Valuing an East European Company

• Published in: Long range planning Vol. 28; no. 6; pp. 48 - 60
• Main Authors: Ferris, Stephen P., Joshi, Yash P., Makhija, Anil K.
• Format: Journal Article
• Language: English
• Published: London, etc Elsevier Ltd 01-12-1995; Pergamon Press; Pergamon Press Inc
• Subjects: Foreign investment; Joint ventures; Metal industry; Methods; Statistical data; Strategic planning; Valuation; Czech Republic
• ISSN: 0024-6301; 1873-1872
• DOI: 10.1016/0024-6301(95)00051-J

Investors in many parts of the world are considering opportunities in transitional economies, but such investments typically require analyses that are different from those performed in mature, market-based economies. This article evaluates the application of traditional firm valuation procedures to state-owned enterprises in the former Soviet bloc countries. The valuation problems faced by the foreign joint venture partner extend beyond those posed by an absence of capital market prices and a lack of useful managerial data in the socialist-styled financial statements. A more fundamental problem arises from the deteriorated condition of the assets of most of these firms. Years of underinvestment and neglect have eroded the worth of assets so that firm value is driven by future growth opportunities rather than currently profitable assets. Based on extensive interviews with participants and using both socialist and western-compatible financial statements, we illustrate the difficulties in obtaining valuation estimates through the example of a Czech metals manufacturer. Given the importance of growth opportunities, we recommend that valuation be undertaken with active participation of insiders, instead of a mechanical task done by outside consultants alone.