A critical analysis of the issues faced when valuing businesses in emerging economies.

In addition such reports help to evaluate the company’s performance in dynamic.
Other criteria may also be considered especially in the period of recession. Some start-up launchers abandon the fund raising idea and choose “organic growth”, that is slow development driven by reinvestment of retained earnings. It may be argued that this model is inefficient. However, retaining of full control over business and low gearing may be considered a fair compensation for slow growth.
There is one more widely spread start up model - venture capital model. In simple words it means creation of a joint venture by a manufacturing company and a venture fund. Start-ups grow and subsequently may be integrated into one of the founders. Tim Stevens (1998, p. 28) provides impressive examples of mutually beneficial cooperation. Unfortunately at the moment most international companies are wary about heavy capital outlays. Many start-ups are delayed till the economy rebounds. This is true for both developed and emerging markets.
Valuation in the crisis environment: opportunities and threats
There are three major aspects of the economic crisis influence on the business valuation (Held, 2009, p. 45). These aspects are as follows
Companies are sold with notable discounts
Diminishing of the investors’ activity
Credit market freeze
In the downturn environment valuation of most companies falls off the cliff. As Held (2009, p. 45) explains this, “most companies are underperforming their past performance, meaning they are worth less now than they were last year”. If a company is sold now, the buyers will demand a significant discount. Even stable performance and compelling growth prospects are not likely to significantly enhance the sellers’ position.
Diminishing of the investors’ activity is governed by the following reasons
Losses incurred in the financial markets
Poor access to credit recourses
Hesitation to make risky investments in the situation of uncertainty
Any investor – even possessing the best portfolio ever – has suffered losses. This fact undermined investment capacity of lots of investors. Lack of cash cannot be covered by credit resources because banks are strongly unwilling to provide loans. There are also psychological factors that influence investors’ behavior. Everyone would prefer to invest on the bull trend. Hence investments in gold and government securities are becoming more and more popular. Investors tend to wait until the recession turns to growth.
As far as world economy is concerned, the following trends are emerging
Slowing down of the globalization process
Turning to the protectionism, especially in the emerging markets
Price falling in the commodities markets
Whether these trends will grow or just die away depends on the recession length. It is hard to predict when the economy will start to rebound. the most optimistic forecast states it will be 2010.
However, most active money managers do not intend to wait. They try to take an advantage of the crisis and win. For example, Samra and O’ Keefe, co-managers of an international fund, actively seek bargains - big ones (Blackstone, 2009, p.39). Their acquisition targets are low risk intermediaries with steady fees, and discounts negotiable reach 45% (Blackstone, 2009, p.39). Investors love companies that can, as Samra puts it, "go out and grow their business during bad economic times" (Blackstone, 2009, p.39). Despite optimistic prospects, Samra and O’ Keefe admit that valuation in the downturn is extremely tricky.
Blackstone, who covers the Federal Reserve for Dow Jones Newswires in Washington, states: “These are among the best times to be buying stocks, they say, even if people don't realize it yet”.
Conclusions
We have outlined major issues faced when valuing businesses in emerging economies. Critical factors affecting valuation involve higher risks, undeveloped financial markets, economic situation (growth or downturn), industry situation, availability of credit resources, stage of business (well-established or start-up), growth potential of a particular business, management expertise. Valuation of non-listed companies and start-ups is the most complicated and involves high inherent risks.
Despite economic crisis, emerging markets remain quite attractive for aggressive investors because there is a chance to buy businesses at a good discount. Such investments are often risky but promise far greater returns than in developed markets.
Valuation methods applied when valuing companies in emerging economies are generally the same as for developed ones. However, basic methods are often amended and modified in order to provide better assessment of risks and local peculiarities.
The current economic downturn affected valuations greatly. Most business owners are depressed with the quotes drop dramatically. On the other side, some lucky investors enjoy the prices fall and make promising acquisitions.
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