Strategic Considerations in Valuation
Subjective factors are routinely used to either discount or justify a premium valuation. For example, a specific company may derive a valuation for a firm based upon strategic considerations that are unique to that entity. Strategic considerations when valuing a business include the synergies that will result as a result of a prospective combination or the competitive advantages created by a transaction. The combination of innovative firms makes the determination of synergies largely speculative. For example, Facebook, Inc., recently purchased WhatsApp, Inc., for approximately $19 Billion in cash and stock. The valuation of this purchase was largely based upon the synergies available from combining the two companies and the competitive advantage that WhatsApp possessed in the current market. This merger represents a valuation based upon market or industry trends. Facebook’s valuation of WhatsApp reflected a belief that the market for this type of free-communication technology will continue into the future.
Other factors to consider in the valuation of a firm include: the bargaining power of a prospective purchaser; the competitive landscape for a company, the cost of entry for new competitors, the legal or regulatory risk associated with a business activity. While all of these considerations are common in valuing a firm, the innovative nature of startup ventures often makes the impact of these factors on business productivity difficult to value.