Valuations carried out as part of takeover bids are based on a multi-criteria approach, which means that only criteria deemed irrelevant to the case in question or redundant methods are discarded. The valuation criteria or benchmarks most often used are discounted free cash flows, multiples of comparable companies, the share price, transactions in the target company’s share capital and multiples of comparable transactions (see Appendix 1). One or more of these criteria may always be deemed irrelevant or not applicable due to a lack of information or benchmarks, and may therefore be discarded, even though this situation only arises in the case of the share price in those few cases where trading is very infrequent.
The approach adopted assumes that, in order to be considered fair, the price offered must fall within the range of values derived from the multi-criteria approach, and while it may not necessarily be higher than all these values, any discount on one or other of the results of the methods used remains limited.
For the same criterion, the expert may also have to answer questions about alternative scenarios to those used by management, for example the impact that outsourcing certain expenses, more aggressive financial management or other management choices might have.
While these questions may be legitimate in some cases, it seems difficult to generalise them in cases where these scenarios are the subject of disagreement between management and/or the majority shareholder.
The criteria most often explicitly rejected are the discounting of dividends and methods based on net assets, whether book value or revalued, except in the few sectors where they are appropriate, namely real estate and the financial sector in the broad sense (banks, holding companies, etc.). The working group has deliberately focused on the valuation of listed companies for Public Offerings, excluding the financial and real estate sectors, which, due to their specific characteristics, merit ad hoc consideration.
This practice, which is widely used for valuations carried out in the context of takeover bids, is due in particular to the widespread use of the free cash flow method, which allows account to be taken of the real capacity to generate cash flow, unlike dividend-based methods which depend on a distribution rate that can be relatively arbitrary, and integrates the value of all tangible and intangible assets on the basis of the profitability they generate, thus advantageously replacing the NAV for companies for which it can be used.
While the exclusion of dividend-based methods does not seem to have been called into question in the specific context of public offerings in which this working group was set up, vigilance is required when the target company has/has a significant and recurring distribution policy, the exclusion of net book value may raise questions, as in some cases it is considered to be a floor value. The introduction of IFRS, which are based in part on market values, seems to have strengthened the notion that net book value is a floor value in the minds of a number of investors, both private individuals and professionals.
Although the subject had not really been debated since the widely-publicised disputes in the early 2000s (Orange and Louis Dreyfus Citrus, see appendices), the financial crisis of 2007/2008 has led to market valuations (stock market prices but also transactions) that may show discounts in relation to the consolidated net book value of the companies concerned.
As a result, a number of takeover bids launched since the beginning of 2009 have been made at prices significantly lower than the net book value of the targets, prompting debate and questions.
In this respect, one of the first observations made by the members of the working group was that, in terms of form, the justification for the methods discarded by the experts was generally inspired by a prosperous period in which bonuses were the rule, and was therefore generally unsatisfactory because it was unsuited to the situations encountered more recently.