April 2021 | 

More than Price: Getting Corporate Valuation Right

More than Price: Getting Corporate Valuation Right

A company is only worth what someone is willing to pay for it, so the saying goes. But all negotiations start with an offer, and knowing how to determine it (or how others came up with their number) is essential to avoiding overpaying or leaving money on the table. “Unless something untold happens,” says Wharton professor of accounting and finance Bob Holthausen, “you will see record numbers of M&A deals this year.” Maximizing the value of those deals depends on your knowledge of valuation, whether you are selling or buying, working in PE or M&A, or investing for yourself or advising others.

Holthausen, who wrote the book on corporate valuation with co-author Mark Zmijewski, now leads Wharton’s program on the subject. He and Zmijewski help participants understand the numerous approaches to valuation, the circumstances under which each should be used, and the technical issues involved. The rigorous Corporate Valuation program also provides daily opportunities for hands-on practice and small group work with the other professionals in attendance.

Learning by the Book

Holthausen and Zmijewski, former colleagues at the University of Chicago, based Corporate Valuation: Theory, Evidence, and Practice on 15 years’ worth of notes they developed for the classroom. “I was frequently contacted by former students about how they were still using those notes and passing them on to colleagues,” says Holthausen. “It was time to share that knowledge with a wider audience.”

Like the program, the book is highly detailed, and technical issues are illustrated with many problems and real-world examples. It covers valuation tools, frameworks, and models that apply to any entity and setting, including highly leveraged transactions, mergers and acquisitions, and cross-border valuations. Because Zmijewski frequently testifies in court about valuations — when billions of dollars are in play — he also brings a tangible context to classroom content.

“Without this knowledge, you might hire a valuation expert, but you will have to take that expert at his or her word without being able to verify that their methods are sound,” says Holthausen. Corporate Valuation helps you become conversant in the language of these experts, spot potential problems, and ask intelligent questions.

Diving Deeper

Holthausen is also director of Mergers and Acquisitions, which complements Corporate Valuation. “The M&A program has technical content, but because those transactions are cross-disciplinary, we also cover strategy, negotiations, human capital issues, and post-acquisition integration,” he says. “We bring in faculty from finance, accounting, economics, management, and legal studies. The expertise of our faculty is remarkable, and you can’t learn this cross-functional approach anywhere else: that book hasn’t been written.”

Mergers and Acquisitions helps participants develop actionable approaches to the strategic, managerial, economic, and financial decisions affecting mergers and acquisitions. Some come to hone extensive experience and others are learning about M&A with no prior experience. They all benefit from guidance on capturing maximum value and avoiding the 60 to 70 percent failure rate typical of these transactions.

Holthausen says the potential loss of value is discussed beginning on the first day. “We spend a lot of time exploring why deals don’t succeed and what you can to do to get an advantage. Capturing maximum value requires a skill set and putting a process in place. We look at it from multiple perspectives, including the valuation process, strategy, and integration: you have to think about each one and how all the pieces fit together. Mergers and acquisitions are very complex transactions, and they’re very difficult to get right. We show participants how to navigate that minefield.”

“When I was asked to lead the Mergers and Acquisitions program in the online format,” he says, “I had one condition: all of the content covered in our on-campus program had to be included. That’s why we are running it online over four weeks, three days per week. There is a certain body of knowledge you need to be effective, and we cover all of it.”

That content includes networking during the program and after hours in optional sessions. “By the end of the first day,” says Holthausen, “you can expect to have had conversations with over half the class. We continue those conversations in breakout rooms during the week.” In January, participants took part in an optional wine tasting with management professor Emilie Feldman, who is a trained sommelier.

Opportune Timing

Holthausen says it’s important to acquire this knowledge now. “This is the right time to build the skill sets we teach in these programs. There is much less uncertainty than there was a few months ago. We believe the economy will not only recover, but regain strength, and employment will get back on track. That provides greater confidence, which leads to more deals.”

Add to that confidence the fact that money is “basically free, and a lot of companies are sitting on cash. Potential tax changes, including talk of increasing the capital gains tax and corporate tax rates, are motivating companies to sell this year. It’s important to understand how to value companies and the economic reasons that are driving increased M&A activity, because those changes will foster even more activity. You don’t want to wait until 2022 to get these skill sets, because by then the prizes will be gone.”