The Hindu Business Line : `The hypothetical purchaser' is `endlessly wealthy'

In this season of mega deals, valuation is the flavour. Get a taste this in The Valuation of Businesses, Shares and Other Equity. Mega deals are all thrust and parry games, and Trump Style Negotiations offers some keen insights. All this is taking the world on a new course. Top-notch economist offer opinions on where the global economy is headed in Flying on One Engine.

A day after Vodafone won the Hutch Essar auction with a $19 billion bid, analysts are busy reworking the valuations of other telecom companies. Dwarfed, in comparison, was Hindalco's acquisition of Canadian aluminium producer Novelis for about $6 billion in cash.

"Overseas mergers and acquisitions (M&A) grew significantly to $7.17 billion in 2006 from $4.4 billion in 2005. In 2007, so far the announced and completed acquisitions have gone past the 2006 mark," notes www.tradingmarkets.com in a February 11-dated story. "It was only a few weeks ago that another Indian company, Tata Steel, won the bidding war to acquire UK-based Corus group PLC for $11.3 billion. But strangely, analysts reportedly believe that the valuation for both Novelis and Corus Group seems to have been overstretched."

Overvaluation is the fear, again, with Fortress, a private equity and hedge fund manager, which soared on debut last Friday in New York,' nearly doubling in early trading before closing up almost 70 per cent,' as if harking back to `the dotcom frenzy of the late 1990s,' as Ben White reports on www.theaustralian.news.com.au, in a February 12 posting.

"Fortress's closing share price gave it a valuation of about 37 times earnings, nearly four times the valuation of Goldman Sachs, the investment bank, and nearly double that of Man Group, the British alternative asset manager," one learns.

The Australian cites the view of Jay Ritter, a finance professor at the University of Florida, thus: "Apparently there is huge demand from small investors to get into hedge funds and private equity. And I suspect when other similar funds see this kind of valuation, there will be a rush to the public markets."

Before you catch up with the `rush', read up The Valuation of Businesses, Shares and Other Equity (fourth edition), by Wayne Lonergan, from Viva (www.vivagroupindia.com). "Valuations have the objective of determining the price on which a willing but not anxious purchaser and a willing but not anxious seller could agree in an open and unrestricted market," explains the author. "As such, it is assumed that the purchaser and vendor will both act rationally and without reference to emotion or subjective considerations."

The process of valuation, though, may not eliminate subjectivity, though mitigation is possible through professional judgment. Which explains why different valuers of the same business can arrive at different values, as get reflected in auction bids.

In many valuations, the purchaser is truly hypothetical, says Lonergan. "For example, it is often extremely difficult, if not impossible, to find a purchaser for shares in a small private company. Even if such a purchaser did exist, the search costs of locating the purchaser would frequently exceed the value of the shares under consideration."

The author likens `the hypothetical purchaser' to `an endlessly wealthy and acquisitive conglomerate investor prepared to acquire any form of shares or business investment', be it a single share in a small family company or the whole of a big business. However, preparedness should not be confused with over-eagerness, because the hypothetical purchaser would invest in anything at a fair value.

The book discusses themes such as valuation of securities, intangible asset valuation, specialised industry valuation, and regulatory factors. A chapter titled `The 1980s — How valuers went wrong' begins with this quote of Charles Williams: `Murphy's law of investment: losses gravitate to portfolios that are not marked to market.'

A substantial proportion of equity values in boom periods may be represented by intangible assets, Lonergan cautions. "When the downturn occurs the value of intangible assets often collapses quickly." Take care, therefore: "Economic behaviour may be distorted by factors such as inflation, taxation and a lack of understanding of correct valuation principles... When the `bubble' bursts, the downturn is exacerbated by the return of yields to more normal levels and the unwinding of artifices... "

Clarity from Wall Street economists

If bubble talk frightens you, try this: "It is bad enough that the global economy has been flying on one engine. But it is going to be a lot worse if it has to land on one wheel," reads a quote of Kenneth S. Rogoff on the dust jacket of Flying on One Engine, from Bloomberg (www.bloomberg.com). "This fascinating collection of essays offers a window into a world most ordinary individuals have no access to: the insights and analyses of Wall Street's highly paid top economists," begins Rogoff in his foreword to the book, which gathers `fourteen views on the world economy'. "These economists are not academics aiming to change how the world works twenty years from now, they are practical thinkers who think deeply about how complex financial markets work here and now."

Thomas R. Keene, the book's editor acknowledges that clarity is the distinction of his contributors. "They are smart. Most express an opinion, but an opinion not wrapped in certitude but instead tempered by respect for risk and for the uncertainty of outcomes. Many of the authors write gracefully."

Such as John P. Lipsky and James E. Glassman writing in the opening chapter on employment how `perceptions about the health of the nation's job market are strongly shaped by the pace of net hiring and by the unemployment rate'. Net hiring indicates that economic growth is outpacing the increase in the economy's productive potential, they explain.

A chapter titled `The global labour arbitrage' by Stephen S. Roach notes that the Internet Age `with its ubiquitous diffusion of knowledge, innovation, and technological change' achieves `convergence of the human capital'.

He speaks of `a veritable renaissance in IT-enabled services — software, business process outsourcing, multimedia, network management, and systems integration — that has enabled India to fill the void left by seemingly chronic deficiencies on the industrialisation front.'

Anything goes in negotiations

Armed with inputs from top-notch economists, when you go to strike a deal, Trump Style Negotiation can help, with `powerful strategies and tactics for mastering every deal'.

The book by George H. Ross, from Wiley (www.wiley.com) begins with two questions about negotiation: `Are there any rules in negotiation? Are lying, cheating, and deception permitted?' What are the right answers? "No, there are no rules in negotiation," and "Yes, anything goes."

Negotiation is the sum of all the ways in which we convey information about what we want, what we desire, and what we expect from other people, defines Ross. Negotiation is not limited to talking, listening and bargaining, he explains. "Negotiation has many other nonverbal forms. If someone is late for an appointment without an apology or doesn't show up at all, this is an element of negotiation as well. Sometimes what people don't do or say is the most telling factor — not taking a phone call, cutting a meeting short, or scheduling a conflicting meeting — these are all negotiation tactics of one kind or another."

The ability to negotiate effectively is a worthwhile talent in any situation, industry, or organisation, emphasises Ross. "You will discover that it transcends your professional life and carries over into your personal life as well."

A set of books you may like to deal with in a week that has started off with a deal too many.

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