Welcome to Scribd, the world's digital library. Read, publish, and share books and documents. See more
Download
Standard view
Full view
of .
Look up keyword
Like this
1Activity
0 of .
Results for:
No results containing your search query
P. 1
Valuation in emerging market

Valuation in emerging market

Ratings: (0)|Views: 36|Likes:

More info:

Published by: Esther Ojochide Achem on Apr 01, 2011
Copyright:Attribution Non-commercial

Availability:

Read on Scribd mobile: iPhone, iPad and Android.
download as PDF, TXT or read online from Scribd
See more
See less

04/01/2011

pdf

text

original

 
Valuation in
emerging markets
1
Asian Development Outlook 2000
, Asian Development Bank and Oxford University Press, p. 32.The authors acknowledge the contributions of Cuong Do, Keiko Honda, Takeshi Ishiga, Jean-Marc Poullet,and Duncan Woods to this article.
Mimi James
is an alumnus of McKinsey’s New York office, where
Tim Koller 
is a principal. Copyright© 2000 McKinsey & Company. All rights reserved. This article is adapted from Tom Copeland, TimKoller, and Jack Murrin,
Valuation: Measuring and Managing the Value of Companies
, third edition,New York: John Wiley & Sons, 2000, available at www.wileyvaluation.com.
s the economies of the world globalize
and capital becomes moremobile, valuation is gaining importance in emerging markets—forprivatization, joint ventures, mergers and acquisitions, restructuring, andjust for the basic task of running businesses to create value. Yet valuation ismuch more difficult in these environments because buyers and sellers facegreater risks and obstacles than they do in developed markets.In recent years, nowhere have those risks and obstacles been more seriousthan in the emerging markets of East Asia. The Asian financial crisis, whichbegan in August 1997, weakened a mass of companies and banks and led toa surge in M&A activity, giving valuation practitioners a good chance totest their skills. In Indonesia, Malaysia, the Philippines, South Korea, andThailand—the hardest-hit Asian economies—cross-border majority-ownedM&A reached an annual average value of $12 billion in both 1998 and 1999,compared with $1 billion annually from 1994 to 1996.
1
Mimi James and Timothy M. Koller
Procedures for estimating a company’s future cash flows discounted ata rate that reflects risk are the same everywhere. But in emerging markets,the risks are much greater.
A
C O R P O R A T E F I N A N C E
78
 
PETER BENNETT
 
Yet little agreement has emerged among academics, investment bankers, andindustry practitioners about how to conduct valuations in emerging markets.Methods not only vary but also often involve making arbitrary adjustmentsbased on gut feel and limited empirical evidence. Our preferred approachis to use discounted cash flows (DCFs) together with probability-weightedscenarios that model the risks a business faces.
2
The basics of estimating a DCF value—that is, the future cash flows of acompany discounted at a rate that reflects potential risk—are the sameeveryplace. We will therefore focuson how to incorporate into a valua-tion the extra level of risk that char-acterizes many emerging markets.Those risks may include high levelsof inflation, macroeconomic vola-tility, capital controls, politicalchanges, war or civil unrest, regulatory change, poorly defined or enforcedcontract and investor rights, lax accounting controls, and corruption.Different assessments of these risks can lead to very different valuations, asone recent case in Asia demonstrates. During negotiations between a SouthKorean consumer goods company and a European counterpart, it becameclear that the parties had arrived at very different valuations of the SouthKorean concern, largely because of different views about the impact of futurechanges in tax law and the deregulation of the industry.Macroeconomic volatility is another minefield in Asia, where the financialcollapse and subsequent recession generated a mountain of nonperformingbank loans. One company bidding for two Thai banks nationalized by thegovernment during the financial crisis discovered that each had nonperform-ing loans of at least 60 percent of the value of its loan portfolio. Assessingthe extent to which these loans might be recovered was crucial to the valua-tion of the banks and to the eventual structure of the deal.Indeed, expertise in the valuation of nonperforming loans has become anessential element of Asian banking M&A. But even the best analysis andmodeling can’t anticipate all possible risks, especially political ones. InMalaysia, for example, several financial institutions were negotiating analliance. Typically, an assessment of nonperforming loans would have been
80
THE McKINSEY QUARTERLY
2000 NUMBER 4: ASIA REVALUED
2
The use of probability-weighted scenarios constitutes an acknowledgment that forecasts of financial per-formance are at best educated guesses and that the forecaster can do no more than narrow the range of likely future performance levels. Developing scenarios involves creating a comprehensive set of assump-tions about how the future may evolve and how it is likely to affect an industry’s profitability and financial per-formance. Each scenario then receives a weight reflecting the likelihood that it will actually occur. Managersbase these estimates on both knowledge and instinct.
Expertise in valuing nonperformingloans has become an essentialelement of
Asian banking M&A

You're Reading a Free Preview

Download
scribd
/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->