Valuation of privatized businesses
Valuation of equity shows the value of a company based on its current assets and its position in the market. The valuation is of significance to potential shareholders and debt providers to know how the shares of the company perform in the market. The challenges in the valuation of companies differ between the developed and developing countries (Gibson, 2011). Besides, challenges might be more difficult for privatized companies that were previously owned by the government in developed and developing countries.
There are several reasons why the valuation of privatized businesses previously owned by the governments of developing countries is more difficult than valuations of existing firms in developed countries. The first reason is the fact that the future cash flows that are associated with privatized ventures are not certain since the ventures were previously operating within environments of monopoly or very little competition (Eugene & John, 2009). This means that the valuation of the privatized venture might not be easy. Besides, there exists very minimal and unreliable data in the developing countries as compared to the developed countries (Hitchner, 2011). This means that the valuation process might lack the relevant data that is significant in establishing the net worth of such businesses (Wainwright, 2012).
The third reason is the uncertain economic dynamics and conditions in the developing countries, which make it difficult to integrate the economic conditions in the valuation as compared to the developed countries (Wainwright, 2012). The economies of the developing countries have very uncertain estimates of the exchange rate. This makes it difficult to predict the true value of privatized businesses that were previously owned by the government. Moreover, the local cost of project financing within developing countries is unpredictable due to a series of swings, which make it difficult to value the privatized businesses (Eugene & John, 2009).
Notwithstanding, “the lack of established stock markets in developing countries prevents an MNC from deriving a value for a business based on comparable publicly held firms” (Wainwright, 2012, p. 33). The lack of well-established stock markets in developing countries would prevent these privatized ventures from getting the business value as a result of comparative advantage to other publically traded businesses. The last reason for the difficulty in the valuation of a privatized company that was previously owned by the government in developing countries is that the government might decide to retain a portion of the firm. This decision might lead to serious conflict in the control of such a venture in the long term (Hitchner, 2011). The partial ownership of a private firm in developing countries translates into some element of interference with the performance and management of such a venture.
Subsidiary valuation
The subsidiary valuation may have to reduce as a result of a reduction within the cash flow. This means that the “potential buyers may not be willing to pay an amount that even reflects the present value of the expected future cash flows” (Subramanyam, 2013, p. 56). This is because the subsidiaries might affect the expected cash flows in the future in the case of the Asian market. Therefore, a U.S.-based MNC might not sell all its Asian subsidiaries because the parent company should retain some of the subsidiaries when they cannot be sold at a price that is equivalent to their particular values in the market (Ormiston, 2006).
References
Eugene, B., & John, M. (2009). Financial management theory and practice. New York, NY: South-Western Cengage Learning.
Gibson, C.H. (2011). Financial reporting and analysis. San Diego, CA: Cengage Learning Publishing Company.
Hitchner, J. (2011). Financial valuation: Applications and models. New York, NY: John Wiley & Sons.
Ormiston, F. (2006). Understanding financial statements. New York, NY: Cram 101 Incorporated.
Subramanyam, J. (2013). Financial statement analysis. New York, NY: McGraw- Hill Education. Print.
Wainwright, S. (2012). Principles of accounting. San Diego, CA: Bridgepoint Education, Inc.