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Corporate Valuation

Measuring the Value of Companies in Turbulent Times





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The value of a business is essentially related to three main factors: its current operations, its future prospects, and its embedded risk. The advent of globalization, new technologies, and the consequences of the recent financial crisis completely reshaped these elements, thus making more elusive the definition of company “value” and of the metrics to measure it.

Firstly, firms do business in a context becoming progressively faster, more diverse, and more interconnected so that also valuing their current operations is a task less straightforward than in the past. Secondly, forecasting future macro and business related dynamics is getting less standardized in a business environment characterized by inherent difficulty in predicting changes—both on the upside and on the downside—and by constant innovation for companies that are more and more exposed to hyper-competitive industry dynamics. Thirdly, new types of risks and competition, so far unknown (think for example of climate change risks), are shaping both the operational and the financial side of enterprises, redefining the importance of managing uncertainty as a key element to achieve success.

In this context, the book is organized in three parts. In the first part of the book (Chapters 1 to 4), the main focus is on the relationship between value and business/economic uncertainty. In an environment characterized by an increased complexity where the concept of value itself is challenged, we provide a definition of corporate value based on a holistic approach, thus encompassing both the accounting and the financial perspective (Chapter 1).

Moving to relationship between uncertainty and value, we focus on the business modeling tools available to forecast corporate results and determine company value. Depending on the level of uncertainty, on the information available, and the time and effort investable in the analysis, it is possible to pick one out of three possible approaches. We start from a standard situation when uncertainty is limited and there is a clearly dominant, likely scenario (Chapter 2).

When there is a significant amount of uncertainty and there is one or more scenario(s) that are alternative to the most likely one and that could have extreme—either positive or negative—consequences for company's value, the scenario-based approach is to be preferred (Chapter 3).

Stochastic simulation (Chapter 4) is to be used when detailed data is available (or assumed) regarding the probability distributions of key variables affecting future cash flows. This approach, as discussed, is mathematically complex but it can be handled by software packages easily available.

Having tackled the uncertainty modeling aspects, the second part of the book is focused on the main valuation approaches that can be used in practice. The chapters from 5 to 13 present therefore the main principles of corporate valuation starting from the reorganization of the financial statement data and business plan figures (Chapter 5). The relationship between financial leverage and corporate value is then presented (Chapter 6), followed by the discussion of how corporate growth and, financial leverage are interrelated (Chapter 7).

Chapter 8 presents the main techniques and tools to estimate the cost of capital. From Chapter 9 to Chapter 11, the discounted cash flow analysis is presented in depth highlighting the various approaches that can be used in practice.

Moving to relative valuation, Chapters 12 and 13 present respectively the theory and practice of multiple-based valuation for companies.

The third and final section of the book comprises Chapter 14 and 15, which introduce the main elements of valuations in the market for corporate control and models to structure corporate valuations in the framework of M&A transactions.

Chapter 16 features a topic, the valuation of right issues, seldom mentioned by corporate finance handbooks but which is becoming crucial in many financial markets.

Chapter 17 closes by introducing a topic that is receiving increasing attention by investors and policymakers, namely the incorporation of environmental risks in corporate valuation.

The key message of the book is that standard business planning and valuation, which assume high visibility of firms' future performances, tend to prove more and more inadequate. In the context of high market volatility and recurring disruptive economic events associated with the post-financial crisis business world, companies' operations face systematically new points of discontinuity and increased risks. As a consequence, traditional standard valuation techniques may provide insufficient information in an economic environment characterized by high uncertainty. This book treats risk not as one of the input variables used in the valuation process but as the main driver to be considered when approaching the estimation of corporate value.


Of course, we owe a very great debt of thanks to friends, colleagues, and students who have contributed to this work. First, we thank greatly Marco Villani, a valuation expert who read and commented on chapters. Second, Federico D'Agruma provided extensive and invaluable assistance for the preparation and revision of the manuscript. We would like to also thank Marco Ghitti who prepared the supporting materials for the book. We are also grateful to John Carusone, Alberto Maria Ghezzi and Kim Salvadori, who helped in the revision of some sections of the manuscript. We are immensely grateful to the Wiley team—especially to Meg Freeborn, Bill Falloon, and Caroline Maria Vincent—who assisted us in the book preparation and showed incredible patience with our consistent missing of deadlines.

About the Author

Mario Massari is Full Professor of Corporate Finance and former Head of the Finance Department at Bocconi University (Milan). He has written extensively on business valuation and corporate finance topics, and he is considered one of the leading experts in Italy in the field of Business Valuation. He serves as board member at several listed and unlisted companies and he is a member of the Executive Committee of the OIV (the Italian valuation principles setter).

Gianfranco Gianfrate is a Giorgio Ruffolo Fellow at the Harvard Kennedy School (Cambridge, MA) and a research affiliate of Tufts University (Medford, MA). He has authored several books and articles on business valuation and corporate governance issues.

Previously, he was a consultant at Deloitte (Milan), a manager at Hermes Fund Managers (London), and served as member of the Investment Committee at Eumedion (Amsterdam). He has also been a member of the IPO Best Practice Committee at the Italian Stock Exchange, co-authoring the official Listing Guide for going public companies.

Laura Zanetti is Associate Professor of corporate finance at Bocconi University (Milan), where she teaches company valuation and is research fellow within CAREFIN, centre for applied research in finance.

She has been the director of the Master of Science in Finance at Bocconi, visiting scholar at Massachusetts Institute of Technology (Cambridge, MA) and London School of Economics and Political Sciences (London).

She published several books and articles on corporate governance, valuation, M&A, and industrial performance. She is a Certified Public Accountant, Certified Auditor in Italy, and board member of listed and private companies.