Traps, Pitfalls and Snares in the Valuation of Technology

Abstract

OVERVIEW:In a world where financial wizards are seeking to maximize value for shareholders through corporate restructuring, mergers, acquisitions, and spin-offs, there is no escaping the question of how one values technology. The consequences of mis-valuing it, however, can be unfortunate. This article introduces the prevailing free cash flow method for valuation and the significant pitfalls that can occur in misuse of hurdle rates or miscalculating horizon value. It is equally important to recognize that much of the value of R&D is embedded in options, whether these are simple options to terminate the project, or broad options to pursue a range of technology-based opportunities. Properly applied, discounted cash flow (DCF) analysis can be an ally, rather than the nemesis, of innovation.