School of Management Blekinge Institute of Technology
VALUING COMPANIES IN EMERGING MARKETSTHE CASE OF NIGERIA
Jaunty Edobor, AIDAMENBOR
Supervisor: Anders Hederstierna
Thesis for the Master’s degree in Business Administration Spring 2008
ABSTRACT Valuing companies in emerging markets: The case of Nigeria Jaunty Edobor Aidamenbor and Chika Mgbemena Anders Hederstierna
Title: Author: Supervisor:
Department: School of Management, Blekinge Institute of Technology Course: Master’s thesis in business administration, FE 2413, 15 credits (ECTS).
Background and Problem Discussion: Nigeria as an emerging market offers a wealth of opportunity to investors. However, very little is known about how real managers and analysts appraise the economic value of acquisitions and investment projects in Nigeria. Given the high risks of the Nigerian market and increased interests of investors in emerging markets, it is of great importance to research how practitioners carry out valuation in Nigeria. Purpose: This research attempts to investigate the valuation methods employed by finance managers, investors and financial advisors in Nigeria in comparison with best practices recommended in literature. Method: Quantitative empirical method using a questionnaire-based survey of financial practitioners with a total of 30 respondents (out of 200 contacted) from corporations, financial advisor/analyst firms, banks & insurance firms and some individual investors. Theory: The theory section in the literature review looks at different methods and techniques of valuation and the adjustments used to apply them to emerging markets. The common methods of valuation and a theoretical understanding of how they apply to emerging markets are summarised. Analysis: Quantitative analysis of the survey data to show the percentage of practitioners using a particular method of valuation and the areas of highest uncertainty has been carried out. Conclusion: Results show that Discounted Cashflow (DCF) is the most popular valuation method with practitioners in Nigeria. 100% of practitioners in corporations, banks and insurance firms and 80% of those in financial advisor firms use DCF-based valuation model. Other valuation models are less in use and the general practice in Nigeria compares well with those in Argentina and the US with little variations. This study also reveals that country specific issues such as computing the value of the country and market risk premiums are the most controversial areas in company valuation with practitioners in the Nigerian emerging market.
ACKNOWLEDGEMENT We are grateful to God for the completion of this rigorous and quite tasking MBA programme. We wish to acknowledge the contributions of our families, friends and classmates throughout the period of the MBA programme and especially during this research work. We are grateful to our supervisor, Anders Hederstierna, for all of his support, guidance and kind responses to all of our requests and especially for believing in us and this work. We are grateful to Klaus Solberg Söilen for the guidance provided on this work – especially the video lectures. We are grateful to Vernimmen P. for his newsletters transmitted to us electronically. Thanks to all the participants who responded to our survey and interviews and to Chioma Owotor and Williams Bassey for helping with the ground work done in Nigeria and in collecting our questionnaires. We are grateful to Leah Okenwa for helping to read this entire work and for her very useful suggestions. They were indispensable. It will be a crime to forget Chikanayo’s husband, Henry Mgbemena who had been very supportive of this work. We are indeed very grateful. Jaunty and Chika, June 2008
TABLE OF CONTENTS CHAPTER ONE ......................................................................................................................1 1.0 1.1 1.2 1.3 1.4...
Standard and Poor’s (2002)
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