The Financial Times Guide to Corporate Valuation

7

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Underlying analysis and key value drivers 109

Generic operational value drivers

There are a large number of variables suitable for analysis in the areas of

industry structure and intellectual capital that influence the value of a

company. Sifting through all of these variables is time-consuming and to

some extent unnecessary, which is the reason why most people who work

with valuation choose a smaller number of variables to focus on.

In a study conducted at Stockholm School of Economics by the authors of

this book in 1998, it was concluded that seven main non-financial value

drivers seemed to have such general value impact that they verged on

being generic. The Royal Swedish Academy of Engineering Sciences first

published these findings in 1999 in ‘Valuation of Growth Companies’.

We will present and describe these seven vari-

ables and offer suggestions on how it is possible to

measure them. It is important to note that these

variables can vary from company to company and

from industry to industry. When you analyze a

company for valuation purposes, you should not

take for granted that precisely these seven variables are the most suitable.

If you find other variables with greater explanatory value, you should of

course use them instead. However, in most cases, at least a few of the opera-

tional key value drivers can be found among these seven and serve as a basis

for your analysis.

Industry structure value drivers

In the industry structure there are three key value drivers as outlined

under the following headings.

Level of consolidation

The level of consolidation, i.e. the number of companies in an industry, is

a measure of the competition. If an industry has 200 competing companies,

it is possible to assume that competition is hard and margins low. If, on the

other hand, there are only three companies in the industry, then one can

expect higher margins and maybe even a certain measure of co-competition.

The more the company’s position can be compared to a monopoly, the

more attractive the company’s position is. The reason for this is, of course,

that a monopolist enjoys advantages that companies exposed to competi-

tion simply do not. The monopolist can set higher prices for its products

Note that these

variables can vary from

company to company

and from industry

to industry