Valuation Challenges in High Tech Platform Based Corporations
Purpose: This paper explores the practical issues of information asymmetry as it pertains to the methods of valuation of high-tech platform-based corporations. The paper touches upon the theoretical discussion of the issues of asymmetry and valuation techniques and summarizes some of the published literary work on these issues, without engaging in an in-depth discussion. Design/Methodology/Approach: The methodology consists of an analysis and comparison/ contrast between supply, demand platform companies ((SDPs) with industry incumbents on: capital structure, weighted average cost of capital (WACC), working capital and liquidity management, and enterprise risk structure and management strategy as they pertain to discounted cash flows and multiples valuation techniques. Tables showcasing various types of financial data such as: assets and liabilities, equity, market capitalization, debt to equity and current ratios are utilized in making the comparisons and drawings conclusions Findings: The research shows that the peculiar and complicated structure, the ability to raise funds, the initial high profit margins and the explosive growth rates of companies such as: WeCo, Uber, B2B, Netflix and others, lead to overvaluation when the traditional valuation models are utilized. Practical implementations: The study concludes by recommending alternative valuation models that utilize some of the specific findings of previous researchers on assessing terminal value, estimating cost of capital, and capital expenditures to address some of the peculiarities of the SDPs and adding to the rubrics and scorecards to account for non-financial factors such as switching costs, brand recognition and other intangibles. The inclusion of these would lead to an improved valuation of these types of companies and reduce the overall risk exposure of financial intermediaries that provide funding Originality value: The audience for this type of research are: financial advisors, stock analysts and investors who appreciate the challenges that information asymmetry and uncertainty present in their efforts to correctly value stock and IPOs in this high-tech subsector.