Business Combinations and Intangible Assets †MyAssignmenthelp.com

Question: Discuss about the Business Combinations and Intangible Assets. Answer: Introduction This paper is a critique of an article by Christopher Hennessey that talks about how difficult it is to value cash rich businesses. The author argues that there is a great challenge presented by companies that have minimal debt than the companies that have higher borrowings and fewer financial assets. There are several arguments that the author makes in his article(Hennessy, 2017). The purpose of the article is clear from the way the author has presented his arguments. The reader is able to clearly comprehend the authors arguments as presented in the article. The topic is how valuation of big tech companies can be made easier. The author states that valuation of companies with a financial structure that consists of huge operating assets and a small portion of it being liabilities being difficult to be valued.As the title of the article suggests, businesses with big profits and few debts should be easy to value but the fact is that they are not. This statement may sound odd but the author suggests that valuers encounter a big challenge when valuing businesses that are cash rich as compared to businesses that have a higher proportion of debt and fewer assets( Hitchner, 2017). No specific hypothesis has been put forward but the author purpose is to show that big businesses with a big proportion of assets and fewer liabilities pose a great challenge when being valued.The author begins with an argument that there is a big challenge in valuing companies that have too much cash ( operating assets) and little debt in their capital structure. In many companies especially those in the manufacturing sector, the companies have a large pool of operating assets and equity and debt being part of the liabilities(Ammann, 2013). However, the author argues that in these companies financial apparatus would be comprised of a large portion of debt. One argument that the author brings out is that for a cash rich company is that they have large financial assets which is cash but actually are portfolios of various assets and bonds. The authors continues to argue that the financial structure of cash rich companies is different from the typical manufacturing companies hence applying conventional formulas when valuing the cash rich companies would feel uncomfortable. He argues that the reason why applying conventional formulas in valuing these companies is that they would not be able to know the risk characteristics of their operating assets(Bernstrom, 2014). The author should have put more emphisies on the methods that have been used in valuing of these companies and have proved to be complex when being used in valuing these companies. The authors discusion is relevant as to the topic as he puts across the reasons why valuers can find it hard to value cash rich companies( Hitchner, 2017). However, the author has underemphasized the methods of valuation that may be used and the article says so little on the methods which had been used to qualify the statement that it is hard for cash rich companies to be valued(Ammann, 2013). The author should have given some method that were used since valuation does not always have to be done in one way, there are different types of methods that can be used if one does not want to use the financial structure of the company. One such method is known as comparable analysis also known as peer group analysis( Mard, Hitchner, Hyde, 2010). This is where you compare the current value of a business with its peers by looking at trading multiples such as EV/EBITDA, P/E or other ratios. This area should have been expanded on the article to give the reader a comprehensive understanding on how he came up with such a statement. Another argument that the writer propagates is that most of the cash rich companies are tech companies. This is an assumption because there are companies that are in manufacturing and other industries that are cash rich in terms of operating assets. The writer argues that tech giants buy a lot of government bonds and has the assumption that the tech giants only invest in risk free assets such as the government bonds(Shapiro, Modern Methods of Valuation, 2012). What makes matters more complicated when valuing the tech giants is that these companies have ventured well beyond riskless government bonds in terms of asset allocation. The authors argues that a company with $20 billion in government bonds would bring difficulties when being valued because it would not be clear what the company would be intending to do with that bond pile and cash(Hennessy, 2017). This statement can be challenged because in every valuation there is a discount factor that is used to know how much cash the company could have generated if the company invested the money in a certain project for a given time(Shapiro Sams, Modern Methods of Valuation, 2013).A good method for valuing the company when faced by a problem of investing the cash into a project is the Discounted Cash Flow analysis where analysis is carried out by calculating the free cash flow into the future and discount it back to todays at the companys weighted average cost of capital(WACC)( Mard, Hitchner, Hyde, 2010). Conclusion In many ways the article fail to convince the reader that it is not possible to value cash risk companies and especially for those who are conversant with corporate and business finance. There are holes that can be poked in so many of his arguments especially if the reader is conversant with the various methods of valuations that we have studied in this course. However, the author has remained objective to the topic of discussion and brought about arguments that enables a reader to remain focused on the topic. References Hitchner, J. R. (2017). Financial Valuation Workbook: Step-by-Step Exercises and Tests to Help You Master Financial Valuation. London: Wiley. Hood, P., Lee, T. R. (2011). A Reviewer's Handbook to Business Valuation: Practical Guidance to the Use and Abuse of a Business Appraisal. New York: John Wiley Sons. Mard, M. J., Hitchner, J., Hyde, S. D. ( 2010). Valuation for Financial Reporting: Fair Value, Business Combinations, Intangible Assets, Goodwill, and Impairment Analysis. Detroit: John Wiley Sons. Ammann, M. ( 2013). Credit Risk Valuation: Methods, Models, and Applications. Chicago: Springer Science Business Media. Bernstrom, S. (2014). Valuation: The Market Approach. Chicago: Wiley. Hennessy, C. (2017, November 8). Why is it so hard to value cash-rich companies? London Business School Review . Shapiro, E. (2012). Modern Methods of Valuation. Bristol: Taylor Francis. Shapiro, E., Sams, G. (2013). Modern Methods of Valuation. London: Routledge.