The Covid-19 pandemic has uprooted virtually all aspects of life as we knew it–in an economic, political, and social sense. As people and businesses struggle to navigate this trying time, it can oftentimes be useful to reflect and establish some semblance of normalcy to mirror life before the pandemic. For instance, how should firms approach their valuation methods, all things considered? Although it is impossible to come up with a plan that works for every merger and acquisition taking place now, evaluating several different options can take some burdens away and allow for the formation of a clear cut path.
Typically, valuation deals only take into account events that occurred prior to the making of the deal. The pandemic was announced in early 2020, so valuation deals made before December 31st, 2019 are, strictly speaking, immune to the consequences of Covid-19. A gray area arises for deals made in early 2020, when there was still limited information available about the extent of the effects of the virus and what would ensue. Ultimately, however, it is up to both parties to decide whether their valuation methods will include considerations for Covid’s trajectory path.
There are several valuation methods to consider, each with their own advantages and disadvantages, particularly in this time. For example, a Discounted Cash Flow may be the most appropriate valuation method, all things considered. This type of method involves making a decision on the value of the company today, based on future projections of income and growth, typically over a set period of time. With the disruptions that Covid-19 has created, the DCF method will allow for the valuator to account for each year individually as things slowly return back to “normal”. Other methods, such as those that look to the prices in the market in an attempt to make a sensible valuation, need to take into account the vastly different market brought on by the pandemic.