Summary
Highlights
The remaining steps in the valuation process include selecting the right valuation model, preparing the valuation model based on forecasts, and finally, applying, evaluating, concluding, and recommending based on the forecast and chosen valuation method.
The video introduces the course 'Evaluation Concepts and Methodologies' and outlines the objectives: interpreting value concepts, identifying valuation roles in business, understanding the valuation process, identifying key principles, and understanding risks involved in valuation. Valuation is defined as the estimation of an asset's value based on future investment returns, comparison with similar assets, or immediate liquidation proceeds, emphasizing professional judgment and projections of future events.
Three major factors link to the value of a business: current operations (operating performance), future prospects (long-term strategic direction), and embedded risks (business risks involved). An example of risk is provided with the impact of a 'sin tax' on tobacco manufacturers, showing initial revenue decline followed by market adjustment due to consumer addiction.
Different concepts of value are discussed: Intrinsic Value (fair or inherent value, true value considering both qualitative and quantitative factors, as exemplified by ABS-CBN's stock), Going Concern Value (assuming continuous operation of the enterprise), Liquidation Value (net amount realized if the business is terminated and assets are sold piecemeal, common for financially distressed entities), and Fair Market Value (price with a willing seller and willing buyer).
Valuation plays crucial roles in business, specifically in portfolio management, analysis of business transactions, corporate finance, and legal and tax purposes.
In portfolio management, valuation helps in diversifying investments. The impact of the Maximum Drug Retail Price law on pharmaceutical companies in 2009 is used as an example to illustrate investment risks within a single industry. Five types of players involved in stock investment are introduced: fundamental analysts, activist investors, charitists (focused on investor sentiment), sell-side analysts, and buy-side analysts.
Valuation is vital in business transactions such as acquisitions (e.g., GMA and TV5), mergers (combining assets to form a new entity, e.g., MPIC Group acquiring hospitals), divestitures (selling a major segment, e.g., Pfizer's consumer health to GSK), spin-offs (transforming a segment into a separate legal entity, e.g., Pfizer's animal health), and leveraged buyouts (acquiring a business using significant debt with the acquired business as collateral).
Corporate finance's goal is to maximize shareholder wealth by managing capital structures and funding sources. Valuation is crucial for small businesses to obtain capital from private entities (e.g., Mang Inasal before Jollibee acquisition) and for larger businesses to raise funds through initial public offerings for expansion (e.g., Monde Nissin).
The first step in the valuation process is understanding the business, including its strengths, weaknesses, and competitors. Michael Porter's Five Forces analysis (rivalry of competition, potential for new entrants, bargaining power of suppliers, bargaining power of buyers, and potential for substitutes) is presented as a tool for this analysis, using Pfizer as an example.
Three generic corporate strategies for competitive advantage are discussed: Cost Leadership (lowest cost with comparable quality, e.g., Myra E vs. branded vitamins), Differentiation (unique products/services with premium pricing, e.g., iPhone vs. Cherry Mobile), and Focus (targeting specific demographic or category segments using either cost leadership or differentiation, e.g., Greenbelt vs. SM Department Store).
The second step is forecasting financial performance, primarily focusing on the income statement using trends. Two approaches are explained: top-down forecasting (starting from macroeconomic projections and considering industry specifics) and bottom-up forecasting (starting from lower levels of the firm and building up).