Despite the unsettled stock market this year, following on the heels of the Oct. 19, 1987, crash, the average business is worth as much today as it was last year, maybe even more.
That's the assessment of American Appraisal Associates (AAA), a Milwaukee-based firm that appraises the value of businesses worldwide.Businesses sold today are commanding record high premiums even with lower stock prices," said P. Michael Kelly, AAA vice president. "When you add premiums to stock prices, you see that, in many cases, companies may actually be worth more today" than they were before Black Monday a year ago.
A typical manufacturing company trading at $35 per common share on Oct. 16, 1987, may have dropped to $28 following the crash. Today, said Kelly, it would probably have rebounded to $33 per share, based on average changes in the Dow Jones Industrial Averages.
During the same period, the premiums that buyers paid to acquire manufacturing companies rose from 33 percent to 55 percent. The median premium over market for all industries doubled from 26 percent to 53 percent, according to a mergers and acquisitions study by AAA.
"While this is a hypothetical case," said Kelly, "it illustrates that there is a certain intrinsic and sustaining value in businesses that can weather the volatility of the stock market."
Because companies are commanding higher premiums today than a year ago, their value in the marketplace has actually been increased despite declines in stock prices, he said. Kelly said AAA expects the second half of 1988 to show that buyers of businesses continued paying higher premiums than last year. "But we anticipate medians in the high 30s to 40s" percent, he said.
The historically high premiums that have been paid for acquisitions since Black Monday have been fueled by a number of factors, he said:
- The perception that companies could be purchased for reasonable or even bargain prices brought corporate buyers back into the marketplace during the first part of the year. Target companies that might not have been considered a year ago, looked attractive at post-crash stock prices.
- A record number of transactions after the crash were involved in bidding wars. Some 38 percent of the target companies in the study were put into play by a suitor other than the acquirer. The winning bids were an average 37 percent higher than the first prospective buyer's offers. This compares to 12 percent of 1987 transactions that involved third parties. They paid an average of 17 percent over the original offer price.