When valuations go wrong

A business valuation is the ultimate arbiter on whether the decisions the board makes are adding to what the company is ultimately worth. 

Some businesses may plan for a near term fall in the valuation of their business as they invest heavily in the promise of significant future value gains. Other companies, like Uber and Tesla, are ambivalent to the ultimate book value of their business while in the “break out” phase of their disruption strategy. If investors continue to buy into the vision offered by the founder and decision-makers, the current valuation of the business is considered inconsequential at this point.

If you have invested in your business to fund growth, often the increased gearing placed on your business and the increase in assets leads to a drop in company value. Over the course of the coming 3-10 business years, companies must try to generate a return on investments made. The return also must be of sufficient level to add value to the business rather than a marginal sales gain.

Failure to achieve this often increases a company’s debt burden, reduces returns on capital employed, eats up cash on the balance sheet and eventually puts pressure on the profit margins of the business.

The following are examples of companies that have seen their valuation fall as a result of letting their business decisions succumb to hubris, poor decision making or acting too late to salvage the situation. 

THOMAS COOK GROUP PLC

The defunct travel giant ultimately fell victim to a series of poor decisions and a lack of foresight within the board. After a series of ambitious takeovers of other travel businesses including MyTravel, and an abortive merger with Co-operative Travel, the debt burden on Thomas Cook was too much to bear. Coupled with the creeping digitisation of travel from budget airlines to self-rent options such as Airbnb, Thomas Cook Group Plc were left with a one-stop travel business model that less and less consumers were prepared to pay a premium for. As a result, its value plunged sharply into negative territory,  and losses of more than £1 billion were posted in the year leading to its collapse.

The company had opportunities to arrest the slide in the value of the business and its ultimate decline into failure. Thomas Cook Airlines was valued at around £500 million by Plimsoll just before the group’s collapse. With hundreds of landing slots at some of the UK’s leading hub airports and a relatively young aircraft fleet, it was a viable proposition to sell on as part of a restructuring - but the opportunity was missed.

The Plimsoll Analysis on the travel agents’ market shows a contrast between Thomas Cook Group Plc and others, including Hays Travel. Pre-pandemic value in Hays Travel had increased steadily, including their acquisition and restructuring of some Thomas Cook assets. Value can be added to a business even in industries facing severe tailwinds.

ALCATEL LUCENT

In the face of rising challengers from Asia, an ambitious merger between the French and US telecoms companies was supposed to create a dynamic, global brand.

However, the deal soured very quickly due to a mixture of cultural differences and a seemingly unsustainable business model. After the merger in 2006, the newly formed group suffered seven consecutive years of negative cash flows. The value of the company fell below zero throughout this period.

Despite a rescue plan from 2013 to 2016, including a debt restructuring, asset disposal including its enterprise division to Huaxin in China, and shedding 10% of its global workforce, the company was eventually bought by Nokia Group and subsumed into Nokia Networks having never made a profit.

The Plimsoll Analysis on the world’s leading telecommunications companies is awash with examples of companies that have added value year on year operating in the same market as Alcatel Lucent were. Norwegian firm Inmarsat AS has seen its value increase fourfold over the past four years while US-based Costar Group Inc has doubled in value over the same period.

These two examples, across fundamentally different industries, show how business valuations must play a significant role when determining a company’s future direction and strategy. Does an acquisition, merger, growth strategy or restructuring period add to the “book value” of the overall company? Unless that can be mapped out clearly with the end value goal in mind, challenges addressed and planned for, then further consideration must be given to whether it’s the correct decision.

A valuation should be the cornerstone of every company’s annual strategic planning session. Have your own decisions over the past year added value to your business? If you have chosen to forego value growth over the next 3-5 years as part of an expansion strategy, is your value trend within the parameters you expected at this stage? From what position are you planning the future of your business? All these questions and more are answered by an annual business valuation.

An annual business valuation from Plimsoll offers an easy to complete, but mission-critical valuation of your company. Our service requires is two years of full financial data for your company and, within 72 hours we can deliver a fully independent valuation of your business. We will also include a complete valuation on 5 other companies of your choice for instant competitor benchmarking.

For more information on the Plimsoll Valuation Service, please click here