What’s it worth?
In this whirlwind climate of concentration, relocation and trepidation, a question that I’m getting asked a lot is “What’s it worth?” For “it,” read “my channels,” “my towers,” “my business,” bands of spectrum auctioned by the FCC and more. It’s a question with which people wrestle with increasing frequency as operators try to decide their next moves.
Some folks are doing estate planning and want a valuation to decide what to do with a lifetime of amassed assets. Then there are those who are trying to decide whether to sell out or keep going. Other people are trying to get financing for expansion, leveraging current assets for new ones. Whatever the reason, the question is a tough one, but it is approachable.
The problem most operators have is that few people do telecommunications valuations, except those who prepare those mysterious numbers that appear on 10Q reports for publicly traded companies. If you give a large accounting firm enough money, it will find a numerical method for valuing everything. Whether that number has any basis in reality . well, let’s just say that some of the greatest works of fiction can be found on balance sheets.
But because I was getting asked the question by a lot of my clients, I figured that I had better find a way to answer. So, I turned to Michael O’Doherty for guidance. Mike is a CPA. Mike is my CPA. Mike likes reading the tax code. Mike likes doing tax returns. Mike is a very, very dull man. Nice and helpful, but dull.
He explained (I’ll give you the shortened version because the actual conversation lasted longer than Steve Forbes trying to explain why he should be president) that a valuation is an opinion, based on a reasonable methodology, gathered facts and good math, that arrives at a number on which people might rely for some purposes. He also pointed out that the person doing the valuation should have some clue as to what he is talking about.
I spent many hours with Mike learning about discounted returns on investment, book value vs. good will, and a bunch of other stuff of which only the conversationally challenged speak. (If the FBI had done a CALEA tap on our telephone conversations, there would be some federal agents out there who would have been so bored that they probably quit the service and became toll takers.)
Having made this learning sacrifice, I was now prepared to perform valuations for my clients. With my sturdy calculator and lexicon of accounting mumbo (not to mention jumbo), I performed my first valuation about eight years ago. Since then, I’ve done about 200 of them, putting a dollar value on towers, paging channels, whole businesses, SMR channels, microwave systems and more. Clients received my opinion about what a particular group of telecommunications assets were worth. But, what did I discover?
First, I found out why Mike is so dull. The work is mind-numbing. Second, I found out that most people ask the question for the same reason that many people count their chips at the blackjack table. They want some inkling about their economic status. The old, “how’m I doin'” syndrome. Let’s face it. After 20 years in the business, people want to know if they’re getting ahead and, if so, by how much.
What is surprising to many people is that some things that they consider valuable assets aren’t all that valuable, and other things that are quite precious are given a shrug by some operators. Here are some examples that might help you decide your next business investment: *Spectrum – Spectrum always has some value because it represents inventory of opportunity, competitive advantage and time (as in the time it takes to duplicate the license). Exclusive spectrum is worth more. Broadband is worth more than narrowband. Spectrum lying between 150MHz and 1,000MHz is the best, with PCS coming in a close second. *Revenue – Wonderful stuff, this “money.” With it you can pay bills, make profit and produce a return on investment. It’s also a sign of success: that you have made something out of an opportunity by creating sales. It creates cash flow against which multiples for determining value can be applied. My advice: Make a lot of this, and you will never be disappointed with a valuation. *Equipment – OK, you need this to use the spectrum and to make the dough. But, I have to tell you, it doesn’t mean much in a telecommunications valuation as compared to other stuff. Why? Because today’s wonder box is tomorrow’s obsolete tinker toy. *Location – I’ll take urban over rural most of the time, but not always. You might be surprised at the profit margin made by plenty of rural businesses. *Towers – A separate subject, but a hot market item right now. These should be valued separately from the remainder of the telecommunications business, applying different values for different situations such as a tower company vs. an operator who owns towers. *Contracts – Deals have value, particularly when they are written down. The opportunity reflected in an agreement or series of agreements is often quite valuable.
These are some of the assets that are valued regularly throughout our industry. In combination, the assets are a vital, working, ongoing business for which a financial snapshot may be appropriate to serve the needs of the owner. For example, is it a good time to sell, expand or stand pat?
Businesses, sets of assets and situations are each different. A channel in one part of the country may be worth more or less than a comparable channel in another. Assets are worth more to some buyers than others. The multiples applied to cash flow also vary among industry segments.
Which leads us back to the original question: What is it worth? Why do you want to know? The answer to this second question is as important to the valuation task as any other. If the valuation is performed for tax purposes, it might apply different (albeit legitimate) methods than a valuation for sale, purchase, estate planning or financing. The issue is who will rely on the valuation, and does that entity normally expect a highly conservative or highly optimistic approach?
There’s a line from Kenny Rogers’ song “The Gambler” that says “You never count your money while you’re sitting at the table.” Frankly, that’s bull. Ask any gambler about effective use of chips, table stakes and manipulation of antes vs. folds, consideration of betting units and . well, that’s another column. Hey, does anyone want to play poker at the next IWCE in Vegas?