More on that valuation problem

HP is at it again. According to a story in Business Week – HP Shows Proclivity for High Premiums With ArcSight:

Hewlett-Packard Co. outbid at least two rivals to clinch its acquisition of ArcSight Inc., two people familiar with the $1.5 billion transaction said, underscoring HP’s willingness to offer high prices for growth.

In my earlier posting, I raised the question of why HP would buy a company for 3.5x the pre-bidding war market value (and why Dell would have offered almost 2x pre-bidding market value to begin with). The answer, at least according to Sam Palmisano of IBM, is “they had too.” Palmisano’s view is that since HP has cut internal R&D, they have to buy innovation from outside.
That raises an interesting question. What are the benchmarks for valuation? Remember that there are three basic methods of valuation: actual cost, replacement value and market comparables. In this case, we generally look at market comparable. But HP’s benchmarks for its acquisitions, if Palmisano is right, is replacement cost. What would it cost me in R&D to create what 3PAR and ArcSight already have. And, of course, since time to market is critical in these technology-intensive areas, how much would it cost to create this capability before my competitors do it.
Thus, this might be a perfect case of the value to the buyer being extraordinarily greater than the value on the general market. This information asymmetry is a standard problem in economies. So, how do we figure that into the calculations of intangible values?

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2 thoughts on “More on that valuation problem”

  1. Thanks for the comment. It is true that you could use discounted cash flow and options analysis for a M&A valuation. But as I understand these methods, they take a whole enterprise approach — the value of the parts such as the intangibles are not considered. The intangibles are assumed to contribute to cash flow — and how one gets to cash flow is irrelevant. The issue I was raising is the supposed synergy of a company acquiring specific intangible assets (such as a technology or a particular skill set) and not interested in the acquired company as an on going enterprise.

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