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SESSION 19: A DETOUR INTO

ASSET BASED VALUATION
Aswath Damodaran
 What is asset based valuation?

 In intrinsic valuation, you value a business based

upon the cash flows you expect that business to
generate over time.
 In relative valuation, you value a business based
upon how similar businesses are priced.
 In asset based valuation, you value a business by
valuing its individual assets. These individual assets
can be tangible or intangible.

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 Why would you do asset based valuation?
 Liquidation: If you are liquidating a business by selling its assets
piece meal, rather than as a composite business, you would like to
estimate what you will get from each asset or asset class
individually.
 Accounting mission: As both US and international accounting
standards have turned to “fair value” accounting, accountants have
been called upon to redo balance sheet to reflect the assets at
their fair rather than book value.
 Sum of the parts: If a business is made up of individual divisions or
assets, you may want to value these parts individually for one of
two groups:
🞑 Potential acquirers may want to do this, as a precursor to restructuring the
business.
🞑 Investors may be interested because a business that is selling for less than
the sum of its parts may be “cheap”.

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 How do you do asset based valuation?

 Intrinsic value: Estimate the expected cash flows on

each asset or asset class, discount back at a risk
adjusted discount rate and arrive at an intrinsic
value for each asset.
 Relative value: Look for similar assets that have sold
in the recent past and estimate a value for each
asset in the business.
 Accounting value: You could use the book value of
the asset as a proxy for the estimated value of the
asset.

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 When is asset-­‐based valuation easiest to do?

 Separable assets: If a company is a collection of separable assets (a set of

real estate holdings, a holding company of different independent
businesses), asset-­‐based valuation is easier to do. If the assets are
interrelated or difficult to separate, asset-­‐based valuation becomes
problematic. Thus, while real estate or a long term licensing/franchising
contract may be easily valued, brand name (which cuts across assets) is
more difficult to value separately.
 Stand alone earnings/ cash flows: An asset is much simpler to value if you
can trace its earnings/cash flows to it. It is much more difficult to value
when the business generates earnings, but the role of individual assets in
generating these earnings cannot be isolated.
 Active market for similar assets: If you plan to do a relative valuation, it is
easier if you can find an active market for “similar” assets which you can
draw on for transactions prices.

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 I. Liquidation Valuation

 In liquidation valuation, you are trying to assess how

much you would get from selling the assets of the
business today, rather than the business as a going
concern.
 Consequently, it makes more sense to price those assets
(i.e., do relative valuation) than it is to value them (do
intrinsic valuation). For assets that are separable and
traded (example: real estate), pricing is easy to do. For
assets that are not, you often see book value used either
as a proxy for liquidation value or as a basis for
estimating liquidation value.
 To the extent that the liquidation is urgent, you may
attach a discount to the estimated value.
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 II. Accounting Valuation: Glimmers from FAS
157
 The ubiquitous “market participant”: Through FAS 157,
accountants are asked to attach values to assets/liabilities that
market participants would have been willing to pay/ receive.
 Tilt towards relative value: “The definition focuses on the price
that would be received to sell the asset or paid to transfer the
liability (an exit price), not the price that would be paid to acquire
the asset or received to assume the liability (an entry price).” The
hierarchy puts “market prices”, if available for an asset, at the top
with intrinsic value being accepted only if market prices are not
accessible.
 Split mission: While accounting fair value is titled towards relative
valuation, accountants are also required to back their relative
valuations with intrinsic valuations. Often, this leads to reverse
engineering, where accountants arrive at values first and develop
valuations later.

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 III. Sum of the parts valuation

 You can value a company in pieces, using either relative

or intrinsic valuation. Which one you use will depend on
who you are and your motives for doing the sum of the
parts valuation.
 If you are long term, passive investor in the company,
your intent may be to find market mistakes that you
hope will get corrected over time. If that is the case, you
should do an intrinsic valuation of the individual assets.
 If you are an activist investor that plans to acquire the
company or push for change, you should be more
focused on relative valuation, since your intent is to get
the company to split up and gain the increase in value.

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 Let’s try this
United Technologies: Raw Data ‐-­ 2009
Pre-tax
EBITDA Operati Capital Total
Division Business Revenues ng Expendit Depreciation Asse
Income ures ts
Refrigeration
Carrier systems $14,944 $1,510 $1,316 $191 $194 $10,810
Pratt &
Whitney Defense $12,965 $2,490 $2,122 $412 $368 $9,650
Otis Construction $12,949 $2,680 $2,477 $150 $203 $7,731
UTC Fire
& Security $6,462 $780 $542 $95 $238 $10,022
Security
Hamilton
Sundstrand Manufacturing $6,207 $1,277 $1,099 $141 $178 $8,648
Sikorsky The
Aircraft $5,368had $540
company also corporate $478 $165
expenses, unallocated $62the divisions
to $3,985
of $408 million in the most recent year.

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 United Technologies: Relative Valuation
A Simple Calculation
Division Business EBITDA EV/EBITDA for sector Value of Business
Carrier Refrigeration systems $1,510 5.25 $7,928
Pratt & Whitney Defense $2,490 8.00 $19,920
Otis Construction $2,680 6.00 $16,080
UTC Fire & Security Security $780 7.50 $5,850
Hamilton Sundstrand Industrial Products $1,277 5.50 $7,024
Sikorsky Aircraft $540 9.00 $4,860
Sum of the parts value
for business =
$61,661

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 United Technologies: Relative Valuation
A “better” valuation?
Current
value
Scaling for Operati Tax Estimat
Division scaling ROC ng Predicted Multiple ed
Varia variable Margin Rat Value
ble e
5.35 – 3.55 (.38) +
Carrier EBITDA $1,510 13.57% 8.81% 38% 14.17 $8,944.47
(.1357) =5.92
Pratt &
Whitney Revenues $12,965 24.51% 16.37% 38% 0.85 + 7.32 (.1637) $26,553.29
=2.05
3.17 – 2.87
Otis EBITDA $2,680 35.71% 19.13% 38% (.38)+14.66 $19,601.70
(.3571) =7.31
UTC Fire
& Capital $5,575 6.03% 8.39% 38% 0.55 + 8.22 (.0603) $5,828.76
Security =1.05
Hamilton
Aswath Sundstrand Revenues $6,207 14.16% 17.71% 38% 0.51 + 6.13 (.1771) $9,902.44
D11amodaran =1.59 11
Sikorsky Capital $2,217 13.37% 8.90% 38% 0.65 + 6.98 (.1337) $3,509.61
=1.58
 United Technologies, DCF valuation
Growth Choices

Cost Return Reinvestment Expected Length of Stable Stable

Division of on Rate growth growth growth rate ROC
capital capital period
Carrier 7.84% 13.57% 43.28% 5.87% 5 3% 7.84%
Pratt &
Whitney 7.72% 24.51% 57.90% 14.19% 5 3% 12.00%
Otis 9.94% 35.71% 18.06% 6.45% 5 3% 14.00%
UTC Fire
& 6.78% 6.03% 52.27% 3.15% 0 3% 6.78%
Security
Hamilton
Sundstrand 9.06% 14.16% 38.26% 5.42% 5 3% 9.06%
Sikorsky 9.82% 13.37% 102.95% 13.76% 5 3% 9.82%

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 United Technologies, DCF valuation
Values of the parts

Cost of PV of PV of Value of
Business capital FCFF Terminal Operating
Value Assets
Carrier 7.84% $2,190 $9,498 $11,688
Pratt & 7.72% $3,310 $27,989 $31,299
Whitney
Otis 9.94% $5,717 $14,798 $20,515
UTC Fire &
Security 6.78% $0 $4,953 $4,953
Hamilton
Sundstr 9.06% $1,902 $6,343 $8,245
and
Sikorsky 9.82% -$49 $3,598 $3,550
Sum $80,250

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 United Technologies, DCF valuation
Sum of the Parts
 Value of the parts =
$80,250
 VaCul orepooraftecoExrppCurrent 408(1.38)(1.03)
eonrseaste 
 (Cost of capitalCompany  g) (.0868 =$ 4,587
ex(1petn)(1sesg) .03)

 Value of operating assets (sum of parts DCF) = $75,663

 Value of operating assets (sum of parts RV) = $74,230
 Value of operating assets (company DCF) = $71,410
 Enterprise value (based on market prices) = $52,261

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