Valuation and Positioning
Preliminary valuation is conducted according to a number of commonly accepted models (DCF – Discounted Cash Flows, NAV – Net Asset Value, comparative ratios). As a result of applying various methods, a range of the company’s value is arrived at. It is at this stage that the intangible elements of the business come through: transparency of the ownership structure, effective internal accounting and control systems, respectable corporate governance, professional management, brand portfolio, positive legal due diligence assessment and others. The greater the number of these positive intangible elements, the greater is the valuation put on the company’s shares by the market.
It is also possible that the process of preparing for the outside investor may help the company achieve other important goals, in particular:
- to clarify and establish the optimal capital requirements for funding. It is entirely possible that the ultimate decision may be taken against IPO or private placement; instead, a merger with another company, mezzanine finance or debt placement could be the viable alternatives.
- to define the valuation parameters of the equity offering. At the valuation stage the company will have had the detailed information about the value of the business, and thus is ready to start the negotiations with the broker/underwriter.
Investor relations function is much more profound than a traditional PR function, primarily because the equity investors are looking at the company from the standpoint of rigorous financial and valuation analysis. Collaboration with the investor community starts with communication of the history of the business. The company has to be consistent in declaration of the corporate principles and goals – and precise in delivery of the pre-announced performance targets. It is important that all current and potential users of the corporate information are fully informed about the recent developments at the company.
While communicating the history of the business, a company can pursue another principal goal, investor positioning. From a practical standpoint, investor positioning denotes perception of a business by the investor community. In order to achieve a favourable investor perception, emphasis should be put on the strengths of the business – in particular, such performance indicators as growth rates, margins, market share, brands etc. It is equally important to present a credible corporate strategy aimed at achieving – and possibly improving on – the above key indicators.
Even if, having started the equity-raising process, a company then decides to abandon or to postpone an equity issue, the investments made into preparation for the IPO or private placement are effectively recouped via the attainment of better quality of management, increase in business efficiency, and reduction in interest rate on the bank loans. Banks do prefer to provide loans to transparent, open companies – because the credit risks of such borrowers are also transparent and open to analysis!