Valuation - The Trick Is In The Fundamentals

Implications: To accept or reject an offer to sell all or part of a company is a challenge.  There are two issues.  First is the maximization of shareholder value.  The second is understanding the basis of conflicting valuations. 

Analysis: In entertaining an offer to sell all or part of a company, a company's board must embrace two issues.

The first issue is to whom does the company belong.  Often political, agency, and other such issues get involved.  However the ultimate question is whether the shareholders have more value with retaining or surrendering the company/division.

The second, and related issue, is how that value is created.  Fundamentally the value of a company is equal to the present value of the expected benefits from owning that company.  As such, it is a function of the quantity, timing, and risk of the expected future benefits from ownership.  Different perceptions of  these benefits create different valuations.  Different perceptions are created by different strategies.

Which bring us to the retail industry.  The industry is a mature business filled with risk.  The challenge Woolworth, or any potential seller of a company must deal with, is basically who can compete by creating a strategic competitive advantage.  Can current management do better than the acquiring company?  If not, then sell if the valuation is fair.  If yes, hold onto the company and create value that exceeds the offered price.  It's a Darwinian economic world, based on survival of the fittest.  The question is "Who can survive best?" 

Which brings us one step further.  The survival question must also be tainted with the question, "Is creating economic value feasible through operations?"  Too often investors forget that liquidation value can significantly exceed the benefits generated through continuing operations.

The bottom line is simple.  The bottom line deals with maximizing value and understanding the basis for difference in perceived value.