Find out how you can use the beta factors based on a listed peer group for business valuation.
Find out how you can use the beta factors based on a listed peer group for business valuation.
In the specific application of the Capital Asset Pricing Model (CAPM), the valuer is regularly faced with the challenge that the valuation object is not listed on the stock exchange. In order to derive the company-specific beta factors, it is therefore both permissible and necessary to derive them based on a peer group of listed comparable companies. The following article shows how the issue of the "comparability" of peer group companies can be approached.
Hardly any other argument is used as frequently in the context of peer group selection and analysis as that of the lack of comparability of the valuation object with other publicly traded companies that could be used to determine the beta factors.
However, this argument is almost as often misguided. On the contrary, only in the rarest of cases is it possible to find peer group companies that have exactly the same product mix in the same market with the same customer portfolio with the same production technology and the same employee qualifications under the same collective bargaining conditions. This list of important influencing factors could be continued indefinitely. It is merely intended to illustrate that there are many factors that influence a company's success, all of which are ultimately reflected in the beta factors.
Capital market theory, i.e. the CAPM, does not provide any direct indication of the specific factors that define a company's beta. Rather, beta is the result of the risk expectations of market participants. This perspective should serve as a starting point if the search for comparable companies proves difficult.
Note: The company-specific influencing factors mentioned above should not be confused with the "unsystematic risk" known from the CAPM. The unsystematic risk in the CAPM is so-called "noise"; it does not arise from the structure of a company, but from the permanent processing of new, price-relevant information on the capital markets.
When compiling this peer group, it is therefore particularly important to ensure that peer companies are included that largely match the valuation object in terms of risk structure. The following fictitious examples are intended to illustrate how the valuer can proceed in order to identify suitable peer companies.
The obvious thing to do here would be to look for solar park operators on the international capital markets. In principle, there will be regional peculiarities, e.g. the EEG in Germany. However, the business model will often be similar.
Shipyards, for example, can be used as comparative companies here. The economic dynamics and cyclical dependency of a supplier often depend heavily on the development of the industry as a whole, in this case shipbuilding. The shipping industry would be less suitable, as here the dependency is only very direct and, above all, very delayed.
Airport operators, for example, are a good comparison. The take-off and landing fees of airlines are a good equivalent to the station fees that train operators have to pay. As with airports, train stations generate a large part of their revenues through the marketing of shopping and restaurant space. And finally, airport operators and station operators are travel service providers, albeit in different sub-sectors of the transportation market.
The above examples should be seen as suggestions as to how the valuer can approach a suitable peer group. It should be clearly pointed out that poor direct comparability requires all the more analysis and economic appraiser expertise.
In principle, a peer group comparison is always strongly influenced by the subjective influences of the valuer and must therefore initially be viewed critically when determining objectified company values within the meaning of IDW Standard 1. However, it is equally undisputed that even in cases of "difficult comparability", a business value must ultimately be determined on the basis of the CAPM and using the beta factors. In the absence of (practicable) alternatives, no other procedure is currently available.
IDW S1 provides for recourse to the returns of listed peer companies. In this context, the IDW expressly and regularly points out that it is ultimately the responsibility of the valuer to determine the beta factors appropriately on a case-by-case basis. However, a blanket determination of the beta factors is not an alternative. Ultimately, the valuer is therefore required to select the peer group carefully and to justify his selection with arguments.
The search for suitable publicly traded peer group companies to derive the beta factors is a challenge that should not be underestimated. It is less a question of an exact match of all company characteristics, but rather of a broad match in the risk structure.
By applying intelligent search strategies and using specialized databases, valuation professionals can successfully accomplish this task and thus determine well-founded and objectified company values.
