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Chapter 9. Valuation of Companies > Value to Investors or Strategic Investors a...

Value to Investors or Strategic Investors and Buyers

Introduction

Financial investors value a firm based on the direct cash flows arising from the investment (e.g., in the form of dividends and capital gains). Strategic investors are those who derive additional expected cash flows from the investment in the firm (for example, the products of the firm can enhance their own product offerings marketability), or investors whose investment brings additional value to the firm (in terms of reputation, sales capabilities, etc.). Companies are typically worth more to strategic investors than to financial investors. On the other hand, the value of one investor to the company may be higher than the value of another investor. Therefore, although the company's value to a particular investor may be higher, the company may agree to an investment by another investor according to a low value since such investor is expected to better enhance the company's value than other investors. The company must always remember that its goal is to raise its value over the long run and not in any specific round of investment. The reasons for a company's being worth more to some strategic investors than to financial investors are varied—starting with the fact that the company's customer base could be better exposed to sales of other products by the strategic investor and ending with the possibility that the products developed by the company in which the investment is made will fit into the mosaic of products manufactured and offered by the strategic investor to its own customers.

Let us assume, for instance, that Radio Ltd. has developed an algorithm for compressing vocal information which makes it possible to broadcast to a thousand listeners at a bandwidth required by other technologies for broadcasting to a single listener. The value of the company will naturally be derived from the fact that it opens up possibilities to save substantially on broadcasting costs and to expand the station's audience without changing its infrastructure. However, obviously such or another type of cooperation with one or more Internet radio station infrastructure suppliers will raise the company's value considerably, since it will enable an integration of the product into the products of the infrastructure manufacturer.


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