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Unformatted text preview: L.E.PEREIRO VALUATION IN LATIN AMERICA PAGE 1 The valuation of closely-held companies in Latin America Luis E.Pereiro Center for Entrepreneurship & Business Venturing Universidad Torcuato Di Tella Miñones 2177, 1428 Buenos Aires, Argentina Phone.: (5411) 4783-3112 - Ext.191 Fax: (5411) 4783-3220 e-mail: [email protected] Abstract M&A activity has greatly increased in Latin America in the recent past. As a result, the improvement of valuation techniques has gained a prominent place in the agenda of investors and financial analysts dealing with the region. The task entails two substantial challenges, however. First, fundamental valuation requires the determination of an appropriate cost of capital, and the traditional CAPM-based models which are normally used to compute it are difficult to apply in such transitional, less efficient markets. Second, most companies and transactions in Latin America are closely-held operations, and hence bear components of unsystematic risk which classical appraisal techniques do not easily capture. In this paper, we develop a comprehensive fundamentals-based valuation model and provide supporting empirical data for valuing privately-held companies in Latin American emerging markets. Keywords: Valuation, Latin America. L.E.PEREIRO VALUATION IN LATIN AMERICA PAGE 2 1. The issues at stake In the last years, a substantial and increasing number of M&A deals have been forged on privately-held assets in Latin America; as a result, appropriately appraising such investment opportunities has become a relevant matter in the region. However, traditional fundamental valuation techniques do not provide much guidance as to how they should be applied to closely-held firms in transitioning markets. First, when using CAPM- based methods for the cost of capital determination, it is not clear whether the hypotheses of market efficiency hold, and then the straight application of the classical CAPM in such contexts is controversial. Indeed, neither diversification nor transparency—the main tenets of developed financial markets—are present in the trading or real, closely-held assets in emerging Latin American markets. First, diversification is imperfect when a single or only a handful of acquisitions is made, in a market where only a few interested buyers and sellers are operating; this is truly the case in the overwhelming majority of M&A deals in the region. Second, in most company acquisitions, the final price of a transaction is not a transparent reference arrived at by financial investors, but it is rather a compound of the different viewpoints and dissimilar risk-return expectations of the entrepreneurs, strategic investors and venture capitalists negotiating the deal; as a result, there is no single market for gauging “true” asset prices....
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This note was uploaded on 12/16/2010 for the course FIN 644 taught by Professor Sen during the Spring '10 term at Pace.
- Spring '10