As the economies of the world globalize and capital becomes more mobile, valuation is gaining importance in emerging markets—for privatization, joint ventures, mergers and acquisitions, restructuring, and just for the basic task of running businesses to create value. Yet valuation is much more difficult in these environments because buyers and sellers face greater risks and obstacles than they do in developed markets.
In recent years, nowhere have those risks and obstacles been more serious than in the emerging markets of East Asia. The Asian financial crisis, which began in August 1997, weakened a mass of companies and banks and led to a surge in M&A activity, giving valuation practitioners a good chance to test their skills. In Indonesia, Malaysia, the Philippines, South Korea, and Thailand—the hardest-hit Asian economies—cross-border majority-owned M&A reached an annual average value of $12 billion in both 1998 and 1999, compared with $1 billion annually from 1994 to 1996.1
Yet little agreement has emerged among academics, investment bankers, and industry practitioners about how to conduct valuations in emerging markets. Methods not only vary but also often involve making arbitrary adjustments based on gut feel and limited empirical evidence. Our preferred approach is to use discounted...