Valuation: The Market Approach

Chapter 4

How to Put the Peer Group Together

Selecting relevant peers is one of the most important steps in a market approach valuation. If the comparable companies are significantly different in structure and operations to that of the valuation subject, then the conclusions, of course, run the risk of being flawed.

4.1 THE SELECTION PROCESS

In most cases, it is natural to seek peers within the same geographical area and the same sector or industry as the valuation subject. If, for example, we are valuing a European car manufacturer, it would be natural to seek peers within that current pool of companies.

4.1.1 Geography

If suitable peers of immediate geographical proximity are limited, you might be forced to broaden your horizons. In such a case, the recommended approach is to seek peers in an area with general economic value drivers (and risks) that are in line with those of the area in which the valuation subject operates; for example, if valuing a Swedish service company that does not have domestic peers that are appropriate for reference, it would be better to seek supplementary peers in the rest of the Nordic region, Europe or possibly the United States rather than in India or China, for example. The variables or factors that are most relevant for China and India at any given time (e.g. the level of risk profile, maturity, interest rates, inflation, economic growth, etc.) are probably not the same, or at least not in the same phase, as the corresponding most relevant variables ...