How do you value a company?

Leslie:
Alison, how do you value companies, and what kind of methodologies do you use, for example dividend yield, price earnings ratio or discounted cash flow technique?

Alison:
Well I think on occasions you will be using all of those methods, and it’s very satisfactory if those methods come up with answers that are an approximation for each other. So I think anybody professionally valuing an earnings stream will look at all of those types of methodologies. I myself favour cash flow, because cash is something that cannot get disguised or adjusted by accountants or accounting standards. So if you have a business that is capable of projecting its earnings over a reasonably medium term timeframe then that is a good way of looking at it. For example, in a property company if you know you have signed up a tenant for 10/15 years and you know that you have various escalation clauses, you are able to make some pretty good guesses, predictions at what the cashflow is coming out of those. You have to adjust that for tenants who are no longer able to pay their rent, which is the sort of thing that some of the property companies are going through at the moment, but that is the way I would value companies. Transactions are important too, when companies get bought and sold, that’s true in the property market, the evidence that’s produced by buildings and developments that get bought and sold adds to the sort of bank of knowledge to enable you to put a valuation on, on properties and companies.

Leslie:
Are there trends and fashions in these methodologies, and is it different for property companies?

Alison:
I don’t think there are trends and fashions, no. I think that would be the wrong way to analyse it. I think there are however differences for property companies where certainly the UK stock market places a lot of reliance on the professional valuations that are put in place by the surveyors, which gives rise then to an asset value and equity shareholders tend to look at the net asset value of a company. By which I mean the gross assets that have been valued at various stages, either as a development property or as an office block, take away the debt that a company has to provide if you like almost a liquidation value assuming all assets could be sold at market price. And then the equity markets play some sort of a discount or premium on that. So for property companies in the UK net asset values are as important as earnings and yields.

Leslie:
And finally, what kind of challenges and issues do you face in undertaking mergers and acquisitions?

Alison:
Well at the moment there are obviously considerable challenges, because so few are happening. Financing, they have to be capable of being financed. So the company that is making the acquisition has to be able to generate the cash to repay the debt, or it has to issue its equity. Well it will only be able to issue equity to its own shareholders to finance a merger if the equity shareholders really believe that the merger’s going to add some value, often described as being earnings enhancing or strategically imperative. So financing is a key constraint at the moment. Confidence is a key constraint. For every buyer that wants to come along, there has to be a seller who is willing to part with his company. Sellers at the moment I think are quite reluctant unless they are distressed sellers, because they don’t believe that acquirers are putting the right valuations on their companies. That always arises at a period of uncertainty. Once a merger or acquisition has happened, the key elements are integration to ensure that you really derive some benefits and synergies that you can demonstrate are coming through to your shareholders. Cultural issues are key. Often businesses are acquired into a culture with which they are unfamiliar, so an enormous amount particular of a chief executive’s time is I think quite rightly devoted to ensuring that those that are coming into his organisation feel comfortable. And these don’t always work as we know. I mean there’s a lot of data and statistics suggesting that actually many mergers and acquisitions are value destroying rather than value creating. It’s all about the execution.

Leslie:
And just quickly, would you say the watchword should be wait and see, that although there’s high corporate savings the scale and depth of uncertainty is a big constraint?

Alison:
Yes, broadly speaking I think that’s correct. So mostly round the world large corporates and medium sized corporates are well funded and well financed. They have, a lot of them have surplus cash. Those that don’t have surplus cash are substantially delevered. But there’s just too much uncertainty around for chief executives and entrepreneurs to want to part with their cash.

Leslie:
Alison Carnwath, thank you very much.