Investment Banking - Valuation

Given that the management of a company is tasked with the maximization of shareholder value, it follows then that the biggest challenge for any company management is to come up with the ideas and recommendations that allow this maximization to occur.

Even the most successful management teams cannot afford to be complacent. In today’s ever-changing world, nothing remains the same for long, especially a business advantage.

The old saying “if its not broken then don’t fix it” has been replaced with “if you are standing still, then you are already behind the competition”.

The challenge then for a company’s management is to both constantly review where they have been (i.e., what has been successful and what needs to change) and where they are going (i.e. what will the marketplace, the competition, the technology and a host of other variables be like in the short and long term future).

Maximum shareholder value is thus achieved through strategic and sound financial management decisions. These decisions are most successful when based upon past performance and future plans.

This process can be enhanced by following the advice of an investment bank which will assess the value of the company (the past) and proposed projects (the future).

Investment banks are experts at calculating what a business is worth.
They are also able to predict how that worth could be altered (i.e. what happens to the value of a company in a number of different scenarios and what those potential futures would mean financially).

This is invaluable to a management team that is considering one of several future plans.
It is much easier to make the right decision (to maximize shareholder value) once it is known what the likely outcomes will be (i.e. what that transaction will add to future shareholder value).

This valuation ability is generally used for the following purposes:

► To price a securities offering (i.e. what is the likely price and best time to sell company stocks and bonds)
► To measure the impact of any restructuring (i.e. selling off or down sizing existing business areas) or investment plans
► To set the value of a merger or acquisition (i.e. how much it would cost to “buy” a company)

Financial models* are constructed by investment banks to capture the most important fixed and variable financial components that could influence the overall value of a company.
These models, depending upon the proposed transaction, can be extremely complex with special variables being added for special areas (i.e. there are different financial factors to consider in different sectors, countries and markets when predicting or measuring a company’s value).