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Other Valuation Techniques

Other Valuation Techniques. Professor Joshua Livnat, Ph.D., CPA 311 Tisch Hall New York University 40 W. 4th St. NY NY 10012 Tel. (212) 998-0022 Fax (212) 995-4230 jlivnat@stern.nyu.edu Web page: www.stern.nyu.edu/~jlivnat. B-to-B Report (Neoforma) Ray Falci (Bear Sterns).

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Other Valuation Techniques

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  1. Other Valuation Techniques Professor Joshua Livnat, Ph.D., CPA 311 Tisch Hall New York University 40 W. 4th St. NY NY 10012 Tel. (212) 998-0022 Fax (212) 995-4230 jlivnat@stern.nyu.edu Web page: www.stern.nyu.edu/~jlivnat

  2. B-to-B Report (Neoforma)Ray Falci (Bear Sterns) • Company operates in the procurement of medical/surgical products. • Fragmented industry. • A few large customers (hospital chains), but many others too. • Many suppliers. • Potential for disintermediation. • IPO at about $14. • Shot up on first day to $60.9375. • Research report indicates target at $79. • Current price (10/31/00) of $1.781.

  3. B-to-B Report (Neoforma)Ray Falci (Bear Sterns) • Valuation methodology: • Assess size of addressable market. • Assess transaction fee (3%). • Predict various scenarios of market shares, and probability of attaining them. • Forecast revenue and cash flow for each scenario. • Using P/E, get predicted price. • Calculate expected price = multiply each scenario’s price by the probability, and sum over all amounts.

  4. B-to-B Report (Neoforma)Ray Falci (Bear Sterns) • As a second approach, addressable market changes for each scenario. • After finding the price at the end of 2005, one can calculate the annual rate of return to get from today’s price to the 2005 price. • The rate of return is used to calculate the 12-months target price.

  5. Comments • Why do more favorable scenarios have higher P/E ratios? • For a company that had revenues of $1.1 million in 1999, getting to revenues of $660-$840 million in 2005 is not a small task. • Actual attempt to model cash flows. • Nice attempt to use probabilities.

  6. Real – Option Valuation • The real-option valuation approach has one major advantage; it assumes path dependency. • Traditional present value of cash flows methods assume the future cash flows are given for all the specific future periods. • Usually, the assumption is that the firm is operating throughout all the future periods. • Uncertainty can be dealt with using probabilities for each cash flow (similar to Neoforma in 2005).

  7. Real – Option Valuation • Real options assume that the firm can decide to stop certain projects (or abandon the whole firm) at periods prior to the ending period. • The option to abandon projects is value-relevant. • One way to model it is through continuous time and path dependency.

  8. Real – Option Valuation • Useful in the pharmaceutical area, where a project that does not have promising consequences at a given milestone can be abandoned. • Useful in the E-Commerce area to assess the probability of running out of funds. • Useful in the E-Commerce area to assess the network effects of discrete steps or acquisitions. • Signing on a major customer in B-to-B. • Acquiring another network.

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