Business valuation in the privatization process: The case o

Multinational Business Review, Spring 1994 by Jermakowicz, Eva K, Jermakowicz, Walter W

Fourth, the analysis of achieved assessments by the application of different methods as well as their comparison with eventually accepted business values seems to say that in four cases the net book value method displayed the greatest impact. This is especially visible in the case of KROSNO (134.4 to 143), KABLE (64.8 against 70), WOLCZANKA (64.2 to 75), and TONSIL (111.7 versus 120). In three cases the biggest influence on accepted values was the discounted cash value method(DCF). This was so in the case of PROCHNIK (73.4 versus 75), in the case of SWARZEDZ (124.5 versus 125), and in the case of ZYWIEC (225.6 versus 200). In this last case the value was an average of DCF and NBV methods. In one case, the WEDEL case, valuation was made by averaging all methods' results: the average was 398.6 billion zlotys and the finally accepted business valuation 416 billion zlotys. In the case of EXBUD, the final value was 47 percent lower than the average valuation, which is hard to explain in any logical manner. The popularity of the net book value method can be explained by its simplicity and ease of use.

Fifth, the comparison of issue prices and net book value shows that the premium of the issue price over the enterprises' book value ranged between 70 percent and 150 percent.

Sixth, the regression analysis made between different methods and the final business valuation shows that the highest correlation between the applied method and final valuation was present in the case of DCF (r=.9889; sig. .001), followed by the average value assessment method (r=.9457; sig. .001), and by the net book value method (r=.8723; sig. .01). This analysis seems to confirm the best applicability under Polish conditions of the DCF method. No significant correlations appeared between the final valuation and the results obtained by plying the RV, LV, or P/E methods.

A lack of proportionality exists between the frequency of methods' applications and their accuracy. The net book value method, the most popular in Polish valuations, obtains the lowest efficiency. The most obvious problem with this method is that the prevailing bookkeeping and auditing methods in Poland do not support the requirements for a reliable valuation of the company's assets. The absence of a real estate market and secondary markets for machinery and equipment forced the government to revalue these assets in an apparently arbitrary manner four times in the last five years. These revaluations increasedfixed assets each time between 10 to 35 percent (Jermakowicz and Jermakowicz).

BUSINESS VALUE ASSESSMENT METHODS

The real indicator of the effectiveness of the business valuation methods occurs in the comparison of the results obtained by these methods with the market value of analyzed and compared businesses. Exhibit 3 presents data for companies listed on the Warsaw Stock Exchange on December 31, 1991, illustrating market value/business value ratio (MV/BV), return on assets (ROA), return on equity (ROE), price/earnings (P/E), and price/book value (P/BV) ratios. (Exhibit 3 omitted)