Family business valuation in emerging economies: the arcor case
Publication date: 14 December 2021
Abstract
Learning outcomes
This case can be used to help students achieve the following objectives: To project financial statements and assemble different pieces of financial information to create a valuation model (objective #1, create), To calculate a value for Arcor shares, supporting the estimated value with the chosen assumptions and methodologies (objective #2, evaluate), To draw connections between four different approaches to valuation (DCF, EVA, RV and VI), contrasting them and weighting their advantages and limitations (objective #3, analyze), To examine the relationship between forecasted financial statements and valuation (objective #3, analyze), To discuss the calculation of the Weighted Average Cost of Capital in a new situation as is an emerging economy, with the corresponding country-risk adjustment (objective #4, apply), To discuss the sources of value creation in a family-owned private company in a developing economy (objective #4, apply), To understand the dilemma that the head of a company was facing, identifying the three possible financing alternatives discussed in the text as follows: corporate bonds, earnings reinvestment and an IPO (objective #5, understand). To recall basic facts, as the main character’s opinion on the direction of the local economy or the fact that Arcor already complies with the information requirements of a public company (objective #7, remember).
Case overview/synopsis
This case is based on the valuation of the world’s largest candy maker, Arcor S.A.I.C., originally a Latin American company, which remains a private family business. The key problem presented by the case is the use of different valuation approaches to price Arcor shares, in view of a possible Initial Public Offer. The case illustrates the application of four main valuation approaches as follows: Discounted Cash Flow (DCF), Economic Value Added (EVA), Relative Valuation (RV) and Value Investing (VI). Additionally, it includes a fundamental analysis of eight years of historical financial information and the preparation of forecasted financial statements. Set in a developing economy, the Arcor case introduces the complexities of calculating the cost of capital with the inclusion of country risk, as well as the financial analysis distortions caused by an environment of high inflation.
Complexity academic level
The Arcor case is appropriate to be used in graduate courses of Corporate Finance, Valuation or Private Equity.
Supplementary materials
Teaching notes are available for educators only.
Subject code
CSS 1: Accounting and Finance.
Keywords
Acknowledgements
Disclaimer. This case is written solely for educational purposes and is not intended to represent successful or unsuccessful managerial decision-making. The authors may have disguised names; financial and other recognisable information to protect confidentiality. The information presented in this case was obtained solely from public sources, on or prior to August 14, 2020. The author would like to acknowledge the endless encouragement and support received from Francisco Marroquin University, in particular from the Dean of the Business School Dr Helmuth Chavez, as well as helpful suggestions and comments from Dr Szabolcs Blazsek. This work was presented at the Family Business in the Arab World Conference in partnership with the STEP Project for Family Enterprising on the 5th of November 2020, receiving valuable feedback.
Citation
Roca, F. (2021), "Family business valuation in emerging economies: the arcor case", , Vol. 11 No. 4. https://doi.org/10.1108/EEMCS-02-2021-0057
Publisher
:Emerald Publishing Limited
Copyright © 2021, Emerald Publishing Limited