Finance
“Which method to use and why” is equally critical. Should we consider Asset base of the target or its
business prospects of the company or intangible of the target or combination of all- It depends? All these
approaches have various variables such as market value of the assets, marketability of the assets, optimal use
of the assets, cash flows, risk premiums etc. we can see in the asset based the art is deciding the book value
or Market value of assets as currently the book value of Joot Mills is higher than the market value. Estimating
all these is beyond statistics and justifying appropriate one out of several methods is a really a challenge and
needs real art. For example, what risk premium should we use in this economic scenario? Should the risk
premium be same for all the companies falling in the same industry, Does micro picture of the target
company has role to play in this and so on.
So, transactions have to evaluate the value creation for everybody in the system so coming out with the
valuation which create value for every body is an art not science because science can not consider the
subjective parameters in the valuation.
Let us study a very old case of Tata Oil Mill Company Ltd's (TOMCO) merger with Hindustan Lever in 1993.
This particular case used three valuation methods- The yield value, the asset value, and the market value of
the shares of both the companies and appropriate weight ages were given to each of the above values. The
valuation figure arrived by the valuation expert Mr. Malegam was less than the book value and the employee
union took the company to the court challenging for the valuation however, later on Supreme Court stood on
Hindustan Lever side for the valuation figure. In the Yield valuation method deciding the profit figure and
profitable year is an art as we can see that Mr Malegam artistically decided the profitable year for TOMCO as
the company was making losses in two subsequent previous years and made above normal profit in 1991.
Therefore, he considered years before 1991 which was showing stability in profit for arriving at the valuation
figure.
“Who is the buyer”, also plays critical role in the valuation. A foreign company acquiring in India shall be
ready to pay for the entry premium and for saving on the gestation period. Only simple projection of cash
flow of the target company shall not justify the value for the acquirer. How much entry premium has to be
paid is probably the main concern and justifying it for the valuer is a real task.
To conclude, Value lies in hands of beholders. A diamond in the hand of diamond merchant is more
valuable than in the normal hand because he understands better than the normal man. Valuation changes
every time, every day as company information is dynamic. Factoring the qualitative aspects is critical. It is a
MODERN ART. How can we develop a standard approach to art? We cannot.
www.Venture-Care.com/Magazine
December 2017
13