“The value of companies that operate in cyclical industries is strongly impacted by economic fluctuations. As the most relevant valuation of a company is based on results on the capital market, an analysis of the evolution of local market indexes shows declines in the value of financial institutions and construction companies,” Wiechen said.
The telecom and IT sectors were the least affected by the crisis, while the energy and utility sectors rapidly recovered from initial shocks, he added. The same happened to the retail sector and the car industry, whose evolution differed from that in other countries.
Valuation must first state its purpose, which may be closing a deal, observing fiscal or legal requirements or obtaining financing. The most frequent case is valuation for sale purposes. Over the past year, Ernst&Young valued over 15 companies either to help sell the company or help the management and shareholders analyze different options, such as mergers, acquisitions, or reorganization, Wiechen explains.
“The diagnosis analysis is followed by a macroeconomic report and an analysis of the industry where the company undergoing valuation operates, including its position against competition. These reports are followed by a thorough analysis of its financial and non-financial data. Based on these, the valuator will opt for one or more relevant valuation methods.”
The valuation interval considers the valuation methods chosen by experts, Wiechen says, adding that valuation is not an exact science, therefore it will generate a value interval and will reflect the methods used and the valuator’s professional judgment.
“The seller and the buyer may have different expectations regarding the future development of a company, which will lead to different valuation figures. The intersection of these intervals will be the price they will negotiate. The final result of negotiations may be above or below the interval, depending on the negotiators’ skills.”
The international macroeconomic context, the evolution of the gross domestic product and of consumer prices, interest rates, exchange rates, raw material prices and prospective competitors may all influence valuation.
“Nobody knows a business better than the one who runs it. Sometimes managers lack the technical capability to correctly and unbiasedly evaluate their business. The seller approaches value in two ways: to see what is acceptable to him, the intrinsic, fundamental or investment value, or to see the company’s market value, the price a prospective seller is willing to pay.
(English version by Ioana Tudor)