Content area
Full text
On August 31, 2009, Disney announced its acquisition of Marvel Entertainment, Inc. for $4 billion, which was approximately 29 percent greater than Marvel's market value at the time.[1] Coincidently, this journal had recently published an article on lessons that could be learned from Marvel's well publicized 1996 bankruptcy.[2] That article recounted how the company emerged from bankruptcy when a controlling interest, about 37 percent of Marvel, was acquired by its current management for just $238 million in 1998.[3] Now, with Disney's acquisition, the value of that investment grew to $1.5 billion, which equates to an impressive 20.2 percent compounded return.[4], [5] Clearly, Disney's acquisition was a stunning success for Marvel's top shareholder, but will it be a success for Disney?
Currently, acquisitions are generally priced using one of three popular approaches. Each involves significant assumptions:
Discounted cash flow - assumes that reasonable estimates of future cash flows can be made in the present.
Multiple-based valuation - derives a price based on some financial variable such as revenue or book value and assumes that one compound of one variable accurately represents a firm's value.
Comparables - assume that the value of similar firms serves as a reasonable proxy for the value of a firm at interest, and also that the proxy firms were valued appropriately.
Each of these approaches also tends to be divorced from strategy. For example, rarely are specific risks linked to a valuation. Instead, they tend to be embedded in a discount rate estimate. As another example, growth tends to be modeled on very broad assumptions that rarely tie back to specific strategic plans and performance measures. Drawbacks such as these could contribute to the failure of many past deals.[6]
As an alternative approach, the modern Graham and Dodd method, which is employed by outstandingly successful investors like Warren Buffett, considers valuation differently. First, it addresses key assumptions upfront in the valuation. This is significant because many valuation assumptions are strategic in nature and therefore require strategic input to address properly. For example, assumptions regarding intangible assets, earnings sustainability, the existence of a sustainable competitive advantage, and the viability of achieving reinvestment hurdles in growth initiatives are all strategic matters. The Graham and Dodd approach integrates strategic and financial analyses and inputs in...