Just look at what has happened to the price of oil and AI stocks due to the results of the US Midterms.
We regularly debate what factors should be considered when establishing the value of an asset whatever legal form it might take.
Every case is unique of course but issues such as a rise in the cost of energy tend to be felt by pretty much everyone, even if it is only through a demand for an increase in pay which then knocks on (again) into inflation.
Geopolitical events might be seen as far off and barely relevant until you see that the Democrats seizing both Congress and the Senate has thrown the data centre and therefore whole AI narrative into a new dimension.
As I write on Friday lunchtime the FTSE100 is off 2.3%, but perhaps more interesting is the fact that the UK software sector has bounced 47%+ since February this year so 3-5% drops in share prices in the last 24 hours may not be as significant as you think. You can now see very clearly why date of valuation matters.
If we had been using RELX and Sage as the comparable quoted companies at the beginning of this week we would have been valuing the identical asset at around 4% higher than if we were doing the same exercise today a mere four working days later.
Returning to the issue of adjusting a valuation for geopolitical risk. If you are using the right set of comparable quoted companies to form the valuation of a business or its shares, then there is a strong-ish argument that the share prices of the comparable basket will have done the heavy lifting on factoring in geopolitical impact. But it is much rarer these days for us to be able to create a reliable basket, not least because of the diminution in volumes of listed companies, let alone having enough ones that would qualify as truly comparable. So we need to attack the issue in another way to make sure we have taken the impact into account.
One way is to incorporate the relevant risk considerations directly into the valuation methodology, for example through the weighted average cost of capital used in a DCF. Another is to apply an explicit percentage adjustment to the enterprise value. What that percentage is based on is the secret source because it has to be justified.
If you are seeing clients who need to get their valuation completed before Christmas, time is now getting shorter. Although we can complete a piece of work in 3-5 days, time must still be allowed to contract and get the data over to us. So do call now as we will always make the capacity available to deliver to your timetable and requirements.
