Roles of Valuation in a Business

Portfolio Management – yung relevance ng valuation dito ay depende sa investment objectives ng investors or financial
managers na nagmamanage ng investment portfolio

Passive Investors – disinterested sa valuation

Active Investors – gustong malaman yung valuation in order to participate intelligently sa stock market.

 Fundamental Analysts – tao na interisado sa understanding at measuring ng intrinsic value ng firm.

Fundementals refers sa characteristics ng entity related sa financial strength, profitability or risk appetite.
- Para sa kanila pede nilang maestimate yung true value ng firm by looking sa financial characteristics,
growth prospects, cash flows at risk appetite nito.
- Naglelean towards sa long-term investment strategies na nakapaloob yung mga principles na:
 Relationship ng value at underlying factors ay namemeasure reliably.
 Stable yung above relationship over an extended period.
 Any deviations mula sa above relationship ay naitatama sa loob ng reasonable time.
- Pedeng value or growth investors.
- Value Investors: mostly interested sa pagbili ng shares na existing at yung price nito ay less than sa true
value nito.
- Growth Investors: lean towards sa growth assets (hindi man profitable yung business ngayon pero may
high expected value ito in future years) pinupurchase nila ito at a discount.
- Security and investment analysts: gumagamit ng valuation techniques para masuportahan yung buy/sell
recommendations nila sa mga clients.
- Yung market conditions implied by the market price ay often iniinfer ng analysts by assesing this against
sa own expectations nito.
- Inaallow sila nito na maassess yung reasonableness at maadjust yung future estimates.
- Yung market expectations regarding sa fundamentals ng firm ay pwedeng magamit as benchmark ng
other companies na nageexhibit ng same characteristics.

 Activist Investors – naghahanap sila ng company na may good growth prospects pero mayroong poor
management.
- Ginagawa nila yung “takeovers” na kung saan gagamitin nila yung equity holdings nila para mapatalsik
yung old management sa kompanya at mabago yung way the company is run.
- Para sa kanila hindi dahil sa current value ng kompanya but sa potential value nito once na napatakbo
nang maayos.
- Critical para sa kanila yung knowledge about valuation para mapinpoint nila yung kompanya na kayang
magcreate ng additional value if napalitan yung management nito.
- Para magawa ito, kailangan nila ng good understanding ng company’s model at kung pano nakakaapekto
sa value nito yung pamamaraan ng implementation ng changes sa investment, dividend at financing
policies.

 Chartists - nakarely naman sila sa concept na ang stock prices ay mayroong significant influence sa kung
papaano magisip at umakto ang mga investors.
- Nakarely sila sa available trading KPIs tulad ng price movements, trading volume at short sales kapag
gumagawa ng investment decisions.
- Naniniwala sila na yung mga metrics na ito nagiimply ng investor psychology at nagprepredict ng future
movements sa stock prices.
 - Inaassume nila na yung stock prices ay nagbabago at sumusunod sa predictable patterns since yung mga
investors ay kalimitang gumagawa ng decisions based on their emotions rather than rational analysis.
- Hindi masyadong nakakatulong yung valuation dito pero helpful naman siya kapag nagploplot ng
support at resistance lines.

 Information Traders – sila yung mga traders na nagrereact based sa new information about sa firms na nailabas
sa stock market.
- May paniniwala na sila ay more adept sa paghula or pagkuha ng new information about sa firm at kaya
rin nilang ipredict kung paano magrereact yung market based on this.
- Kinocorrelate nila yung value at kung pano maapektuhan ng information na ito yung value na iyon.
- Important yung valuation sa kanila kasi they buy or sell shares based sa assessment kung pano
maaapektuhan ng new information yung stock price.

*Under ng portfolio management, pedeng maperform yung following activities sa pamamagitan ng paggamit ng mga
valuation techniques:

- Stock Selection: yung particular asset ba ay fairly priced, overpriced or underpriced in relation sa prevailing
computed intrinsic value at prices ng comparable assets?

- Deducing market expectations: anong estimated ng firm’s future performance ang in line sa prevailing market
price ng stocks nito? Meron bang assumptions about sa fundamentals na magjujustify ng prevailing price?

* Typically yung ibang investors wala silang gaanong oras para aralin lahat ng available information para magcome up ng
investment decisions. Dahil dito humihingi sila ng tulong sa mga professionals.

- Sell-side Analysts: nagtratrabaho sa brokerage department ng investment firms na nagiissue ng valuation judgment na
naka contain sa research reports na disseminated widely sa current at potential clients.

- Buy-side Analysts: nakatuon sa specific investment options at gumagawa ng valuation analysis sa mga ito at
nagrereport sa portfolio manager or investment committee. Sila yung mga nagperperform ng in-depth analysis sa firm at
nag eengage sa more rigorous stock selection methodologies.

- Financial Analysts: assist clients para ma realize nila yung investment goals nila sa pamamagitan ng pagprovide sa
kanila ng information na makakatulong sa paggawa ng right decision whether to buy or sell. Malaki rin yung role nila sa
financial markets sa pamamagitan ng pagprovide ng right information para sa mga investors na pede nilang magamit to
assess whether to buy or sell shares.

*Dahil nga tinitingnan nila as a whole yung businesses, they serve a monitoring role para maensure ng management na
yung desisyon na gagawin nila ay in line sa pagcreate ng value para sa mga shareholders.

ANALYSIS OF BUSINESS TRANSACTIONS/DEALS: yung valuation ay mayroong very big role when analyzing potential
deals. Yung mga potential acquirers ay gumagamit ng relevant valuation techniques para maestimate yung value ng
target firms na pinaplano nilang bilhin at inaalam din nila yung mga synergies na pede nilang makuha from the purchase.
Ginagamit rin nila yung valuation techniques sa negotiation process para makapag set ng deal price.

Ilan sa mga business deals include the following corporate events:

1) Acquisition: merong 2 parties: the buying firm at selling firm. Yung buying firm ay kailangang madetermine yung
FV ng target company prior sa pag-oofer ng bid price. Yung selling firm naman ay kailangang may alam sa firm
value para maglabas ng reasonable bid offers. Ginagamit nila yung information na ito para piliin kung anong bid
yung tatanggapin at irereject nila. Maaaring maging malaking issue ang bias sa acquisition analysis. Kasi
 maaaring yung target firms ay magpakita ng very optimistic projections para lang maitaas yung price sa bid or
maaaring magkaroon ng pressure para lang maipakita na yung resulting valuation analysis ay favorable if yung
target firm ay certain na mabibili as a result ng strategic decision.
2) Merger: general term na kung saan dinedescribe yung transaction na kung saan yung dalawang companies ay
pinagsama yung mga assets nila para magform ng panibagong entity.
3) Divesture: sale ng major component or segment ng business sa other company (e.g band or product line)
4) Spin-off: paghiwalay sa segment or component business at pagtransform nito sa separate legal entity.
5) Leveraged Buyout: acquisition ng another business by using significant debt na kung saan ginagamit yung
acquired business as collateral

Valuation sa deals analysis considers 2 important unique factors:

1) Synergy: potential increase ng firm value na maaaring magenerate once yung 2 firms ay nagmerge with each
other. Inaassume nito na yung combined value ng 2 firms ay mas malaki kaysa sa sum ng separate frms. Maaari
itong maging attributable sa more efficient operations, cost reductions, increase revenues, combined
products/markets or cross-disciplinary talents ng combined organization.
2) Control: change sa taong nagmamanage ng organization dala ng ginawang acquisition. Any impact sa firm value
dahil sa change ng management at pagrestructure ng target company ay dapat nakapaloob sa valuation
exercise. Important matters para sa mga hostile takeovers.

Corporate Finance: involves managing the firm’s capital structure, nakapaloob dito yung mga funding sources at
strategies na kailangan ng business para mamaximize yung firm value. Ang ultimate goal nito ay mamaximize yung firm
value gamit ang appropriate planning at implementation ng resources, habang binabalnce yung profitability at risk
appetite.

Small private businesses: ginagamit nila yung valuation concepts para may mapakitang promise ng business kapag
kailangan nila ng additional money to expand their entity and kailangan nilang iapproach yung mga private equity
investors at venture caital providers. Yung kapalit ng perang ipapahiram nila ay naka base sa estimated value ng small
private business.

Larger companies: ginagamit nila yung valuation sa pagestimate ng price na ilalagay nila sa stock market kapag kailangan
nilang magobtain ng additional funds sa pamamagitan ng pag-offer ng shares nila sa public.

*Ineensure ng corporate finance na yung financial outcomes at corporate strategy drives maximization of firm value.

Legal Tax Purposes: importante rin yung valuation sa mga businesses dahil sa legal at tax purposes. Kunwari yung new
partner ay sasali sa partnership or yung old partner will retire. Kailangan ngayong I-value yung buong partnership para
maidentify kung magkano ba yung magiging buy-in or sell-out. Ganito rin yung case para sa mga liquidated partnership.
At vung firms din ay vinavalue para sa estate tax purposes if namatay yung owner.

Other Purposes: Issuance of a fairness opinion for valuations provided by third party; baisis for assessment of potential
lending activities by financial institutions; share-based payment/compensation.

VALUATION PROCESS: 5 STEPS (Understanding the Business, Forecasting Financial Performace; Selcting the right
valuation model; preparing valuation model based on forecasts; applying valuation conclusions & providing
recommendations)

1) Understanding the business: importante it dahil nagbibigay ito ng idea sa mga analysts at investors about sa
economic conditions, industry peculiarities, company strategy at company’s historical performace. Ineenable
 nito yung analyst na magcome up sa appropriate assumptions na kung san pedeng reasonably macapture yung
busines realities na nakakaapekto sa firm at sa value nito.

- Yung mga frameworks na kung saan nagcacapture ng industry at competitive analysis already exist ay very useful sa
mga analysts. Ginagamit nila ito para maorganize yung thoughts nila about sa industry at competitive environment at
kung papaano ito nakrelate sa performance ng firm na vinavalue nila.

-Industry structure: refers sa inherent technical at economic characteristics ng industry at trends na pedeng makaapekto
sa structure na ito. Porter’s Five Forces: most common tool used para maencapsulate yung industry structure.

Porter’s Five Forces:

a) Industry Rivalry: refers sa nature at intensity ng rivalry between market players sa industry. Less intense if
mayroong lower number ng market players or competitors which means may higher potential for industry
profitability. (includes concentration of market players, degree of differentiation, switching costs, information at
government restraint)
b) New Entrants: refer sa barriers sa pagpasok sa industry ng mga new market players. If merong high entry costs,
merong fewer new entrants, thus, mas less yung competition at improves profitability potential. (includes entry
costs, speed of adjustment, economies of scale, reputation, swithcing costs, sunk costs at government
restraints)
c) Substitutes and Compliments: refers sa relationships between sa interrelated products at services sa industry.
Yung availability ng substitute products (replace the sale of existing product) or complementary products(can be
used together with another product) ay nakakaapekto sa industry profitability.
d) Supplier Power: refers sa kung papaano makipagnegotiate yung mga suppliers better terms in their favor.
Malakas ang supplier power, makes industry profits lower. Nageexist yung strong supplier power if meron
lamang few suppliers ang kayang magsupply ng specific input.
e) Buyer Power: pertains kung pano makipagnegotiate yung mga customers ng better terms in their favor para sa
mga products/services na pinurchase nila. Low ang buyer power if low din yung concentration at fragmanted
yung mga customers. This means na yung market players ay hindi dependent sa few customers para magsurvie.
Iniimprove ng low buyer power yung industry profits dahil hindi nila kayang makipagnegotiate significantly para
mapababa yung presyo nung product.

*Competitive Position: kung gaano kaunique yung products, services at yung company itself from other competing
market players. Minemeasure ito using the prevailing market share level na ineenjoy ng company. Mas mataas yung
firm’s value if it consistently sustain yung competitive advantage nito against its competitors. Mayroong generic
corporate strategies para maachieve yung competitive advantage:

1) Cost Leadership: naka relate sa incurrence ng lowest cost among sa mga market players with quality na comparable
sa competitors ay nag aallow sa firm na presyuhan yung mga products around sa industry average.

2) Differentiation: dahil unique ang product at service ng firm willing na magbayad ang customer para sa additional
premium.

3) Focus: nagiidentify yung firm ng specific demographic segment or category segment na oagfofocusan nila by using
cost leadership strategy (cost focus) or differentiation strategy (differentiation focus).

2) Forecasting Financial Performance: pagkatapos alamin yun operation ng business at pag aanlayze ng historical fs nito,
nest step is ang pagforecast ng financial performance. It can be lloked at 2 lenses:

A) Macro perspective: viewing the economic environment at industry where it operates.

B) Micro perspective: focusing sa firm’s financial & operating characteristics.
Sinasummarize nito yung future-looking view na kung saan nagreresult galing sa assessment ng industry at competitive
landscape, business strategy at historical financials. Can be summarized in 2 approaches:

1) Top-down Forecasting Approach: yung forecast ay nagsisimula sa international or national

macroeconomic projections na merong utmost consideration papunta sa industry specific forecasts.
Mula dito pipili yung analysts kung ano yung relevant sa firm at iaapply ito sa firm at asset forecast.
1) Bottom-up Forecasting Approach: yung forecasts ay nagsisimula sa lower levels ng firm hanggang sa
macapture nito kung ano yung mangyayri sa company bases sa inputs ng segments/units nito.

3) Selecting the Right Valuation Model: yung appropriate valuation model ay nakadepende sa context ng valuation at
yung inherent characteristics ng company being valued. Yung mga details ng valuation models na ito at yung mga
circumstances kung kailn sila dapat gamitin ay ididscuss sa succeeding chapters.

4) Preparing Valuation Model based of Forecasts: kailangang iinput yung forecast at iconvet it sa chosen
valuation model. Yung step na ito ay hindi lamang about sa pag encode ng forecasts sa model para maestimate
yung value bagkus kailangan ring iconsider ng analysts whether yung resulting value ba from this process makes
sense based sa knowledge nila about sa business. Para magawa ito merong 2 aspects na kailangang iconsider:

1) Sensitivity Analysis: isang common methodology sa valuation exercises na kung saan yung multiply analyses
ay ginagawa para maintindihan yung mga changes sa input or kung paano maaapektuhan ng variable yung
outcome. Yung mga assumptions na ginagamit sa input para dito ay ang sales growth, gross margin rates at
discount rates.

2) Situational adjustments or Scenario Modelling: merong intances kung saan may mga facyors na hindi
nakakaapekto sa value per se kapag tumingin lamang yung analysts sa core business operations pero maaari pa
rin nitong maaapektuhan yung value regardless. Nakaploob dito yugn control premium, absence of marketability
discounts at illiquidity discounts.

Control premium: additional value na kinoconsider sa stock investment kapag nag aacquire magbibigay ito ng
controlling power sa investor

Lack of markertability discount: yung stock ay hindi madaling ibenta dahil walang ready market para rito

Illiquidity discount: kailangang iconsider kapag yung price ng particular shares ay less depth or generally
considered less liquid compared sa other active publicly traded share.

Yung lack ng marketability discount at illiquidity discount drive down share value.

5) Applying Valuation Conclusions and Providing recommendation: once na yung value ay nacalculate based sa
lahat ng assumptions considered, yung analysts at investors ay pwedeng gamitin yung results na ito para magprovide ng
recommendations or gumawa ng decisions na magsusuit sa investment objective nila.

KEY PRINCIPLES IN VALUATION

1) The Value of a business is defined only at a specific point in time

2) Vales varies based on the ability of business to generate future cash flows
3) Market dictates the appropriate rate of return for investors
4) Firm value can be impacted by underlying net intangible assets
5) Value is influenced by transferability of future cash flows
6) Value is impacted by liquidity