Chapter 3: How to Better Value Branded Businesses: A Conditional Multiplier Approach
Natalie Mizik INTRODUCTION The last few decades have been characterized by high levels of merger and acquisition activity and the growing disparity between the book value of the acquired businesses and their acquisition prices. For example, in June 2005 Procter & Gamble paid $58.6bn for Gillette. This acquisition price was 13 times greater than Gillette’s $4.5bn book value ($0.9bn of net working capital and $3.6bn of net property, plant, and equipment). Cadbury plc, a company with a tangible book value of assets of less than $3bn (negative $0.5bn of net working capital and $3bn of net property, plant, and equipment) accepted Kraft’s takeover offer of $21.8bn. This offer price was almost a nine-times multiple of Cadbury’s book value. Pfizer sold its consumer goods business units to Johnson & Johnson in 2006 and the Swedish government privatized V&S in 2008. The Swedish government considered splitting V&S (best known for its Absolut Vodka brand) and selling each brand individually. All these transactions require estimating the value of the enterprise. For public companies (like Gillette and Cadbury), their stock market valuation serves as a starting reference price in acquisition negotiations, but for most business combinations, which involve private firms or business units, a good estimate of enterprise value is not easily available and needs to be established. When consumers buy a computer, a pair of sneakers, shaving cream, or a brokerage service, they are paying for more than the physical good or service in question: they are also buying a brand. Dell, Nike,...
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