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The Valuation of Distressed Companies - A Conceptual Framework, Part II

Crystal, M; Mokal, R; (2006) The Valuation of Distressed Companies - A Conceptual Framework, Part II. International Corporate Rescue , 3 (3) 123 - 131.

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Abstract

The first part of this article, published in the previous issue of this journal, identified the bases on which a company’s business might be valued. Drawing upon economic theory, empirical evidence, and the sophisticated principles evolved by US courts with long experience of dealing with such issues, it explained the circumstances in which one or other of these bases might appropriately be adopted. The onset of corporate distress creates unique additional problems in attempting business valuations, whether carried out in a court context or out of court. Focusing particularly on the incentives of those interested in the outcome of reorganisation proceedings, the article sought in its first part to distinguish between the ‘structural’ and the ‘strategic’ factors giving rise to these problems, and explained how these might impact upon the valuation process. It drew on the US jurisprudence on business valuation to outline three methods for putting a value on a ‘going concern’. It was submitted that the principles developed by US courts will prove helpful and persuasive as UK courts grapple more and more frequently with valuation issues. The question of the basis on which to value a company subject to a proposed reorganisation has recently come before the English courts. In the light of the discussion in the first part of this article, the way in which the matter was dealt with is an eye-opener. The remainder of this article uses In re MyTravel Group Plc, as a case study to demonstrate the nature of the concepts and the operation of the principles elucidated thus far.

Type:Article
Title:The Valuation of Distressed Companies - A Conceptual Framework, Part II
Keywords:Motivation costs, coordination costs, goving concern value, liquidation value, enterprise value, market value, economic distress, financial distress, fire-sale, adverse selection, large-block stock transactions, market comparison approach, comparable company approach, discounted cash flow approach
UCL classification:UCL > School of Arts and Social Sciences > Faculty of Laws

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