Business valuation of distressed assets : private equity value generation from acquisition to exit

Abstract

This thesis has demonstrated the mechanisms of valuation under normal conditions and under distress. The author has aligned the approaches described in the literature with the real world example. One result is that the valuation is a very subjective process and depending on the individual view of the person performing the valuation. The author has discussed in this paper some fundamental techniques of valuation and has brought them into context of valuation under distress. While the discussion about valuation under distress is not new, little research has been done on this topic on effects in practical application, Volker Kraft105 tried to examine closer to the truth in his paper on turnaround investments, he left open a clear position about the valuation techniques. Damodaran offers here solutions that are helpful and enhances the objectivity of the approaches, but still is dependent on individual assumptions. "Valuation is as much Art as Science"; a major learning out of this is, that the models have to be applied to each case individually and need to be set up individually by experts in this field. A further learning is, that the DCF model in research and in practice can be sufficient enough for valuation of distressed assets. Once the distressed asset has been valued, the author explores the critical success factors of a fruitful turnaround and tested the hypothesis given by the literature on practical existence and application. The result is surprising as generic success factors obviously apply, especially in a turnaround situation the staff and experts behind the acquisition are a significant success factor. This also leads to a new hypothesis, that easily a team could be build up to repeat the Arques success, as long as this team is able to find the potential subsidiaries. As the auditor associations recommend the net asset value for determination of a company value, the practioner's are using it under distress to find their lower pricing limit. In the exit phase of the investor the perspective changes to a long and prospectus future of the reanimated company, so naturally, the DCF model find it application and to draw a nice future, here the aim is to set a high price, but to show enough potential for an, preferred, strategic investor to realise synergies with his business. Both methods demonstrated at the described case study its applicability and that with the limited data available it is possible to determine closely the values published in the press-releases. As turnaround financing is mixed on a European level by EVCA107 with expansion financing, no European wide data is available, but it is fair to say that the expected return rates are similar to those of start-up financing. As turnaround financing plays only a niche role according to the studies presented in the thesis, it would be a opportunity to research in the portfolios of European companies and to understand their success-rate and returns in comparison to start-up investors. Further a detailed research on valuation methods and practical application in a turnaround portfolio could be done, in order to improve the acquisition of attractive investment opportunities. During the thesis the author took the perspective of acquisition phase and exit phase, here it would be interesting for future research to find out the correlation of success factors between an acquisition and an successful exit to enhance the models of valuation the turnaround viability of a potential investment. A major question left open is a comparison of success rates and under what factors returns are higher, especially concerning the development of distressed asset investing from anglo-saxon countries to Europe and then to Germany. Are turnarounds in a specific region in the world more beneficial than in another region, is the model transferable to e.g. Eastern-European countries and how would it applied there? Are industries sectors more likely to be turnaround than others? All these questions would be interesting to answer in future research.