Monday, May 2, 2011

Using comparables for the valuation of internet startups at emerging markets

PART #1. Introduction to the problem.

In the next post series will talk about well known method of comparables, a good way to get quick estimation of the value of the company or it’s equity. 

Let’s make a set of assumptions which are very important in our case:

• The firm is a typical e-business;
• It is not global. Operates on the local market;
• Located in Russia;
• Comparable analogues are presented abroad, e.g. USA.

Hope that would be enough. You should notice that despite the fact of taking the Russian company as an example the methodology seems to be the same as for other developing markets. It should not be difficult for you to make some adjustment to the model, but if there is any problem you can describe it in comments and challenge us.

Let me tell you what made me feel puzzled in case of applying comparables to the valuation of the company described above.

First. How to estimate country risks. If we compare the Russian company with one presented in the US, it’s evident that the value of American companies is mostly higher than in Russia. It may be caused by the fact of the capital market, which is more developed in America. There are more deals, the market is more liquid and more people like to invest.

Second. How to compare public company with a private one. IPO can increase the value of equity up to 10 times. It’s okay when the object of valuation goes public either, but the situation may be different. What about seed, first, second or other stages of financing before bridge.

Finally. I decided to use specific industrial multiplicator, but traditional financial ones for the reason of lack of information for the last. Private companies do not publish a lot of financial information. Moreover there is a strong need for some sort of adjustment, which could make the multiple approach more realistic. There was a number of unique visitors used as a variable. 

If you are interested in good articles on this topic I’d like to recommend you the following:

• Goedhart, M., Koller, T. & Wessels, D. 2005. The right role for multiples in valuation. The McKinsey Quarterly, March. New York: McKinsey & Company Inc.:1-3.
• Damodaran book on Valuation. There is also a short introduction to the problem at his home page.
• P. Fernandez. “Valuation using multiples. How do analysts reach their conclusions?”
• Lie E., Lie H., "Multiples used to estimate corporate value", Financial Analysts Journal, Mar/Apr 2002
• Liu, J., Nissim, D., Thomas, J., 2000. International equity valuation using multiples. Working paper, Columbia University.
• Ivashkovskaya, I. & Kuznetsov, I. 2007. An empirical study of country risk adjustments to market multiples in emerging markets: the case of Russia.
• Bhojraj, Sanjeev, Charles M.C. Lee, and David T. Ng. 2003. International Valuation Using Smart Multiples. Working Paper (March 14).
• Bhojraj, Sanjeev, and Charles M.C. Lee. 2002. Who Is My Peer? A Valuation-Based Approach to the Selection of Comparable Firms. Journal of Accounting Research, Vol. 40, No.2, (May), pp. 407-439.

You can try to find them at scholar. Maybe there is something you want to recommend as well. You r welcome!

In a couple of days I’ll publish a short insight on how to overcome the problem of taking risk factors into consideration. Until the next time!

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