Company Valuations

Company valuations are often tested in accountancy exams. We know of methods using DVM and also using DCF and PE but does this really value the company?

Gerald Ratner former CEO of Ratners jewellers managed to devalue his company by £500 million overnight by probably one of the worst business decisions ever!

Ratner, for reasons best known to himself, gave a speech at the Institute of Directors in 1991. Joking about the cheapness of his wares, he described a £4.95 Ratners decanter (I had just been given one as a birthday present) as ‘total crap’ and further said that the firm’s 99p earrings were ‘cheaper than a prawn sandwich from Marks & Spencer, but probably wouldn’t last as long’.

His was a very famous and popular company, but if he said his products were crap, why should anyone like you and me buy them? Before he addressed the meeting and made these statements everyone knew that the products were cheap, but once they had been officially branded as such, they lost their glamour. Jewellery is after all a ‘glamour’ item. And that was that. The share price collapsed. He tried to justify his comments but these were worthless, the damage had been done – value and subsequently the company gone.

Making such a gaff is known now as 'doing a Ratner' But would history repeat itself?

Asked in an interview in 2001 to clarify the target market for the Topman clothing chain, the firm's brand director, David Shepherd, replied: "Hooligans or whatever." He went on: "Very few of our customers have to wear suits for work. They'll be for his first interview or first court case." The company later suggested that the word "hooligan" would not be seen as an insult among its customers.

In 2003, Matt Barrett, the Barclays chief executive, shocked observers by suggesting that consumers should stay clear of his company's product, the Barclaycard, because it was so expensive. Giving evidence to a panel of MPs, he admitted he would not use one himself. He said: "I do not borrow on credit cards. I have four young children. I give them advice not to pile up debts on their credit cards."

So remember with company valuation it’s not a science but an art and so is making gaffs!