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Open Access: Journal of Business Economics, 1 October 2020

Authors: Andreas Schüler

Please follow this link: Cross-border DCF valuation: discounting cash flows in foreign currency

Abstract: The paper seeks to develop a comprehensive framework to cross-border discounted cash flow valuation. Although the literature on company valuation and on international financial management is vast, such a framework has not yet been proposed. We build upon well-known fundamentals and relevant contributions, e.g. on the derivation of the risk-adjusted rate of return. Relevant risks are exchange rate risk, business risk, financial risk, the risk of the tax effects induced by debt financing, and the risk of default. Additional tax effects beyond the well-known tax shield on interest expenses must be considered. Risk discounts from cash flows and risk premia to be added to risk-free interest rates are derived according to the global capital asset pricing model. A conceptual choice occurs not only between the foreign currency and the home currency approach, but also regarding the estimation of future exchange rates. The paper shows how a valuation can be implemented with or without consideration of covariances between cash flows and rate of returns with exchange rates. It also derives the discount rates if forward exchange rates are applied. We discuss the consequences of assuming the uncovered interest parity to hold. We assume deterministic debt and apply the adjusted present value approach. In addition, we derive the RADR to be used in the flow to equity and weighted average cost of capital approach. The paper addresses not only the valuation of a foreign company, but also the valuation of a domestic company that generates cash flows in foreign currency and/or uses debt in foreign currency.

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Open Access: Journal of Business Economics, 24 October 2020

Authors: Stefan Dierkes & Ulrich Schäfer

Please follow this link: Valuation of firms with multiple business units

Abstract: Corporate valuation often relies on the assumption of a constant and homogenous growth rate. However, large firms frequently (re)balance their activities by diverting cash flows from some business units to fund investments in other units. We develop a value driver model of terminal value for a firm with two units. The model relaxes common assumptions and allows for cross-unit differences in the return on invested capital. We consider intra-unit and cross-unit investments and show their implications for firm value and the long-term development of key accounting variables. Our results help characterize business unit strategies that can be reconciled with popular firm strategies such as the constant payout and constant growth strategies. We find that popular valuation methods that assume both constant payout ratios and constant growth rates (e.g., Gordon and Shapiro, Manage Sci 3:102–110, 1956) constitute a restrictive special case of our model and should only be applied to firms with homogenous business units. We use a simulation analysis to compare our results with alternative valuation models and to illustrate the economic relevance of our findings. The simulation shows that an accurate depiction of business unit strategy is particularly useful if firms plan large-scale cross-unit investments into business units with high returns and if the cost of capital is low.

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Open Access: Journal of Business Economics, 23 December 2020

Authors: Benjamin Hammer, Nils Janssen & Bernhard Schwetzler

Please follow this link: Cross-border buyout pricing

Abstract: Using a dataset of 1149 global private equity transactions, we find that cross-border buyouts are associated with significantly higher valuation multiples than domestic ones. We attribute this finding to informational disadvantages of foreign acquirers. Consistent with this idea, we find that the spread in valuation multiples narrows when the target operates in a country with high accounting standards, when it was publicly listed prior to the buyout, and when information production is facilitated due to large firm size. Further results suggest that local partnering in a syndicate serves as an effective remedy to avoid adverse pricing effects. The spread in valuation multiples is also less pronounced for large buyout funds, presumably because they draw on sufficient organizational resources to cope with cross-border-related transaction costs.

In this second Perspectives Paper on ESG “A Framework to Assess ESG Value Creation” IVSC analyses the impact of ESG on value creation and explore how such a framework may be incorporated into the capital allocation process.

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The Economist’s report How the pandemic changed the global economy analyses the impact of the Covid-19 pandemic on the global economy.

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