The Value of Valuations

Why some fast-growing companies may be ideal takeover targets. Plus: Accounting snags at Stagecoach; AT&T and Tyco take impairment charges.

Plummeting stock prices tend to encourage takeover attempts. But remarkably, few finance chiefs at fast-growing companies have a good idea of what their businesses are worth. Or at least that’s the takeaway from the latest “Trendsetter Barometer” from accountancy PricewaterhouseCoopers.

According to that yardstick, management teams at more than two-thirds of the fastest-growing companies in the United States don’t know the value of their operations.

Only 29 percent of the surveyed companies report having a current valuation. Of the rest, 9 percent are planning to have one completed in the next 12 months. About 15 percent noted they had conducted a valuation in the past, but indicated that it was no longer current. Fully 44 percent have no valuation—or no plans to obtain one.

Only 27 percent of technology companies have a current valuation, compared with 31 percent of nontech companies. Just 29 percent of service and product sector companies have a valuation.

“Current market conditions may have caused some of these high-potential companies to delay a valuation until business improves,” says Paul Weaver, global technology industry group leader for PwC. “Whether to sell a company, make a public offering, or exchange equity for capital, a current valuation is a strategic must.” (PwC offers valuation services.)

Interestingly, 25 percent of the CEOs surveyed have tried to sell their company at least once, either in its entirety (19 percent) or in part (6 percent), with most of these attempted sales (61 percent) occurring within the past two years.

Among the prospective sellers, only 48 percent have ever had a formal valuation, and only 33 percent have a current one.

“Entertaining momentous financial decisions without knowing the current value of the company is risky, and can result in equity and other financing transactions at below optimal levels for the owners,” said Weaver.

Weaver believes a formal valuation “is critical to understanding the factors that make the company valuable to an acquirer, and therefore what must be achieved, postintegration, to justify paying a specific price.”

According to the survey, companies planning new, first-time valuations appear to be attractive acquisition candidates.

On average, first-time valuers have grown nearly twice as large as their industry peers ($52 million in revenues versus $27.2 million).

Despite their larger size, these companies are also growing 31 percent faster than their rivals. The rate? 1,947 percent during the past five years for first-time valuers versus 1,482 percent for non-first-time valuers.

Among this group of first-time valuers, 54 percent are planning M&A activity, including a potential sale, in the next 12 months.

“Few business activities are more complex or risky as a sale or acquisition,” notes Weaver. “These companies planning their first valuation have growth superior to their peers, and many have a clear interest in combining with others.”

By his lights, Weaver believes the valuation process “will help them to better anticipate the many business issues that are likely to emerge in their transaction, and to more effectively prepare for negotiations.”

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