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Summary and Conclusions

Given the normative wealth maximisation objective that underpins financial theory, we began our study by observing that in an efficient capital market:

The prime determinant of any company's long-run performance and wealth is the amount it can first earn and subsequently retain for reinvestment or distribute to the providers of capital.

However, if we apply these criteria to corporate equity valuation relating to market listings or takeover targets, there is a methodological conflict between a tangible asset figure revealed in the balance sheet (even based on current costs) and the market price of shares derived from a capitalisation of earning, dividends, or cash flows, using stock market data. The former ignores so many intangible and external factors, i.e. goodwill, brands, the quality of management and workforce, government policy, changing social, economic and political conditions at home and abroad, speculation and rumor. The latter methods are entity based, more inclusive and forward looking.

Irrespective of the valuation method, without perfect information, market participants wishing to invest in companies seeking a stock exchange listing or prey to takeover should also be aware of the dubious managerial motives that often underpin them. Each motive may be rationalized but highly subjective. Not necessarily based on long-term corporate profitability but managerial short-termism or satisfying behaviour, leading to a catastrophic breakdown of the agency principle and a fall in share price.

Suffice it to say that in an ideal world with a free flow of information, a present value (PV) analysis based upon a risk-adjusted estimation of all projected cash flows, discounted at the company's opportunity cost of capital, is the most sophisticated technique for valuing a company as a going concern. Relax this assumption and at a practical level, the valuation of market placements and takeovers can only be confirmed using publicly available information, financial reports and stock market data.

Selected References

1) Slater, J., Beyond the Zulu Principle, Orion, (1996) and Harriman Press (2011).

2) Mackay, L.L. D., (originally published in 1841), Extraordinary Delusions of Madness of Crowds, Farrar, Strauss and Giroux, 2011.

3) Shiller, R.J., Irrational Exuberance, Princeton University Press, 2005.

4) Kindleberger, C.P.and Aliber, R.Z., Extraordinary Manias, Panics and Crashes: A History of Financial Crises, Palgrave and MacMillan, 2011.

5) Myers, S.C., "A Framework for Evaluating Mergers", in Myers S.C. (Ed.), Modern Developments in Financial Management, Frederick A. Praeger, 1976.

6) Miller, M.H., and Modigliani, F., "Dividend Policy, Growth and the Valuation of Shares", Journal of Business of the University of Chicago, Vol. XXXIV, No.4, October, 1961.


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