Question

Discuss the concerns related to valuing a firm that deals in multiple currencies.

Answer 1

Companies that spread their tentacles across multiple business and many parts of the globe are difficult to value, because their cash flows from each business or region can have very different risk and growth characteristics.There are two ways that we can approach the valuation of these.

The first is to value the company as a whole, using the weighted averages (WACC) of risk parameters to estimate discount rates, which we then use to discount consolidated cash flows for the firm. The dangers here are that the weights will change over time, and as they do, so will the fundamentals of the firm.

The second is to value the cash flow streams separately, using different risk measures and growth rates for each stream. Thus, emerging market and risky business cash flows will be discounted at higher rates than developed market and safer business cash flows. The aggregated value of the different businesses should yield a better estimate of the overall company’s value. When we use relative valuation to value these companies, we run into the same valuation issues. Again, we can try to value the consolidated firm, but finding companies that are similar in business mix is an almost impossible task. For that reason, it makes sense to expand our definition of comparable firms to include firms that may not be similar to the multi-business firm that we are valuing, and to control for differences on valuation fundamentals – risk, cash flow and growth. Alternatively, we can try to find comparable firms within each business, and use the information in how the market is pricing these companies to value the pieces that make up the larger firm. No matter what approach we use, we will be faced with more complexity and information gaps with multi-business companies than with single business, independent companies. We have to determine whether this complexity exposes us to more risk and, if so, how we will incorporate that concern into value.