Other Valuation Techniques

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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. [phone] Fax [phone]
• jlivnat_at_stern.nyu.edu
• Web page www.stern.nyu.edu/jlivnat

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B-to-B Report (Neoforma)Ray Falci (Bear Sterns)

• Company operates in the procurement of
  medical/surgical products.
• Fragmented industry.
• A few large customers (hospital chains), but many
  others too.
• Many suppliers.
• Potential for disintermediation.
• IPO at about 14.
• Shot up on first day to 60.9375.
• Research report indicates target at 79.
• Current price (10/31/00) of 1.781.

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B-to-B Report (Neoforma)Ray Falci (Bear Sterns)

• Valuation methodology
• Assess size of addressable market.
• Assess transaction fee (3).
• Predict various scenarios of market shares, and
  probability of attaining them.
• Forecast revenue and cash flow for each scenario.
• Using P/E, get predicted price.
• Calculate expected price multiply each
  scenarios price by the probability, and sum over
  all amounts.

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B-to-B Report (Neoforma)Ray Falci (Bear Sterns)

• As a second approach, addressable market changes
  for each scenario.
• After finding the price at the end of 2005, one
  can calculate the annual rate of return to get
  from todays price to the 2005 price.
• The rate of return is used to calculate the
  12-months target price.

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Comments

• Why do more favorable scenarios have higher P/E
  ratios?
• For a company that had revenues of 1.1 million
  in 1999, getting to revenues of 660-840 million
  in 2005 is not a small task.
• Actual attempt to model cash flows.
• Nice attempt to use probabilities.

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Real Option Valuation

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

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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.
• The option to abandon projects is value-relevant.
• One way to model it is through continuous time
  and path dependency.

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Real Option Valuation

• Useful in the pharmaceutical area, where a
  project that does not have promising consequences
  at a given milestone can be abandoned.
• Useful in the E-Commerce area to assess the
  probability of running out of funds.
• 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.
• Acquiring another network.