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The Octopus: Valuing Multi-business, Multi-national companies

Aswath Damodaran Stern School of Business, New York University November 2009


The Octopus: Valuing Multi-business, Multi-national companies
As both investors and firms globalize, it should come as no surprise that valuing these firms brings special challenges. In this paper, we look at firms thatnot only operate in many countries but also in diverse businesses. The different risk, growth and cash flow profiles of the cash flow streams generated by these firms requires us to reconsider how we estimate discount rates and approach valuation. We consider how best to value these firms as consolidated entities and contrast these valuations with an alternative, where we value each part of thefirm separately and use the sum of the parts to value the businesses.

3 If globalization has been a key theme of the last decade, it should come as no surprise that the companies that we are valuing reflect that globalization. In this paper, we focus on a subset of companies that are diversified not only across countries, but also across businesses. These multi-business firms, spreadgeographically, are difficult to value because they represent multiple businesses, bundled and sold as a single package. In this paper, we examine these firms and consider the best ways of reflecting the differences in risk, cash flow and growth characteristics across the different businesses/regions that a company may operate in.

The multinational, multi-business firm is not new tomarkets. At the risk of arousing the ire of historians, we would argue that the colonial powers of previous centuries – the British, the French and the Dutch – were the very first multi-national businesses. In fact, the British were open about their commercial interests, allowing the East India Company to treat entire countries as subsidiary businesses, from which it generated profits and value. Formuch of the twentieth century, publicly traded firms reflected this colonial history, with firms from developed markets in the United States and Europe expanding into emerging markets. In the last decade, though, the equation has been muddled by the emergence of multinational, emerging market companies that operate in developed markets. In this section, we will examine the role that complexcompanies play in the economy and then focus on some characteristics that they share. Role in the economy Many publicly traded firms in most markets are single-business companies that derive the bulk of their revenues and earnings from domestic operations. While the firms that are in many businesses and multiple markets that we highlight in this paper may not represent a large percentage of the overallnumber of firms, they have an outsized influence, because they tend to be the largest firms (in terms of revenues, earnings and market capitalization) in many markets. The correlation between company size and operating in multiple businesses is not an accident. After all, most firms that stay in a single business reach a saturation point in that business sooner or later, and have to make a choice.They can accept the fact that

4 they are now mature companies and settle into that status, or they can aspire for more growth, usually by entering new businesses and new markets. While not every large firm is a General Electric or Siemens, most large firms have expanded beyond their original markets (both in terms of products and geography). Finally, as economies mature, companies within thateconomy that want to maintain high growth have to look at foreign markets. Consequently, companies in Europe and North America have aggressively expanded into emerging markets, in general, but Asia, in particular, because the potential for economic growth is greatest in those markets. Companies in emerging markets have historically not jumped on the bandwagon of global growth, for two reasons....
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