Case Studies
Issue No. 26 - December/January 2005/06
Fast Movers SA 2005
Hitchhiker’s guide to valuations
by Mr Geoff Thomas
At some point in every investment we make, there exists the crunch moment – hackles are drawn up, everyone is suddenly short of breath, and the question is asked “So, what’s the company worth?”
In Western society, we are used to everything having a stated, non-negotiable price. Even petrol prices, which fluctuate daily, are fixed in accordance with the two foot high letters. We might drive past to find the cheaper price, but we won’t instead go in and try to haggle the price down to match the one down the road.
If you choose to buy BHP shares, or any of the 1000+ listed shares, the price is as stated. You don’t ring up the bloke selling them and suggest “look, I’ll do a deal with you now if you knock off two cents a share”. You can go ahead, or you can wait for a better price, but you can’t negotiate.
In all these cases, price is set by a past set of dealings between willing and knowledgeable buyers and willing and knowledgeable sellers. These past dealings are visible to all – see a queue at the fuel station, and you may join in – “this has got to be a good price”
However, private companies don’t have a regular market in their shares. They are often held by one person, or held in a small group. Trading may, or may not, be performed by knowledgeable shareholders. Did Uncle Percy buy his shares based on a detailed assessment of company performance, or to help out his nephew? Alternatively, a standard share price may have been used, and no-one has questioned its validity, even though the company has changed significantly.
When we get to the discussion of “What’s the company worth?”, everyone is outside of their comfort zone. We are used to having prices set for us, and we’re used to having a context of what a ‘reasonable’ price is. Valuation techniques are useful as they give us some ballpark estimates of what the company may be worth.
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