Corporate Valuation Methods in the XXI century

From my point of view, the world and the ways in which people communicate, interact, live and so on have changed so much, that the ways in which we have traditionally valued corporations and businesses have to change, for they are no longer valid.

Whilst its true that finances thus numbers thus facts probably are the soundest way to measure the "tangibility" of wealth creation, money etc, its no less true that these methods of valuation have, at least, two basic failures given the current state of affairs, in their methodology and approach, which, in my humble opinion render them useless in the XXI Century. These failures can be resumed briefly in; 1) the lack of predictability, 2) lack of intangibility measurements.

1.- Lack of predictability.

Every forecast in itself is a formal prostitution of the perception of future events in the way in which no one is able to predict what is going to happen with any degree of certainty except for basic things such as the sun rising tomorrow, etc... In this sense, its an error to base a metric system on the probability of future events basically because of the fact that the biggest chance of something happening, always goes to that which we can't forecast, therefore making any forecast useless. I do understand that the system upon which finances, world trade, stock investments, bond trade, and in general any sort of financial interaction and/or exercise is based, relies upon the capacity of certain individuals/institutions to compile information and generate reports on the future behaviour of certain elements, such as prices, inflation, consumption and so forth, but its an uncontestable fact that all these individuals and institutions by default, year after year, fail to come even near to a result close to reality, and in spite of this, people, investors, governments etc, yet still rely on the opinions of those which systematically fail to generate credible figures. Now, that leads to a situation in which we have to deploy our moneys following generally accepted systemically failing forecasts, which from my point of view is an absolute disaster, but why does this happen?

I believe that, being the whole world interconnected and having so many individuals access to very large pools of information, only increases the number of actors that can affect the outcome of any prediction. Whilst its true that the larger the universe to be measured the more accurate the median of the behaviours, the system fails to account for some individuals' actions accounting far more than others. In this sense, the multiplicity of the events which derive from the uniqueness of every individual, and the subsequent impact in how they affect the others and the system itself, given the increasing interaction amongst them, within an established system, derives in the generation of so many parameters affecting the behaviour of the system itself that any way to measure the system's future behaviour is by default useless. Therefore, the measurement of the value of a company, activity or whatever can't depend upon the capacity to forecast what will happen, but on the level and depth of interconnection of the actors which directly affect the system.

Thus, how can we value a corporation in the future if we have no idea whatsoever about the parameters that are the pillars upon which any forecasting system is made? Lets not forget that a valuation, roughly speaking, is the prediction of what will happen tomorrow based upon a framework of hypothesys, such as CPI, prices, etc... based on past performance and discounted at a rate based both on current measures and future forecasts. Therefore, its just taking some variables and making them work together as if all of them were solid truths, when none of them in fact are, furthermore, it tends to establish a present value of a future uncertainty which will almost for sure not be fulfilled. Doesn't conceptually work, does it? :)

2.-  Lack of intangibility measurement

There is a second very dark pitfall in all these things and valuations, forecasts etc... Given the fact that in a world where the best marketing campaign is self endorsement, whereby an individual, based upon the relevancy his opinion may have for those with whom he communicates, as well as the perception of one product versus another, I remark, the perception, not actually the real performance of the product itself, and that perceptions are personalised in brands, the actual measuring of the strength of a brand fails to account for its true value, which should be directly related not to how much product or how many services can be sold, but for the level of interactivity it generates pivoting upon itself. This is, its impossible to measure the capacity to prescribe or endorse something, for the perception of the endorsement lever - the brand- will depend and vary according to what individual uses it in an interacting context, in what level of discussion and the ascendency the message "generator" has upon the receiving end of the the discussion.

What I explain in the previous paragraph is little by little shown by reality, although no one has come up with a market-accepted system which will bring the true value of brands to an accounting reality. Trying to illustrate this statement, I will use a current example.

The Armani brand, has just hired Vicky Posh Beckham to endorse its line of underwear for some €25m in a several years contract. This is all very good, but I can bet my fortune (F=€0 :) that the Armani people have no idea whatsoever how the larger exposure of their brand derived from the contract is going to be monnetised in terms of increase in the overall sales figure, profit, products sold, etc... but they, being marketing oriented people are very well aware of the fact that their campaign is something which is going to be talked about in television shows all over the world, internet, printed media, etc... but, how can one measure that impact in what it pertains a higher value of the brand due to its validity and relevance? and, how can that relevance be meassured if it partially depends upon who emits a statement, not so much about the numbers of statements emitted?

Believeing in the above, I think some sort of system whereby the number of times a brand is mentioned within a relevant context, times the relevancy and the ascendancy of the statement generator with regards to the audience, should be taken into account in order to come up with a truer value of a brand, which, at the end of the day, for many, if not for all sectors, is one of the pivoting assets of their balance sheets.

Anyhow, intangible assets relating to a particular activity, organisation etc... are not limited to brands, but to what level of importance those intangibles have in our everyday life, thus how present they are in our "pyramid" of natural interaction. For exmaple, for someone working in the fashion industry the fact that Armani has hired VB is important, whilst for me, I honestly don't give a damn, but ultimately, I also buy Armani stuff. In the thread and weaving of all these interactions and back and forth levels of communication between friends, colleagues, peers, audience, etc... lies the real importance of the recognition of a name, colour, logo, tune or whatever, and not in the ammount of investment accounted for in any company`s books.

From my point of view, the above only comes to show that in the modern world, where we're assaulted and inmersed in hyperinteractivity and an unprecedented free flow of information, we need to adjust the method by which we value things in a way that properly reflects how we perceive it, and not how some try to quantify it!