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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.
Stephen Taub, CFO.com | US
July 24, 2002

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 About 15 percent noted they had conducted a valuation in the past, but indicated that it was no longer current.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."

PwC's "Trendsetter Barometer" interviewed CEOs of 407 product and service companies identified in the media as the fastest-growing U.S. businesses during the past five years. The surveyed companies range in size from approximately $5 million to $100 million in revenues.

Another Andersen Problem in Houston
Speaking of valuation woes: a U.K.-based transport company said there were "accounting irregularities" in its recently acquired U.S. business, according to FT.com. The auditor for the Houston-based acquisition target? Arthur Andersen.

Management at Stagecoach said operating profits at its Coach USA division fell about 39 percent for the year ending June 30.

The FT.com report said that accounting irregularities at Coach USA played a part in a $628 million writedown incurred by Stagecoach after it acquired the bus company.

The problems at Coach USA came to light after an employee tip-off, according to the report.

"We were not happy when we bought Coach with the accounting that had gone on [before] our acquisition," said Robert Speirs, Stagecoach's acting nonexecutive chairman, according to FT.com.

"We investigated further and we made relevant adjustments to bring their accounting in line with our own from the date that we acquired it," he reportedly told FT.com. "From that time, there were no accounting irregularities."

More Goodwill Hunting
A pair of active acquirers during the 1990s admitted on Tuesday that they paid way too much money for a number of those deals.

As a result, they are taking substantial charges to write off a lot of the assets they bought.

Yesterday, management at AT&T said that, based on FAS 142 and current market values in the cable industry, it has recorded noncash asset impairment charges of $13.1 billion, after tax. (To read an exclusive interview with departing AT&T CFO Chuck Noski, see "Deconstructing AT&T," in the current issue of CFO magazine.)


And management at embattled Tyco International—which doesn't really need any more bad news right now—took substantial impairment charges as well.

The conglomerate recorded goodwill write-offs of $513 million, pretax, related to the impairment of goodwill at the Tyco Telecommunications and Tyco Engineered Products and Services businesses.

In addition, Tyco recorded $239 million of impairment charges, of which $125 million relates to intangibles associated with health-care businesses that have been exited. Nearly $105 million relates to software development projects at ADT, which have been cancelled.

Tyco CEO Dennis Kozlowski recently resigned from the company amid charges that he evaded paying taxes on paintings he bought. And yesterday, a published report quoted analysts who believe current CFO Mark Swartz will leave Tyco once a new CEO is named.

According to data supplied to CFO.com by Mercer Human Resource Consulting, Swartz was the highest-paid CFO in the United States last year.




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