In Kenya, valuation is also an issue many people struggle with, especially when it comes to that of startups.
We see media reports of startups with big valuation, but one can’t put a finger on where the generous valuation comes from.
There are three main valuation approaches, even though a buyer and a seller always wears different lenses.
The buyer’s viewpoint is the maximum value he or she is prepared to pay whilst the seller is out for the minimum value he or she will accept.
One of the things many people struggle with in takeover deals is valuation or networth of companies and individuals. When Jeff Bezos’ networth grew by $75 billion in 2020, there were calls that billionaires should be taxed more.
The confusion arises from the fact that we confuse networth with liquidity. If Jeff Bezos’ networth grew by $75 billion he pocketed that in 2020 we would only pocket that money if sold shares of his company at that time because that is the valuation of the company.
In Kenya, valuation is also an issue many people struggle with, especially when it comes to that of startups. We see media reports of startups with big valuation, but one can’t put a finger on where the generous valuation comes from. There are three main valuation approaches, even though a buyer and a seller always wears different lenses. The buyer’s viewpoint is the maximum value he or she is prepared to pay whilst the seller is out for the minimum value he or she will accept.
First is Market Value Approach, which looks at the current value of the business compared to other similar businesses using comparable data like market share, revenue or growth potential. Second is Income Approach, which is based on the premise that a company’s value is equal to the current value of its future cash flows, taking into account the time value of money. This method tries to identify the intrinsic value of a company.
Third is Asset-Based approach, which looks at the value of assets of a business at current market value subtracted from its liabilities to derive the net value. This methodology is the most common, especially during liquidation.
For publicly-listed companies, the share price is what is used to obtain the valuation of a company and one can use it to decide on whether to sell, buy or hold the shares. But in a number of takeover deals that have been happening at the Nairobi Securities Exchange (NSE), minority shareholders have rejected a buyout, claiming the company has been undervalued.
One such case was in 2018 when Seaboard Corporation a US company intended to acquire 46.1 percent shares of Unga Group which was held by minority shareholders through NSE listing. Seaboard offered a buyout of Sh40 per share valuing the company at Sh3 billion but minority shareholders turned down the offer saying that it had not factored in other assets.
Now, publicly listed companies are required to provide as much information as possible to the public. This disclosure eliminates information asymmetry problem where a few shareholders may have information about the company and use it to the detriment of other shareholders. This means the share price reflects the most accurate value of the company. So, it's ironical when the minority shareholders claim that the share price undervalues a company and would want valuation of the company be approached through the asset-based methodology.
Though there was concern in the Seaboard deal, the majority shareholder, the Ndegwa family, which owned 50.93 percent, collaborated with the company to buy out minority shareholders and take it private. In such a case, minority shareholders are likely to face a hostile takeover unlike the case where majority shareholders are being bought out. Rarely would a majority shareholder undervalue their company.
Suffice to say that shareholders can now begin to appreciate that valuation is an art and not just a mathematical calculation. The assessment of underlying business performance and management skills and future prospects all play an important part in the process of arriving at a valuation. There isn’t a “one size fits all” valuation methodology across different industries and businesses. Each methodology has its own advantages and disadvantages based on various factors from economic trends to industry valuation practices. The best valuations are derived from using more than one method, thus obtaining a range of values.
