Changing concepts in valuation of cos.

By S. Varadharajan

CHENNAI, APRIL 10. The phenomenon of valuation of companies (an estimate of the current value of a company usually based on its future potential) has undergone a great change, according to Mr. V. Kumar, Vibrant Tech Private Limited, a Bangalore based firm. He was speaking at a seminar on valuation of companies in Chennai organised by his firm on Saturday last. At the seminar speakers with expertise in valuation across different stages and segments shared their experiences.

In the past valuation was mostly based on tangible assets. The valuation methodologies were based on factors such as discounted cash flow, price earnings multiple and market value to book value. It is now calculated on intellectual capital (intangible assets), brand equity and the like. The change is due to the technology revolution such as the Internet, e-business and convergence, which resulted in the emergence of entrepreneurship, new business and expansion. In the Internet age the benchmarks have changed to page views, number of visitors and the like.

It was noted at the seminar that in the present day world, corporates would like to become big with a thrust on consolidation. This led to a lot of mergers and acquisitions.

Mergers and acquisitions need funding and this calls for valuation. Funding in the first round is usually done by a venture capital (VC). In the second round a private equity fund (usually an international investor) will enter the scene. The second round investor will play a complementary role and if needed provide an exit route to the first round investor. He will be a strategic investor assisting the company concerned in accessing markets abroad, entering into strategic alliances or even in acquisitions The second round investor would value the company at 15-20 times the first round value of the company..

According to Mr. Vijay K. Raghavan, M.D. & CEO, Banyan Networks, the valuation of a going concern will be based on book value, replacement cost, projected earnings, discounted cash flow and the price earnings (P/E ratios) of similar listed companies.

For start-up companies, the valuation will be based on the industry trend, quality of promoters, quality of management and financial projections.

According to him, the basis of valuation should be fair to all, providing protection to venture capitalists' interests and company's interests.

According to Mr. Vijay Angadi, ICF Ventures, the parameters for valuation of young companies were the stage of the company, quality of the management team, size of opportunity, quality of homework/plan, rounds of financing, time to exit, market conditions, risk profile and the venture capitalist's view.

The venture capitalist would look for aggressive/ethical teams, key employee friendly polices, large market opportunity, differential product/service, digestible rounds of financing. He would exit at a large multiple in 2-4 years. Mr. Angadi said VCs disliked divided management attention, key management kept within the family, deals shopped around, plans to spin-off subsidiaries and business plans that are inconsistent or keep changing.

Mr. Amitava G Roy, Pricewaterhouse Coopers, elaborated the principles involved in valuation. He said the valuation of dotcoms were not based on traditional methods of valuation and Internet valuations depended on the type of site B2C, B2B. He said valuation of B2B sites were comparatively easier due to presence of a subscriber base and e-commerce related revenue streams.

Mr. S. Srinivasan, KPMG India, took up the subject of valuation for later stage funding/initial public offer while Mr. Sriniketh Chakravarthi, Arthur Andersen, dwelt in detail about deal structuring. Mr. H.V. Harish, A.F. Ferguson & Co presented a paper on valuation for mergers and acquisitions and Mr. R. Venkatesh of Ernst & Young dealt with valuation of dotcom companies.

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