Company Valuation


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Company Valuation

  2. 2. Brand Valuation 10/18/10 - BY ANKIT GOR
  3. 3. Agenda <ul><li>Introduction & evidence of brand valuation. </li></ul><ul><li>Brands on the balance sheet. </li></ul><ul><li>Social value of brands. </li></ul><ul><li>Approaches to brand valuation. </li></ul><ul><li>Calculating a brands value. </li></ul><ul><li>Five steps to brand valuation. </li></ul><ul><li>Applications of brand valuation </li></ul>10/18/10 - BY ANKIT GOR
  4. 4. Introduction & evidence of brand valuation <ul><li>Initially tangible assets were regarded as the main source of business value </li></ul><ul><li>The market was aware of intangibles, but their specific value remained unclear and was not specifically quantified </li></ul><ul><li>Brands, technology, patents and employees were always at the heart of corporate success, but rarely explicitly valued. </li></ul>10/18/10 - BY ANKIT GOR
  5. 5. Introduction & evidence of brand valuation The increasing recognition of the value of intangibles came with the continuous increase in the gap between companies’ book values and their stock market valuations, as well as sharp increases in premiums above the stock market value that were paid in mergers and acquisitions in the late 1980s. 10/18/10 - BY ANKIT GOR
  6. 6. Introduction & evidence of brand valuation <ul><li>Why are brands valuable? </li></ul><ul><li>Why are brands valued? </li></ul>10/18/10 - BY ANKIT GOR
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  9. 9. Brands on the balance sheet <ul><li>The wave of brand acquisitions in the late 1980s resulted in large amounts of goodwill that most accounting standards could not deal with in an economically sensible way. </li></ul><ul><li>Accounting practice for so-called goodwill did not deal with the increasing importance of intangible assets. </li></ul>10/18/10 - BY ANKIT GOR
  10. 10. Brands the balance sheet <ul><li>TRADITIONAL VIEW </li></ul><ul><li>The traditional view is that any valuation figure, other than one supported by a specific purchase price on change of ownership is too arbitrary at all to be credible. </li></ul><ul><li>The balance sheet is not intended as a statement of corporate worth and that subsequently, inclusion of values of brands in fixed assets would mislead the figures in the balance sheet.  </li></ul>10/18/10 - BY ANKIT GOR
  11. 11. Social value of brands <ul><li>Do brands create value for anyone other than their owners? </li></ul><ul><li>Is the value they create at the expense of society at large? </li></ul>10/18/10 - BY ANKIT GOR
  12. 12. Social value of brands Brands are accused of stifling competition and tarnishing the virtues of the capitalist system by encouraging monopoly and limiting consumer choice. The opposing argument is that brands create substantial social as well as economic value as a result of increased competition, improved product performance and the pressure on brand owners to behave in socially responsible ways. 10/18/10 - BY ANKIT GOR
  13. 13. Social value of brands Competition on the basis of performance as well as price, which is the nature of brand competition, fosters product development and improvement. 10/18/10 - BY ANKIT GOR
  14. 14. Approaches to brand valuation <ul><li>Research based approaches </li></ul><ul><ul><li>Use of consumer research </li></ul></ul><ul><li>Financially driven approaches </li></ul><ul><ul><li>Cost based approach </li></ul></ul><ul><li>Premium price </li></ul><ul><ul><li>NPV of a future price premium that a brand would command </li></ul></ul>10/18/10 - BY ANKIT GOR
  15. 15. Calculating a brands value <ul><li>Discounted cash flow : A classic approach to the financial evaluation of any investment whether material or intangible. </li></ul><ul><li>This is the model-type for evaluation by means of discounted net anticipated cash flows. </li></ul>10/18/10 - BY ANKIT GOR
  16. 16. Value of a brand N = ∑ RBt / (1+r)t + residual value/(1+r)n t = 1 = Anticipated revenue in year t, attributable to the brand r = discounting rate Residual value beyond year n RBn/r or RBn/r-g g= Rate of revenue growth 10/18/10 - BY ANKIT GOR
  17. 17. Multiple methods Market value of equity Firm : P/E = Known profits Brand equity Brand Multiple = Brand net profits 10/18/10 - BY ANKIT GOR
  18. 18. Stages to determine Brand Multiple 10/18/10 - BY ANKIT GOR
  19. 19. Deciding the applicable net profit <ul><li>Use of profit for 3 previous years </li></ul><ul><li>Discounting the profits to take inflation into consideration </li></ul><ul><li>Weighted average of the profits takes account of least and most representative years </li></ul><ul><li>Weighted average of the post –tax net profit attributable to the brand forms the basis of all calculations </li></ul>10/18/10 - BY ANKIT GOR
  20. 20. Assessing the brands strength <ul><li>Overall marking based upon a set of marketing and strategic criteria </li></ul><ul><li>Weighted sum of individual marks of each factor determines the overall marks </li></ul>10/18/10 - BY ANKIT GOR
  21. 21. Deciding the multiple <ul><li>A relation has to be established between the multiple and brand strength </li></ul><ul><li>The multiple is the indication of confidence in the brand in future </li></ul><ul><li>The relation is indicated by a brand strength score </li></ul><ul><li>S-curve is the chart linking multiple with brand strength </li></ul>10/18/10 - BY ANKIT GOR
  22. 22. Means of evaluating brand strength 10/18/10 - BY ANKIT GOR Evaluation Factor Maximum Score Brand A Brand B Brand C Leadership 25 19 19 10 Stability 15 12 9 7 Market 10 7 6 8 Internationally 25 18 5 2 Trend 10 7 5 7 Support 10 8 7 8 Protection 5 5 3 4 Brand strength 100 76 54 46
  23. 23. S-curve 10/18/10 - BY ANKIT GOR
  24. 24. Deciding the brand value <ul><li>Brand Value = Net brand profit X Relevant brand multiple </li></ul>10/18/10 - BY ANKIT GOR
  25. 25. 5 steps to brand valuation <ul><li>Market segmentation </li></ul><ul><li>Financial analysis </li></ul><ul><li>Demand analysis </li></ul><ul><li>Competitive benchmarking </li></ul><ul><li>Brand value calculation </li></ul>10/18/10 - BY ANKIT GOR
  26. 26. Applications of brand valuation <ul><li>Brand management and development </li></ul><ul><li>Bench marking of competitors </li></ul><ul><li>Monitoring value year on year </li></ul><ul><li>Brand control </li></ul><ul><li>Brand licensing </li></ul><ul><li>Mergers and acquisitions </li></ul><ul><li>Join-venture negotiations </li></ul>10/18/10 - BY ANKIT GOR
  27. 27. “ If this business were split up, I would give you the land and bricks and mortar, and I would take the brands and trade marks, and I would fare better than you.” -John Stuart, Chairman of Quaker (ca. 1900) 10/18/10 - BY ANKIT GOR
  29. 29. INTRODUCTION <ul><li>The concept of value has essentially two different meanings. 'Value' expresses the utility or service of a particular resource (e.g. the future use of a capital asset) and the purchasing power of the resource (e.g. money, securities). </li></ul><ul><li>If an object is not capable of rendering future economic services in the form of utility to the possessor, no value can be attached to it. </li></ul><ul><li>Human Resource Valuation means identifying and measuring value of human resources and communicating the information to the interested parties. </li></ul>10/18/10 - BY ANKIT GOR
  30. 30. <ul><li>In India HR valuation was first implemented by the public sector giants (e.g. BHEL, SAIL, etc.) For the last two years, HR value reporting has gained momentum amongst the software companies. </li></ul><ul><li>These companies have valued their Human Resources which has been disclosed in their Annual Reports as a statement of intangibles (additional notes to the accounts). </li></ul>10/18/10 - BY ANKIT GOR
  31. 31. HUMAN RESOURCE ACCOUNTING <ul><li>Several models have been developed to try to quantify the intangible and specifically the human component. </li></ul><ul><li>Cost models (Brummet, Flamholtz and Pyle) are based on the acquisition cost, including replacement and training costs and opportunity cost of human asset </li></ul><ul><li>The Lev & Schwartz model, more monetary-centric, is based on the likely future earnings of an employee till his retirement. </li></ul>10/18/10 - BY ANKIT GOR
  32. 32. METHODS <ul><li>Historical cost method: The method suggests capitalizing the firm’s expenditure on recruitment, selection, training and development of employees and treats them as assets for the purpose of human resource accounting. </li></ul><ul><li>Replacement cost method: This method involves assessment of replacement cost of individuals, and rebuilding cost of the organization to reflect HR asset value of both the individuals and the organization. However, the replacement cost may not reflect either the actual costs or the contribution associated with HR. </li></ul>10/18/10 - BY ANKIT GOR
  33. 33. <ul><li>Opportunity cost method: This model envisages computation of monetary value and allocation of people to the most promising activity and thereby to assess the opportunity cost of key employees through competitive bidding among investment centers. </li></ul><ul><li>Behavioral Model: This model aims to establish a set of casual variables through psycho- social test results reflecting the appreciating or depreciating condition of human organization as reflected by a set of intervening variables, which in turn, are likely to result in the achievement of the end result variables. </li></ul>10/18/10 - BY ANKIT GOR
  34. 34. <ul><li>Economic model: Lev & Schwartz advocated the estimation of future earnings during the remaining life of the employee and then arriving at the present value by discounting the estimated earnings at the employee's cost of capital. </li></ul>10/18/10 - BY ANKIT GOR
  35. 35. <ul><li>VALUATION OF INTANGIBLE ASSET </li></ul>10/18/10 - BY ANKIT GOR
  36. 36. Valuation of goodwill <ul><li>Normal capitalisation method </li></ul><ul><ul><li>Normal capital required to get actual return less actual capital employed </li></ul></ul><ul><li>Super profit method </li></ul><ul><ul><li>Excess of actual profit over normal profit multiplied by number of years super profits are expected to continue </li></ul></ul><ul><li>Annuity method </li></ul><ul><ul><li>Discounted super profit at a suitable rate </li></ul></ul>10/18/10 - BY ANKIT GOR
  37. 37. <ul><li>COMPANY A </li></ul><ul><li>Capital employed: Rs. 45 cr </li></ul><ul><li>Normal rate of return: 12 % </li></ul><ul><li>Future maintainable profit: Rs. 5.5 cr </li></ul><ul><li>What would be the goodwill under the normal capitalization </li></ul><ul><li>method? </li></ul><ul><li>SOLUTION: </li></ul><ul><li>= (5.5/.12) – 45 = Rs. 0.83 cr </li></ul>Valuation of goodwill 10/18/10 - BY ANKIT GOR
  38. 38. <ul><li>COMPANY B </li></ul><ul><li>Capital employed: Rs. 50 cr </li></ul><ul><li>Normal rate of return: 15 % </li></ul><ul><li>Future maintainable profit: Rs. 8 cr </li></ul><ul><li>Super profit can be maintained for:3 years </li></ul><ul><li>What would be the goodwill under the super profit method? </li></ul><ul><li>SOLUTION: </li></ul><ul><li>= [8 – (50*.15) ] * 3 = Rs.1.50 cr </li></ul>Valuation of goodwill 10/18/10 - BY ANKIT GOR
  39. 39. <ul><li>Bharti Airtel – flagship company of Bharti enterprise </li></ul><ul><li>The businesses at Bharti Airtel have been structured into three individual strategic business units (SBU’s) - mobile services, telemedia services (ATS) & enterprise services </li></ul><ul><li>First private telecom services provider </li></ul><ul><li>In 10 yrs, Airtel became the leader in providing telecom services to its customers </li></ul>Company profile 10/18/10 - BY ANKIT GOR
  40. 40. <ul><li>Goodwill </li></ul><ul><li>Other acquired intangible assets </li></ul><ul><li>Software </li></ul><ul><li>Bandwidth </li></ul><ul><li>Licenses </li></ul><ul><li>License entry fees </li></ul><ul><li>Brands </li></ul><ul><li>Distribution networks </li></ul><ul><li>Customer relationships </li></ul>Intangible assets 10/18/10 - BY ANKIT GOR
  41. 41. Good will (Rs in thousands) 10/18/10 - BY ANKIT GOR March 31, 2008 March 31,2009 Balance ( beginning of the period) 23683549 27043223 Additions 3427020 10834 Valuation allowance reversals (67,346) - Balance ( end of the period) 27043223 27054057
  42. 42. Other intangible assets (Rs in thousands) 10/18/10 - BY ANKIT GOR Particulars March 31, 2008 Less Amortization March 31, 2009 Less Amortization Software 83,993 83,993 1,00,458 88,659 Bandwidth 20,96,218 96,346 33,63,064 3,07,261 Licences 63,59,042 29,87,002 63,59,402 34,27,900 Licence entry fees 1,08,16,027 31,15,513 1,08,97,940 36,97,713 Brands 1,10,514 92,250 1,10,514 94,990 Distribution networks 11,34,508 11,344,188 11,34,508 11,34,484 Customer relationships 7,28,840 7,23,639 7,28,840 7,28,004 Other intangibles 1,54,659 47,234 1,54,659 60,874 Total 2,14,84,161 82,80,165 2,28,49,385 95,39,885 NET 1,32,03,996 1,33,09,500
  43. 43. <ul><li>Intangible assets of the company – </li></ul><ul><li>Human resources </li></ul><ul><li>Collective expertise, innovation, leadership, managerial skills of employees </li></ul><ul><li>Intellectual property assets </li></ul><ul><li>Know-how, copyrights, patents, products and tools owned by a corporation </li></ul><ul><li>Internal assets </li></ul><ul><li>Systems, technologies, methodologies, processes and tools specific to organization </li></ul><ul><li>External assets </li></ul><ul><li>Examples : customer loyalty, brand value </li></ul>INFOSYS 10/18/10 - BY ANKIT GOR
  44. 44. <ul><li>LEV & SCHWARTZ MODEL </li></ul><ul><li>Projects the direct & indirect benefits enjoyed by the employee till retirement </li></ul><ul><li>Discounts CTC at the WACC to arrive at the present value. </li></ul>HUMAN RESOURCES VALUATION 10/18/10 - BY ANKIT GOR
  45. 45. HUMAN RESOURCE VALUATION AT INFOSYS Assumption : cost of capital 12.18% (Rs. in crores) 10/18/10 - BY ANKIT GOR 2009 2008 Employees no. Software professionals 97349 85013 Support 7501 6174 Total 104850 91187 Value of Human Resources Software professionals 95600 92331 Support 6533 6490 Total 102133 98821
  46. 46. <ul><li>Brand earnings multiple model </li></ul><ul><ul><li>Brand Strength multiple </li></ul></ul><ul><ul><li>Brand Earnings </li></ul></ul><ul><ul><li>Brand Value = Brand Strength multiple X Brand earnings </li></ul></ul>BRAND VALUATION 10/18/10 - BY ANKIT GOR
  47. 47. INFOSYS-BRAND VALUE Rs. in crores 10/18/10 - BY ANKIT GOR 2009 2008 2007 Profit before interest and tax 6907 5344 4245 Less: non-brand income 426 634 335 Adjusted profit before tax 6481 4710 3910 Inflation factor 1.0000 1.092 1.192 PV of brand profits 6481 5142 4660 Weighted factor 3 2 1 Weighted avg profits 5731 - - Remuneration of capital 801 - - Brand related profits 4930 - - Tax 1676 - - Brand earnings 3254 - - Brand multiple 9.94 - - Brand value 32345 - -
  48. 48. Infosys : Intangible assets Intangible Assets / Total Assets = 88.7% In Rs. in crores 10/18/10 - BY ANKIT GOR 2009 Total Assets 152732 Intangible assets Brand value 32345 Human Resources 102133 135478
  49. 49. Conclusion 10/18/10 - BY ANKIT GOR
  50. 50. 10/18/10 - BY ANKIT GOR