Corporate Valuation E-Book

Ralf Hafner

• Herausgeber: UVK
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 209

Veröffentlichungsjahr: 2025

Beschreibung

This textbook provides readers with an interesting overview of the field of corporate valuation in a quick and easy way. For the second edition, the authors have added a new 9th chapter devoted to valuations and the use of argumentation values in negotiation situations. The book includes a number of self-test questions with answers. The contents: Introduction / Discounted Cash Flow Valuation (DCF Valuation) / Comparable Companies Analysis / Precedent Transactions Analysis / Further Valuation Methods / From Enterprise Value to Equity Value / The Tension between Principals, Evaluators, Objectives and Leeway in Corporate Valuations / Value and Price - a Tangent on Valuation Theory / Argumentation Values in Negotiation / Self-Test Questions - Proposal for Solutions.

Leseprobe

Prof. Dr. Ralf Hafner has been Professor of International Business with a focus on Finance & Accounting at the HTW Berlin since 2013. Prior to that, he worked for 25 years as an M&A consultant in leading positions at various consulting firms and investment banks.

Prof. Dr. Veit Wohlgemuth is Professor of Business Administration with a focus on Corporate Finance. He has been teaching at the HTW Berlin since 2014 in various programs that offer specialized classes for corporate valuations.

Ralf Hafner / Veit Wohlgemuth

Corporate Valuation

2nd Edition

Umschlagmotiv: © SHansche · iStockphoto

Bibliografische Information der Deutschen Nationalbibliothek

Die Deutsche Nationalbibliothek verzeichnet diese Publikation in der Deutschen Nationalbibliografie; detaillierte bibliografische Daten sind im Internet über http://dnb.dnb.de abrufbar.

2nd edition 2025

1st edition 2017

https://doi.org/10.24053/9783381135325

© UVK Verlag 2025

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Internet: www.narr.de

eMail: [email protected]

ISBN 978-3-381-13531-8 (Print)

ISBN 978-3-381-13532-5 (ePDF)

ISBN 978-3-381-13533-2 (ePub)

Preface to the Second Edition

We are very pleased that, since its publication in 2017, this little booklet has become standard in our courses on corporate valuation at the HTW Berlin and is also used outside our university. After eight years, we are now presenting the second edition. In addition to some textual revisions, there are two major changes. As you can see from the title page, there is a second author. Veit Wohlgemuth has been a professor at the HTW since 2014 and has worked closely with Ralf Hafner from the beginning. He knows the book very well, having used it regularly in his own courses on corporate valuation. By the time you read this, Ralf Hafner will have retired. Veit Wohlgemuth (25 years younger) will continue the work and will take the main responsibility for future editions.

We have also added a new 9th chapter, which is devoted to valuations and the use of argumentation values in negotiation situations. The goal of the book remains the same. It is not a compendium, but rather what we go through with our students in one semester at the HTW in our corporate valuation classes. Nothing more. Short and to the point.

If you are not a student or a teacher at the HTW and are interested in the lecture notes and other teaching materials, please contact us ([email protected] or [email protected]).

Berlin, March 2025,

Ralf Hafner and Veit Wohlgemuth

Preface to the First Edition

I wrote this book for my students at HTW Berlin, where I teach valuation in our master’s degree program in international business (MIB)1. There are excellent books available on valuation. Most of them are quite comprehensive and come with a lot of pages (400, even 800 plus). My personal experience is that students tend to be somewhat reluctant to make use of these textbooks on top of some hundred pages of lecture notes. I wanted to write something more “handy” to address this. Consequently, this book is far from being a compendium on valuation2. It is what I cover in my class3 and it should go along with my lecture notes4 and the work assignments for the students.

Since the background of an author usually influences her or his view on and the way she or he teaches valuation, here is mine so that you know where I come from. I had my first encounters with valuation in my last semesters as a student. In 1985, I became a research assistant of Prof. Dr. Günter Sieben at the University of Cologne in Germany. He certainly belongs to the pioneers and innovators of this discipline in Germany and made significant contributions to the so-called functional valuation theory.5 So my first interest in valuation was academic and consequently I wrote my PhD thesis on a topic in the field of corporate valuation.6

Luckily, I also had the opportunity to assist my former teacher in his valuation practice. The first valuation “in real life” I worked on (still as a young research assistant) was for one of the two parties in a divorce, where the value of the company formed the basis for the equal distribution of the surplus earned during the marriage. I learned that valuation practice has its own set of rules7 and that valuations outside the academic world usually serve as a tool to realize the interests of the parties involved in a transaction.8

After my time as a research assistant and the finalization of my PhD thesis I worked for over 20 years as an M&A (Mergers & Acquisitions) adviser before I returned to the University in 2012. These years certainly had the biggest impact on my view of what valuations are about and what they are not about. M&A advisers usually don’t focus on true values or fair values.9 If life is not fair, why should valuations be? The focus is on a realistic estimate of a price that will be achievable in a transaction, given the status and the projections of the company for sale, the likely interest in the company as well as the expected distribution of the negotiation power. Valuations are used to get the negotiations or bidding processes started. Therefore, a valuation to me is a medium of communication between the buyer and the seller, like a language. And that is what this book (and my valuation class at HTW) is about, to make you acquainted with this language.

I would like to thank my faculty and the management of HTW Berlin for granting me a research semester in the winter term 2016/17. This made it much easier for me to finalize this book. And many thanks to Ambar, Farel, Frida and Felix, my wonderful family, who had to bear the social costs of this project.

Berlin, March 2017

Ralf Hafner

1 To be precise, the name of the class as per our curriculum is “Contemporary Financial and Accounting Issues“, but what I teach is Corporate Valuation.

2 This book is based on my German publication “Unternehmensbewertung” in Schmeisser/Eckstein/Hafner/Hannemann/Stengel, Wertorientiertes Finanzmanagement, 2015, 81-158. I gratefully acknowledge the permission of my publisher, UVK Verlagsgesellschaft, to reuse the contents in English language. Apologies to my readers in advance for any lexis, grammar and other inaccuracies – I’m not a native English speaker.

3 Prerequisite for the class is good knowledge of the basic principles of Corporate Finance.

4 In case you would like to receive the lecture notes, please send me an E-mail ([email protected]) or download them from my publisher’s website here: https://files.narr.digital/9783381135318/slides.zip. I’m happy to share but have not found the time yet to set up an own website where they can be downloaded.

5 The main message of the functional valuation theory is that the value of a company is determined by the purpose of the valuation. We will look at this in more detail in chapter 8.

6 It was an attempt to apply the toolset developed by Keeney and Raiffa for decisions with multiple objectives to corporate valuation theory.

7 I still remember the hockey stick projection the adviser of the counterparty made for this mature old-fashioned business without any input from the company’s management.

8 To be fair, this applied to both valuations in the case described, i.e. ours as well.

9 Although these terms are often used by investment bankers and corporate finance advisers, what they do (should do) is to determine a potential range for the purchase price.

How to Use this Book

People don’t learn how to play football (soccer) by sitting in front of a TV watching FIFA World Cup games of their favorite team with their friends. They need to go out with them, take a ball along and play!

The same applies to valuation. Please don’t just read books, listen to lectures or watch others performing valuations. Pick a company and value it!

What we ask our students to do

Team up in groups of 3 to 6 students.

Choose an industry (e.g. apparel, social media, beer, pharma, etc.). Avoid banks and insurances if you do this for the first time in your life.

Each group member picks a company within this industry. The company should be quoted on a stock exchange. This ensures the availability of sufficient data for the valuation. Make sure you like your company – you will spend an entire semester to analyze and value it.

Develop the balance sheets shown in chapter 2.1 for your company.

Perform a company analysis using the structure introduced in chapter 2.2.1. Be brief, work with bullet points, tables and charts. Use a Bloomberg terminal to collect the necessary data. If possible, do field research (if your industry is e.g. apparel, luxury or sporting goods, go downtown and visit the shops, touch the products, compare them – you will learn at least as much as from desk research).

Perform a DCF valuation for your company as described in chapters 2.2.2 till 2.2.5. Determine a range for the enterprise value.

Perform a Comparable Companies Analysis as described in chapter 3, and a Precedent Transactions Analysis as described in chapter 4. Focus on EBITDA and sales multiples.

Determine a range for the equity value of your company using the information given in chapter 6.

We strongly recommend meeting regularly with your team – you will benefit from the ideas of your group members. And it will be much more fun, too.

Textbooks on valuation

The following list of four books is our personal selection. All four are excellent and very comprehensive.

Damodaran, Investment Valuation: Tools and Techniques for Determining the Value of Any Asset, 3rd edition, 2012

Holthausen/Zmijewski, Corporate Valuation: Theory, Evidence & Practice, 2nd edition, 2020

Koller/Goedhart/Wessels, Valuation: Measuring and Managing the Value of Companies, 7th edition, 2020

Rosenbaum/Pearl, Investment Banking, Valuation, Leveraged Buyouts, and Mergers & Acquisitions, 3rd edition, 2022. The valuation templates that come with the book will give you a good flavor as to what is standard in valuation practice.

Web

www.damodaran.com. Everything you need to know on corporate finance and valuation. Contains lots of data, spreadsheets, webcasts. Best website of a professor we know.

http://macabacus.com/learn. A good place to visit if you’re looking for Excel templates on valuation.

https://www.bloomberg.com/markets/stocks

http://www.morningstar.com

https://www.google.com/finance

https://finance.yahoo.com

https://www.moodys.com

https://www.standardandpoors.com/en_US/web/guest/home

https://fred.stlouisfed.org

https://www.destatis.de/Europa/EN/Homepage.html

A selection of websites we visit when we are away from our Bloomberg lab at HTW.

Lecture notes for download

https://files.narr.digital/9783381135318/slides.zip

Contents

Prefaces

How to Use this Book

1Introduction

2Discounted Cash Flow Valuation (DCF Valuation)

2.1DCF Valuation Models

2.2Enterprise DCF Valuation

2.2.1Company Analysis

2.2.2Projection of Future Free Cash Flows

2.2.3Estimation of Weighted Average Cost of Capital (WACC)

2.2.4Calculation of Terminal Value

2.2.5Computation of Present Values, Derivation of a Range of Enterprise Values, Sensitivity, Scenario and/or Simulation Analysis

3Comparable Companies Analysis

3.1Standard Multiples

3.2Finding Comparable Companies

3.3Preparation of Figures

3.4Derivation of a Value Range

4Precedent Transactions Analysis

5Further Valuation Methods

5.1LBO Valuation

5.2Option-Based Valuation

5.3Asset-Based Valuation

5.4APV Valuation

5.5Equity DCF Valuation

6From Enterprise Value to Equity Value

6.1Cash and Cash Equivalents

6.2Holdings in Other Companies, Non-Controlling Interests and Other Assets Valued Separately

6.3Pension Obligations, Accrued Liabilities and Provisions

6.4Off-Balance-Sheet Financing

6.5Stock Options, Option Bonds and Convertible Bonds

7The Tension between Principals, Evaluators, Objectives and Leeway in Corporate Valuations

7.1Principals and their Objectives

7.2Evaluators and their Objectives

7.3Leeway in Valuations

7.3.1Leeway in DCF Valuations

7.3.2Leeway in Multiple-Based Valuations

8Value and Price – a Tangent on Valuation Theory

8.1Prices and Values of Companies

8.2Intrinsic (Objective, Objectified, Fundamental) and Subjective Company Values

8.3Functional Valuation Theory

9Argumentation Values in Negotiations

9.1Determinants of the Argumentation Value

9.2The Art of Negotiation

9.3Argumentation Value Determination

Self-Test Questions – Proposal for Solutions

Index

1Introduction

Learning Objectives

Get an overview on the different occasions for corporate valuations.

Understand valuation as a complex, interdisciplinary, and comprehensive exercise that requires the application of the entire spectrum of management theory and practice.

Corporate Valuation is one of the most relevant subjects for management practice in business administration education. There are numerous occasions for the valuation of enterprises. The occasions listed below are not exhaustive.

Exhibit 1: Occasions for Corporate Valuations

Acquisition and Disposal of Companies (Mergers & Acquisitions; M&A)

In every M&A process, valuation plays a vital role. A potential seller should always investigate

the price range that can realistically be expected from purchase price offers,

how to back the own asking price with a valuation,

and, most importantly, what the minimum proceeds from the sale must be so that the seller does not end up in a worse position compared to omitting the sale and keeping the company.

Conversely, potential buyers will value a target company before submitting a bid. They will analyze

how to back their offer price with a valuation,

how to justify an acquisition with a valuation towards shareholders and supervisory boards,

how much other bidders would be willing to put on the table for the target company,

and, most importantly, what the maximum price is that they could pay so that they do not end up in a worse position compared to not realizing the acquisition and following alternative projects instead.

The same applies to mergers, MBOs (management buyouts), MBIs (management buy-ins), transactions between shareholders, IPOs (initial public offerings) and other partial sales of enterprises.

Value-Based Management

The mantra of modern corporate finance theory and practice is to align management decisions and actions with the value of the company. Decisions that enhance the value are good decisions and should be realized. Strategic decisions, capital budgeting decisions, financing decisions and company value are interrelated and depend on each other.

Investment Management

Private and institutional investors including their advisers, especially financial analysts, perform valuations to support their investment recommendations and portfolio management decisions.

Legal Requirements

Many legislations provide for regulations which require valuations at specified special occasions. One example is the so-called squeeze-out, a compulsory sale of the minority shareholders’ shares to the majority shareholder of a publicly traded company. The conclusion of certain agreements, mergers, spin-offs, split-ups will also lead to corporate valuations being required by law in many jurisdictions.

Contractual and Other Regulations

Corporate valuations may also occur in conjunction with the distribution of estate among heirs, the entry or the exit of partners in a partnership, the distribution of the surplus earned during a marriage in a divorce or in other family law matters.

Financial Reporting and Tax Matters

Valuations are also necessary when performing so-called purchase price allocations for the preparation of annual group accounts (allocation of the purchase price paid for a company to the various assets and liabilities including goodwill). The same applies to the necessary goodwill impairment testing in the subsequent years. Valuation occasions may also arise from tax laws.

Valuations of enterprises are ambitious, extensive and fascinating projects. They require the application of the entire spectrum of management theory and practice. Take any existing company as an example, Boeing or Siemens, TikTok or the mom-and-pop flower store just around the corner. What is necessary to be able to derive a value for these businesses?

Exhibit 2: Determinants of Value

The review of a company’s status is usually based on its financial statements. Hence, a profound knowledge of financial accounting and management accounting is required, so to say the ability to “read” financial statements.

The projection of the future development of a company necessitates an analysis of the entire value chain: research and development, design, sourcing/production, marketing, distribution, customer service and administration/information technology should be examined regarding competitive advantages, disadvantages and their sustainability.

In addition, forecasts on procurement and sales markets should be performed. Products or services of the company to be valued should be compared with those of its competitors and peers. Strategy and strategic management can be brought to the table here. Ideally coupled with the ability to transform the results of this analysis into hard figures, a budget of sales, margins, necessary investments in fixed assets and working capital and other balance sheet ratios. How will the profit and loss statement, the balance sheet, the cash flow statement look like in the next five years?

Finally, it should be explored how to factor in the uncertainty associated with any forecast. What is risk, what is opportunity in valuations, how can we measure them and how do we account for them in our analysis? This is one of the most ambitious endeavors in theory and in practice. There will be airplanes in five years, but what will Boeing’s market position be compared to their competitors? Are conglomerates like Tata or Samsung sustainable? How promising is TikTok’s business model? Will we buy our flowers on the web in five years and if so, what impact will this have on the mom-and-pop flower store just around the corner? Difficult questions? Yes, but the more ambitious the valuation, the more necessary it usually is. We will probably still drink Coke in 20 years from now. But will TikTok still be around then?

If you don’t feel comfortable with so many insecurities, you might be better advised to turn to other, more simply structured problems. Risks, uncertainties, subjective judgements on future developments that naturally come along with a high probability of being in error on them, are part of corporate valuation. Valuation is not a precise science. Despite the usage of quantitative models, the values derived are neither objective nor exact and above all not timeless. Valuations determine ranges for the values. And these ranges are subject to change. Every day.

The magnitude of the available literature on valuation also illustrates the depth of the topic. The list of the standard textbooks in English and in German alone is quite extensive, not even mentioning the numerous scientific papers, PhDs and post-doctoral theses on the topic.

Rosenbaum/Pearl’s book Investment Banking can still be considered “handy” at over 500 plus pages. Damodaran’s Investment Valuation and Koller/Goedhart/Wessel’s Valuation easily surpass this with nearly 1,000 pages, and Peemöller’s German Practice Handbook on Valuation comes in at nearly 2,000 pages. Some of the standard German textbooks on valuation are also quite lengthy: Matschke/Brösel/Toll is close to 1,000 pages, Drukarczyk/Schüler over 600. Ballwieser/Hachmeister, Hering, Spremann/Ernst and Hommel/Dehmel are commendable exceptions in terms of length. However, each of the books mentioned has at least a slightly different focus and approach to the topic, so that one might as well just add up all the pages to get a comprehensive overview of the state of the German textbook opinion on corporate valuation.

The variety of valuation methods is another characteristic of our topic. Also, the long and intensive discussion between academia and valuation practice (at least in Germany) on important aspects of valuation, and the pronouncedly critical and partly cold and distant position some prominent representatives of German valuation academia have towards international (i.e. Anglo-Saxon) valuation theory and practice.

As strong advocates of applied science, we will start our “valuation journey” by looking at those methods that are currently (late 2024) most prevalent in international valuation practice. These methods have developed more and more towards a valuation industry standard. Chapter 2 introduces the discounted cash flow method in the so-called "enterprise variant", which – although this view is not universally accepted – has become the mother of all corporate valuation methods, just like the net present value method for investment decisions.

Chapters 3 and 4 describe two methods which are by now usually also part of most valuations, the comparable companies analysis (“trading comps”) and the precedent transactions analysis (“transaction comps”). Chapter 5 elaborates on further valuation methods, chapter 6 deals with the transition from the enterprise value to the equity value of the firm.

Chapter 7 analyses the leeway resulting from the inevitably subjective judgements10 which are necessary in performing a valuation. With this we would like to sharpen your view for the interaction between the value resulting from a valuation exercise and the purpose the principal (the initiator, the person that pays for the valuation) pursues with the valuation. In chapter 8 we look at the topic of value and price or value versus price and try to build a bridge to the perceptions of the functional valuation theory. Chapter 9 deals with valuations in negotiations.

10 These judgements can at best be objectivized, but will never be objective.

2Discounted Cash Flow Valuation (DCF Valuation)

Learning Objectives

Understand discounted cash flow (DCF) valuation as an application of net present value (NPV) analysis.

Recognize the differences between the enterprise and the equity DCF valuation approaches.

Recognize the valuation-specific terms “enterprise value”, “equity value”, “interest-bearing debt”, “cash and cash equivalents” as well as “net debt”, and understand the relationship between them.

DCF valuation is nothing else but the application of the net present value approach in capital budgeting on corporate valuation. The project we look at is the company, being characterized by its future free cash flows. As in capital budgeting, we work with cash flows instead of accounting earnings. The future free cash flows in the years t=1, 2, 3, …, n of the company under investigation are discounted back to t=0 using the appropriate discount rate, i.e. the rate that reflects both the risk of the investment as well as its funding costs, for equity and debt. This discount rate is the weighted average cost of capital (WACC) of the company being valued. The value of the company can be derived by adding up the present values of the future free cash flows. Exhibit 1 on the following page summarizes the relationship.

Other than in standard capital budgeting analysis, there is no initial investment in t=0 in a DCF valuation. Instead, this amount, the sum of the present values of all future free cash flows is the number we are looking for. Once determined and put into a standard net present value analysis with a minus sign in t=0, a net present value of 0 will be the result for this project (the acquisition of the company being valued). The internal rate of return (IRR) of this project will be equal to the weighted average cost of capital (WACC) of the company. What does this imply? If you as an acquirer of the company can negotiate a price below the sum of the present values of the future free cash flows of the target company, you are about to make a good deal. Why? Because the net present value of your project (the acquisition of the target company) will be positive. If you pay more than the sum of the present values of the future free cash flows, your initial investment in t=0 goes up and will lead to a negative net present value for your project. As per the decision rule in capital budgeting analysis, you should not pursue such a project, i.e. not realize the acquisition.

This applies vice versa to a potential seller of a company, who would give up the future free cash flows in case of a divestiture. Consequently, these future free cash flows go into his capital budgeting analysis with a minus sign, whereas the purchase price received is a cash inflow in t=0. If this purchase price equals the sum of the present values of the future free cash flows, the net present value of this project (disposal of the company) will also amount to 0. In case the potential seller receives more than the sum of the present values of the future free cash flows, this will turn into a good project (net present value > 0). If the offers received are below the value derived, the net present value will be negative. As per the basic principles of capital budgeting analysis, the potential seller should keep the company and continue the business. This leaves the seller in a better position compared to selling the company.

Exhibit 3: Discounted Cash Flow Valuation

Before we go into further details, please make sure that you have these basic principles of capital budgeting analysis mentally absorbed:

Don’t do bad projects, i.e. projects with a negative net present value!