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# Other Valuation Techniques

Professor Joshua Livnat, Ph.D., CPA
311 Tisch Hall
New York University
40 W. 4th St.
NY NY 10012
Tel. (212) 998-0022 Fax (212) 995-4230
jlivnat@stern.nyu.edu
Web page: www.stern.nyu.edu/~jlivnat

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781.B-to-B Report (Neoforma) Ray Falci (Bear Sterns) • Company operates in the procurement of medical/surgical products. • Potential for disintermediation. • Fragmented industry.9375. • IPO at about \$14. 2 . – A few large customers (hospital chains). but many others too. – Research report indicates target at \$79. – Current price (10/31/00) of \$1. – Shot up on first day to \$60. – Many suppliers.

B-to-B Report (Neoforma) Ray Falci (Bear Sterns) • Valuation methodology: – Assess size of addressable market. 3 . and probability of attaining them. – Using P/E. and sum over all amounts. – Forecast revenue and cash flow for each scenario. get predicted price. – Assess transaction fee (3%). – Calculate expected price = multiply each scenario’s price by the probability. – Predict various scenarios of market shares.

• After finding the price at the end of 2005.B-to-B Report (Neoforma) Ray Falci (Bear Sterns) • As a second approach. one can calculate the annual rate of return to get from today’s price to the 2005 price. addressable market changes for each scenario. 4 . • The rate of return is used to calculate the 12-months target price.

getting to revenues of \$660-\$840 million in 2005 is not a small task.Comments • Why do more favorable scenarios have higher P/E ratios? • For a company that had revenues of \$1. • Nice attempt to use probabilities. • Actual attempt to model cash flows. 5 .1 million in 1999.

6 .Real – Option Valuation • The real-option valuation approach has one major advantage. • Usually. the assumption is that the firm is operating throughout all the future periods. • Traditional present value of cash flows methods assume the future cash flows are given for all the specific future periods. it assumes path dependency. • Uncertainty can be dealt with using probabilities for each cash flow (similar to Neoforma in 2005).

• The option to abandon projects is valuerelevant. • One way to model it is through continuous time and path dependency.Real – Option Valuation • Real options assume that the firm can decide to stop certain projects (or abandon the whole firm) at periods prior to the ending period. 7 .

• Useful in the E-Commerce area to assess the network effects of discrete steps or acquisitions. – Signing on a major customer in B-to-B. • Useful in the E-Commerce area to assess the probability of running out of funds.Real – Option Valuation • Useful in the pharmaceutical area. where a project that does not have promising consequences at a given milestone can be abandoned. – Acquiring another network. 8 .