

  • When ‘company A’ invest in or acquire the shares of ‘company B’, ‘company A’ might need to add external capital on its won money. In this case, valuation is essential.
  • It sounds complicated, but valuation should be exercised for ‘company A’ or ‘company B’ or both. It depends on whether investors invest directly in ‘company A’ or indirectly in another company (like SPC) separately established by ‘company A’.

■ Others

1. Non-competitive interest

  • Non-competitive interest means that you need to know the value of a company while you are not positioned in competitive situations.
  • For examples, when you need to know the company value in order to provide stock options to the employees, or when investors investing in a minor stake accept the company value as it is, or when the management requires the equity value of the company to determine its debt ratio.

2. Ownership dispute

  • Valuation is also essential when it is necessary to organise the stakes held among investors who have invested together in the same company.

3. Comparison of ‘Market Value’ and ‘Intrinsic Value’

  • To judge whether the market price of listed stocks or the trading price on OTC of unlisted companies is high or low, you need to value the company based on its cash flow.
  • In these cases, the DCF (Discounted Cash Flow) method is proper as valuation methodology.

4. Management performance measurement

  • Performance measurement for the management may require the company value.
  • You can compare the values before their management and after that or on a regular base.

5. Portfolio Management

  • Professional investors evaluate their investment assets to measure the performance of trusts or funds.
  • Like management performance measurement, you can compare the values between the time of holding cash and after the investment or on a regular base.
  • Depending on which valuation methodology you apply, the performance of them may vary significantly.

6. Simple curiosity, etc.

  • There are many other cases such as simple curiosity, stock succession, retirement succession plan, and so forth.or to succeed in stocks, for a number of other reasons.

GIB, Professional Company Valuation Site