The estimation of intrinsic value of private firms with significant innovations is vital in merger and acquisition strategy of corporates, according to a study done by the Indian School of Business (ISB).

Presenting the findings of the study at the ongoing research conference on corporate finance, Krishnamurthy V Subramanian, ISB faculty, said valuation of innovations achieved by young, private firms would pose challenges such as no history of business/track record and lack of availability of data.

A proper valuation of assets of private firms becomes compulsory not only for completing a business deal but also because global accounting norms such as International Financial Reporting Standards (IFRS) make it mandatory to disclose the intrinsic value of innovations, he said.

Giving an example of Cisco which acquired about 150 firms between 1993 and 2012, Subramanian said a serial acquirer such as Cisco was unlikely to resort to over payments to the targets for acquisition as they had evolved a proper process of due diligence and were not desperate for acquisitions.

“Cisco had in fact become a gold standard for merger and acquisitions strategy in the corporate world and economics,” he said.

The patented innovations would naturally lead to higher valuations while in the case of listed firms, the market value of stocks was usually taken as a parameter for valuations, he added.

The study also observed that innovation was primarily driven by young private firms and the exit mode for them would be either going public or acquisition by a major.

naga.gunturi@thehindu.co.in

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