Traditional evaluation techniques based on cash flow analysis and asset value are only the first step in evaluating companies operating in the new economy. This was the sentiment expressed at an Ernst & Young panel discussion held at the Gordon Institute of Business Science on Tuesday.
ITWeb director Patrick Lawlor explained that traditional companies are evaluated by looking at cash flow and assets. However, this does not always apply to new economy companies.
"Using traditional book values to evaluate dot-coms in the US has led the monetary authorities there to maintain that US dot-coms are over-valued. Future cash generation for a dot-com is more intuitive than formulaic," said Lawlor.
According to David Cooke, senior consultant in Ernst & Young`s Corporate Finance division, primary drivers and criteria for the evaluation of new economy companies include flexibility, innovation, intellectual capital and an ability to execute business plans.
"It is also critical that the company displays an extensive understanding of its customers and users, which is one of the major contributing factors to the company`s ability to derive profits from those customers," said Cooke.
Jason Xenopolous, CEO of Metropolis Transactive, stressed that it was not just the company`s business model that had to be scrutinised, but the market in which it operates.
"If a dot-com operates in a vertical market that doesn`t have much potential for cash exploitation, then it doesn`t matter how good a business model the company has."
Xenopolous added that brand awareness, brand integrity and barriers to entry need to be critically viewed when placing a value on an Internet company.
"It`s not just barriers to entry that give a company an edge, barriers to exit also need to be scrutinised. That is, how are customers bound to a company, kept on the site and encouraged to use a dot-com exclusively. We all know how fickle surfers are."
Placing a value on intellectual capital is also near impossible. Xenopolous noted that it was not about valuing individual people within an organisation, but rather about assessing a culture within a company.
Lawlor agreed: "If you get a number after valuing a company`s intellectual capital, you`ve probably got the equation wrong."
The panel concluded that market analysts and the investment public are still figuring out exactly how to evaluate new economy companies, and it may be some time before any kind of consensus is reached.
"We are learning all the time. We know more than we did this time last year, and this time next year things will be a lot clearer. We`ll just have to watch and wait," said Lawlor.
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