1 Other Valuation Techniques Professor Joshua Livnat, Ph.D., CPA 311 Tisch Hall New York University 40 W. 4th St. NY NY Tel. (212) Fax (212) Web page:

2 B-to-B Report (Neoforma) Ray Falci (Bear Sterns) Company operates in the procurement of medical/surgical products. Fragmented industry. –A few large customers (hospital chains), but many others too. –Many suppliers. Potential for disintermediation. IPO at about $14. –Shot up on first day to $ –Research report indicates target at $79. –Current price (10/31/00) of $1.781.

3 B-to-B Report (Neoforma) Ray Falci (Bear Sterns) Valuation methodology: –Assess size of addressable market. –Assess transaction fee (3%). –Predict various scenarios of market shares, and probability of attaining them. –Forecast revenue and cash flow for each scenario. –Using P/E, get predicted price. –Calculate expected price = multiply each scenario’s price by the probability, and sum over all amounts.

4 B-to-B Report (Neoforma) Ray Falci (Bear Sterns) As a second approach, addressable market changes for each scenario. After finding the price at the end of 2005, one can calculate the annual rate of return to get from today’s price to the 2005 price. The rate of return is used to calculate the 12-months target price.

5 Comments Why do more favorable scenarios have higher P/E ratios? For a company that had revenues of $1.1 million in 1999, getting to revenues of $660-$840 million in 2005 is not a small task. Actual attempt to model cash flows. Nice attempt to use probabilities.

6 Real – Option Valuation The real-option valuation approach has one major advantage; it assumes path dependency. Traditional present value of cash flows methods assume the future cash flows are given for all the specific future periods. Usually, the assumption is that the firm is operating throughout all the future periods. Uncertainty can be dealt with using probabilities for each cash flow (similar to Neoforma in 2005).

7 Real – Option Valuation Real options assume that the firm can decide to stop certain projects (or abandon the whole firm) at periods prior to the ending period. The option to abandon projects is value- relevant. One way to model it is through continuous time and path dependency.

8 Real – Option Valuation Useful in the pharmaceutical area, where a project that does not have promising consequences at a given milestone can be abandoned. Useful in the E-Commerce area to assess the probability of running out of funds. Useful in the E-Commerce area to assess the network effects of discrete steps or acquisitions. –Signing on a major customer in B-to-B. –Acquiring another network.