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Asset Valuation, Transcorp and the Reprivatization of NITEL (I)

By A. Eze Nwagbaraji
Markets are stubborn and free markets,   if not tampered with, are self  correcting. These have been the central dictum of capitalist societies over the past two centuries. An individual or a corporate entity’s ability to corner the normal functioning of the market is only temporary.

It is to this temporary period that economists call for a neutral regulatory body, to referee the conduct of market participants. Further, the referee provides some level playing ground for investors, who come to the market with confidence that success and failure depends on their skills as participants in a market with uniform rules of engagement.

The history of markets and the investment world is littered with scams that defraud investors, enrich a few, and at times lead to market failures. Over the past quarter of a century, market participants have witnessed the 1985 E.F. Hutton, one of the most respected Stock Brokerage firms in the United States, who devised a “Check Kiting” strategy that enabled it to write checks for more than it had in banks. At its peak, EF Hutton was obtaining $250 million daily from American financial institutions without paying any interests. When the US Market Regulatory Authorities closed in, it plea bargained to 2,000 counts of mail and wire fraud in lieu of a full blown trial and its consequences.

In 1996, Centennial Technologies, a New York Stock Exchange (NYSE) listed company saw its shares rise more than 450 percent and was designated the best performing company for that year. The company falsely claimed that it was making personal computer memory cards and chips. When regulators looked into the whole scam, it was nothing but a distributor of fruit baskets.

More than 20,000 investors saw their stocks go from $55 per share to pennies within a day. One year later, Canada’s Bre-X Minerals, in a calculated attempt to defraud investors put out information that its Indonesian gold field contained more than 200 million ounces (making it the richest goldmine in the world).

Its stocks skyrocketed with pension funds taking key positions in the company. When the information was proved wrong, millions of retirees lost fortunes. Enron in 2001 emerged as one of the top ten corporations in the US by market capitalization, all based on complex commodity trading schemes that collapsed when regulators looked into its financials. The stock fell from $90 per share to pennies within days. In 2002, Worldcom Telecommunications, one the largest telecom companies in the world then, collapsed when regulators found that it booked billions of dollars worth of operating expenses as investments. Its stock went from $60 to pennies in days.

Transnational Corporation of Nigeria (Transcorp) by virtue of what its investors have lost in value over the past two years is the largest investment scam in Nigeria to date. Though Nigerian Market Regulators have not convicted the corporation of any crimes, the market’s invisible hands have dealt a blow to the company and its stocks are worthless. The revocation of its acquisition of NITEL and the current push by the Nigerian Council on Privatization (NCP) and the Bureau for Public Enterprise (BPE) to reprivatize the telecom assets is a clear indication that the company has failed its investors.

A business is an asset or a set of assets, the value of which leads to the worth of the business. Investors who buy stocks in a publicly traded company are investing in the assets and hopefully, in the ability of the assets to generate income which after operating expenses, may lead to dividends on the invested funds. Business valuation is therefore, a set of procedures used to estimate the economic value of the owner’s interests in the business. To the market participant, valuation is the most important factor in determining what price to pay for a business.

There are no single routes to arriving at the value of a business. Traditionally, sellers and buyers always have differing opinions on how much the business is worth. For example, a seller may believe that the business’s attachment to its community may have values that an appraiser may not capture immediately, and a buyer may look at the historic income stream to gauge the value of the business. Other factors that may affect business valuation include general economic and market conditions, the value of the parent company for publicly traded companies, the circumstances of the business sale, who the buyer or buyers are, etc.

Ultimately, both the seller and the buyer employ the services of business appraisers. An appraiser is an independent umpire, who has at his disposal three possible routes for arriving at the price that the business should sell for. These routes are the asset, market, and income approaches to business valuation.

The asset approach views the business as a set of assets and liabilities that is used as building blocks to construct the business value. Using the principles of substitution or opportunity costs, the question  – what will it cost to create another business like the subject, that will produce similar economic benefits for the owners is answered.

Every business has assets and liabilities and matching the assets to the liabilities produces the value of the business.
In attempt to fashion out a fair market value for a business, the market approach looks to what similar businesses in the industry are selling for. No market operates in a vacuum. Even monopolies have limited competition. Unless a buyer is under compulsion (an unrealistic scenario), the buyer will compare the potential business to other similarly situated businesses.

The sole reason for a non-government corporation running a business is to derive income from such business. This is the core expectation of the income approach to business valuation. The buyer looks at the economic benefit inherent in invested capital and the duration within which such expected value will begin to accrue, within calculated risks. Because the present value of the business is the key to the buyer, expected income and risks are also given present values.

Valuation of a Distressed Company
In valuing a distressed corporation, the appraiser looks to discount the market value of the company based on business factors that have created the limitations that prevents the firm from being at full operational capacity. Some of these adjustments include working capital adjustments, deferred capital expenditures, cost of goods sold, the cost of bringing the business to a functional level, the anticipated rigor in unbundling non performing assets, collecting bad debts, correcting a corporate structure riddled with corrupt practices, etc. Discounting lowers the market value of a company and the reach of such discounting depends on the reach of the debilitating factors. It is absolutely practical that a government corporation riddled with corrupt and “sharp” business practices, after discounting, will be worth only its salvage value. If such salvage value seem insurmountable, the business may be worthless to a non-government operator.

Factors that create insurmountable business costs include wide debt levels that are difficult to ascertain due to corrupt business legacies, the relative competitive nature of the industry, the average cost of unit returns in the industry versus the average cost of unit return in the target corporation, inconclusive present or future legal challenges facing the target corporation, etc. These factors, individually or collectively retard the value of any corporation.

Valuation of a Corporation’s Intangible Assets
Corporate assets such as patents, copyrights, trade secretes, customer relationships, etc. present one of the grossly misunderstood paths in business valuations. These assets are intangible, cannot be observed, and may be susceptible to exaggerated estimates. Because intangible assets valuations are necessary for financial reporting and intellectual property transactions, they are key factors in business valuation. While it may be difficult, costly, and time consuming to calculate the value of these assets in a private corporation, in publicly trade companies and their subsidiaries, the stock market provides a valid opportunity to impose values on them.

The difference between a corporation’s market capitalization and the book value of its hard assets is unarguably a neutral determinant of its intangible assets value, even within a privately held corporation. Leading intangible assets valuation doctrines that have emerged include the 25 Percent Rule, where such assets are pegged at 25 percent of the corporations overall value, the Derivative Revenue Model, based on license revenues, the Net Present Value (NPV),  Internal Rates of Return, and the Discount Cash Flow Models.

The nature of the industry and the pervasive nature of technology in such industry also affect any claims to proprietary know how by the corporation.. The telecommunications industry has witnessed the most far reaching technological innovations over the past decade. Any claim to superior or proprietary technology in the telecommunication industry is suspect.

Centuries old telecom companies such as American Telephone & Telegraph Corporation (A T & T) have been chased out of their core businesses by marginal and nimble corporations adopting disruptive technologies. Skype, a subsidiary of on line auctioneer, EBay, is the world’s largest long distance telephone carrier, using its on line Voice over Internet Protocol (VOIP). To remain in the telecommunication business, A T & T has to completely re-invent its business by acquiring new companies in the wireless segment of the industry. Verizon, Inc. another major global carrier of fixed wire line telephony is unbundling its core business and venturing into wireless telecommunications and their associated businesses.

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