Valuing Businesses in the Ever-changing Global Marketplace

• Author: James L. Horvath
• Pages: 687-717

687

Chapter 25

Valuing Businesses in the

Ever-changing Global Marketplace

james l. horvath

Companies are investing heavily in foreign business entities. With deregula-

tion of capital markets, accelerating trade across borders, and intensifying

competition, they have to prepare themselves to compete in a global market-

place. These compa nies enter foreign countries for many different reasons.

The reasons include defensive and offensive strategies arising from the dy-

namics of trade relationships under North American free-trade agreements,

the Europe an Union marke t, the expa nding economi c power of Asi a, par ticu -

larly China and India, and the changing economic system in central/eastern

Europe. Some companies enter foreign countries in search of growth oppor-

tunities in la rger markets, possibly as a response to satu ration of home mar-

kets or to inc reasin g compet ition f rom domes tic compa nies in a natio n where

a comp any’s exp orts once predominated . Some companies s eek economies

of scale in globalization, opportunities to benef‌it from lower production cost,

know how, and a reduction of dependence on their home economy.

To a lesser extent, companies may also invest in a foreign marketplace to

avoid trade friction or protectionism. Some companies acquire or est ablish

a company abroad to participate direc tly in a high-growth area or an area

where t hey expect greater growth and prof‌it than their domestic market

allows them to generate. With global access to the Internet, ma rkets have

become more demand-driven than ever. With easy access to information

and the power to rapidly move their money from one location to another,

customers have a greater expect ation than ever of a company’s immediate

responsiveness to their individual demands.

688 james l. horvath

A merger with a foreign company can also enhance a brand’s reputation

and secure the technical k nowledge of a former competitor or compliment-

ary company. Corporations may also diversify their operations in foreign

countries to stabilize ea rnings, bring down costs through tax advantages

or cheaper production, or reduce political or economic risk. By aligning

themselves with a foreign company, they may reinvent themselves and their

industries.

To move across borders today, a company must be recognized favourably.

But as companies expand abroad, their domestic reputation and branding

may not follow to a foreign jurisdiction. Instead, these companies must ex-

ploit the leverage value of their brand or reputation while identifying value-

added strategic part ners that can support them in establishing themselves

in foreign markets. A company also may identify more reliable sources of

raw materials, new tec hnologies or intellectua l property in foreign locales.

Indeed, continuous optimization of the global supply chain is a prerequi-

site to unlocking the value of globalization. According to a Deloitte sur-

vey conducted in 2000, companies that continually optimize their e xisting

and new investments within the global supply structure are as much as 70

percent more prof‌itable than their peers. By optimizin g t heir global sup-

ply chain network, companies gain access to critical in formation regarding

product, customer service and manufactur ing costs, customer and product

prof‌itability, and other vital signs. When major domestic companies enter

foreign countries, the service industries that support them such as account-

ing, advertising, and IT organizations tend to follow.

To be comple tely glob al, a compa ny must hav e the abil ity to acc ess capita l

resources globally; develop a system for gett ing the highest-qualit y, lowest-

cost parts and components; and address the political realities of the global

marketplace. Communicating across cultures and recognizing the value of a

different culture are among the greatest challenges as companies globalize.

Since they already provide their services to international companies

located in North America, business valuators in Canada and t he United

States are often asked to value companies abroad. Companies require valua-

tion services beyond North America for the same reasons as they use them

within Canada a nd the U.S. They may acquire or sell an equity interest

in a foreign business. They may conduct a corporate re-organization for

regulatory or tax purposes. Governments may seek to pr ivatize govern-

ment-owned corporations. Shareholders may wish to settle disputes. Valua-

tions may be required to resolve breaches of contract. Or a valuation may be

necessary to secure corporate f‌inancing. A nd with the advent of fair value

accounting over the past six years, the business valuation departments of

many professional practices have increased in size by 200 percent to 350