General valuation question

[jumbojacks]

I've studied some basic finance and accounting, and I was wondering if someone could point me to sources to learn about valuing private companies from the perspective of a strategic buyer (a conglomerate) and how to choose an appropriate discount rate.

[DcifrThs]

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I've studied some basic finance and accounting, and I was wondering if someone could point me to sources to learn about valuing private companies from the perspective of a strategic buyer (a conglomerate) and how to choose an appropriate discount rate.

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i have no background in this so take that for what it's worth.

the valuation methodology should be relatively similar. the problem is that you don't get as much information.

if you are a conglomerate it depends on what you plan on doing with that company. the value of the company could be higher if you plan on taking it over and you have an expertise in that area. i.e. if kraft were to value some consumer food company, it could pay a higher price than, say boeing since the risk would be less (it has a customer base, is known for it and has synergies that would work. boeing would have to basically create a whole new branch). therefore, in this case, the risk would be lower and thus drop the discount rate.

if you are an expert manager, then more companies become valuable if they are being run currently by poor or mediocre management. again, here the value would be higher since risk can be lower due to expertise all else equal (and thus lower discount rate).

modeling is always part science part art, or so i've heard. there is probably no mathematical formula in which you can feed some variables and end up w/ a precise & robust discount rate.

hope this helps,
Barron

[jumbojacks]

Say you have access to audited financials for the last few years. I'm assuming how much you can value the synergy is going to affect FCF and I can probably fidget with that.

[edtost]

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I've studied some basic finance and accounting, and I was wondering if someone could point me to sources to learn about valuing private companies from the perspective of a strategic buyer (a conglomerate) and how to choose an appropriate discount rate.

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the discount rate is whatever the DCF needs plugged in to justify the price the acquiror's bankers want them to bid, or some sort of historical-beta-derived WACC formula, whichever gives a higher valuation.

edit: oops, just noticed that you were talking about valuing a private company ... get rid of the second option, i guess.

[DcifrThs]

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Say you have access to audited financials for the last few years. I'm assuming how much you can value the synergy is going to affect FCF and I can probably fidget with that.

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well if you have access to financials, i'd look at a few things to see how "risky" the company is.

S&P publishes average, median, and mode ratios per rating level including debt/equity, interest coverage/ebitda etc. so you can get a sense for where your company fits in there and then look at as similar as possible public companies of that debt level to get a sense for what their discount rates would be.

from there (once you get a round about discount rate) you can start adjusting.

for instance, you can feed those past few years of financials into a model. add to that model the S&P derived ratios and let that compute a discount rate. from there, add/subtract what you think your company could do to icnrease the revenues/add to the growth rate or decrease the costs/subtract from expenses etc.

then you can see how sensitive the rate is to your changing inputs and get a better sense of where you stand.

Barron

[jumbojacks]

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S&P publishes average, median, and mode ratios per rating level including debt/equity, interest coverage/ebitda etc. so you can get a sense for where your company fits in there and then look at as similar as possible public companies of that debt level to get a sense for what their discount rates would be.

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Thanks for all your help Barron. Do you happen to know the name of this publication?

[DcifrThs]

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S&P publishes average, median, and mode ratios per rating level including debt/equity, interest coverage/ebitda etc. so you can get a sense for where your company fits in there and then look at as similar as possible public companies of that debt level to get a sense for what their discount rates would be.

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Thanks for all your help Barron. Do you happen to know the name of this publication?

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sorry [img]/images/graemlins/frown.gif[/img], been > a year since i did something with it.

i don't know if it is free or you have to pay for it but at the very least a library would have it.

if you find it though, please come back and post it here.

also damodoran (sp?) is an NYU profession about whom evan has posted before and links should be readily available. he might have some of that kind of stuff (ratios --> credit ratings) on his site.

Barron

[Evan]

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also damodoran (sp?)


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Damodaran

http://damodaran.com