Deloitte SA Blog

In 2012, the Economist Intelligence Unit ranked the competitiveness of global cities according to their demonstrated ability to attract capital, business, talent and visitors. In this index Johannesburg occupied the 67th most competitive position out of 120 global cities. While this ranking is not construed as undesirable by any means, as South African cities rank as some of the most competitive in Africa, it could be improved upon from a global stand point.

 Infrastructure, economic growth, improved education, job creation and skills development have all been identified as key focus areas in Government’s National Development Plan 2030. In terms of this plan funding is seen as a key economic enabler. Infrastructure development is intrinsically linked to improving the competitiveness of cities and countries. It enables greater local and international trade, distribution and integration as well as improving the quality of life of its citizens and thereby attracting better qualified and more productive professionals and employees. Having effective, efficient, extensive and well maintained infrastructure contributes to socio-economic development and growth.

Download the full article here, on Partnering for Growth

If you have any questions or require a more detailed discussion, contact Mgcinisihlalo Jordan (Partner – Deloitte South Africa) at mgjordan@deloitte.co.za

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Inadequate infrastructure remains a major obstacle towards Africa achieving its full economic growth potential. With Africa seen as one of the world’s fastest growing economic hubs, meeting the demand for key infrastructure has been identified as a priority. This translates into exciting opportunities for global investors who need to look past the traditional Western view of Africa as a homogeneous block, and undertake the detailed research required to understand the nuances and unique opportunities of each region and each individual country.

This detailed piece of thought leadership looks at the importance of adequate infrastructure within Africa, as it is crucial to long-term growth, backlogs as an opportunity, funding, Public-Private Partnerships (PPP) and Deloitte’s involvement in infrastructure development.

Read the full article . . . . Addressing Africa’s Infrastructure Challenges

Would you like more information or do you require a more detailed discussion? Andre Pottas, Corporate Finance Advisory Leader for sub-Saharan Africa, would love to hear from you! André may be contacted at apottas@deloitte.co.za

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The corporate world is currently debating the Protection of Personal Information Bill (PPI) which will soon be promulgated. Much of this debate centres on how onerous the minimum requirements for compliance will be, how long organisations will be given to comply and what the cost implications are likely to be.

Want to learn more about the Protection of Personal Information Bill? Visit the Deloitte Protection of Personal Information Bill website or contact Dean Chivers at dechivers@deloitte.co.za or Daniella Kafouris at dkafouris@deloitte.co.za.

Some companies have chosen to take a ‘wait and see’ approach. “Those companies that see regulatory changes as an opportunity for increasing business value adopt a more positive, proactive approach and also spend considerably less in achieving compliance over the long term,” comments Dean Chivers, Director Deloitte Legal, at Deloitte. “They are able to link compliance requirements to the entire value chain of the business so that each functional area buys into its importance, realises the value that can be delivered to the business and collectively bring about change to realise this value.”

Chivers cautions that companies should implement PPI compliance as prudently as possible. “Be realistic – your organisation may not be completely compliant by the time the Act is promulgated. PPI is not exclusively an IT or legal or a process or a security issue, it’s a combination of all of these. Create the framework within which PPI will be managed within your organisation, and then build awareness amongst staff around both PPI and your entities PPI compliance framework. This will start to drive PPI issues into your framework, thereby facilitating a proactive, self-regulating model.

Chivers recommends that a response strategy be established, with the responsible person being one who understands what the law requires.

“Decide on your corporate ethics policy and define and communicate it, teaching your organisation to look out for problems,” says Chivers. “If and when a problem arises, react quickly and correctly to deal with it and close the loophole. Look for triggers that indicate your processes are not working properly.”

According to Chivers, the PPI Bill will be the catalyst for companies to add value while achieving compliance. They should engage with their customers in the process and use it as an opportunity to build customer trust in the company by highlighting the company’s efforts to treat customer’s personal information with respect and confidentiality.

The following are just some of many opportunities:

There is tremendous advantage to be gained from proactively engaging customers ahead of promulgation, for example:

• Positive customer approvals are more likely to be obtained prior to promulgation and prior to the market being flooded with requests
• Valuable insights can be obtained from a company’s existing customer database now, ahead of customer requests for data deletion.
• Customers will become aware of the fact that PPI  will result in the protection of their personal information, something most  people will appreciate.
• Companies who lead the market in becoming PPI  compliant will gain customer respect and loyalty.

PPI can also deliver many potential positives within a company, to name a few:

• Technology gets the budget go-ahead for  middleware and data warehouses, new SAP modules, data security upgrades, etc, which  add value when linked to the overall business strategy.
• Data analysis of personal information for  purposes of PPI compliance can yield significant useful information around  customers and markets.
• Provides positive motivation to interface with  customers, alumni, potential employees, personal networks.
• Employee files get updated and remain up-to-date.
• Contracts are reviewed and updated and may even  be better than before.

Chivers recommends that the initial step should be a quick  start process prior to promulgation, followed by detailed design and implementation of value-adding initiatives. This will allow the company to gain  momentum and build a platform for future opportunities. Firstly, understand the  extent of PPI impact on customer and channel strategy, brand positioning and  employee proposition; determine possible impacts on people, processes,  technology and systems; and define key data requirements for business  sustainability.

Thereafter, look at the following opportunities:

• Identify value-adds beyond minimum compliance
• Design customer interactions to increase market share
• Realign processes for a more customer focused organisation
• Link to other initiatives such as process streamlining, productivity improvement and employee communication
• Select technology to support more than just data integration, e.g. non-intrusive technology options ranging from cloud technology, to separate software and simple upgrades
• Build the customer focused organisation by digging deeper into existing customer data
• Use an approach that first establishes the organisational needs and gaps before moving to an ‘all ends at once’ implementation
• Adopt a ‘build to last’ approach for ongoing organisational sustainability

In summary, organisations can gain measurable business performance improvements by approaching the Protection of Personal Information Bill as a strategic opportunity rather than an onerous compliance cost. Realising this potential value from the Bill, however, requires a shift in organisational mindset.

“Don’t be limited or restricted by your existing database,” says Chivers. “Use it as a contact list and first cut segmentation, design a meaningful database for future strategy and populate it by means of an automated permission campaign; don’t be restricted to a single tool or methodology – select those which are most appropriate for your needs; ensure your approach is strategic. Include change management in your implementation; don’t be purely focused on data analytics, ensure that your approach is aligned to your business priorities as well as people, process, technology and system enablers.

Chivers goes on to say “Understand how PPI affects your IT, legal, process and security options before jumping on the analysis bandwagon. Analyse the options and consider the best process for your company. There are a number of options, so give yourself the best chance of adopting the most appropriate one for your company.”

Want to learn more about the Protection of Personal Information Bill? Visit the Deloitte Protection of Personal Information Bill website or contact Dean Chivers at dechivers@deloitte.co.za or Daniella Kafouris at dkafouris@deloitte.co.za.

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2012 looks promising: The results of the second private equity confidence survey indicate that there is an increased appetite for investment in private equity ventures in East Africa. East Africa experienced a significant influx of private equity interest in 2011. New East Africa-focused funds are targeting high-growth small and medium enterprises in consumer-driven sectors. Investors have also begun to explore deals in new markets in Ethiopia, South Sudan and the Democratic Republic of Congo.

While investment sizes remain limited, several large deals were closed in 2011, and investors expect deal size to creep up over time. General partners with wider African mandates are also moving into the sub-region. These funds are active across infrastructure, real estate, health care, agribusiness and green energy, in addition to consumer-driven sectors. Venture capital (VC) funding is still scarce. However, Kenya has begun to stand out as an ICT hub, with help from technology incubators and increasing interest from local and international VC firms.

Many investors see East Africa’s strong growth potential as a driver of better investment performance than in South Africa: This is a huge shift in private equity attitudes toward Africa, which have been historically focused on South Africa. East African investment potential is seen as roughly on par with West Africa, where similar growth dynamics are at play.

Optimism brought about by positive changes in the East African private equity landscape has led to increased investor confidence. There is a dominant investment mood exhibited by GPs, and the survey indicates that the investment appetite is growing. As private equity enthusiasm continues to spread across Africa in 2012, East Africa will certainly be a hot spot to watch.

We trust that you will find this survey insightful and informative in your undertakings in East Africa.

Download the full report . . . .East Africa Private Equity Survey 2011

If you have any questions or require a more detailed conversation, contact Alexander van Schie, Director, Corporate Finance Services (Deloitte East Africa) at avanschie@deloitte.co.ke.

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Deloitte South Africa offers a unique view into the intricacies of the national budget with special focus on VAT, international tax, personal income tax, grants and incentives, carbon tax and energy as well as company tax to name a few. Please also have a look at the 2012 South African budget infographic as a snapshot into this year’s facts and figures.

Also download Deloitte’s Quick Tax Guide for a complete snapshot to keep as your own personal reference.

Budget 2012 Commentary

• Macroeconomic Forecasts
• Value-added tax
• Administrative Issues and Other Taxes
• International Tax
• Personal Income Tax
• Company Tax
• Grants and Incentives
• Customs and Excise
• Carbon Tax and Energy

Budget 2012 Infographic

Download the complete Deloitte Budget 2012 infographic here – Budget 2012 Infographic.

Budget 2012 Insomnia Index

Download the 2012 Budget Insomnia Index results here – Budget Insomnia Index

Introduction

Does a company’s decision regarding its dividend distributions have an impact on the value of its equity? In short, do dividends
matter?

Dividends are irrelevant

In terms of classic finance theory, a rational investor should be indifferent between receiving a cash dividend from a share, or having the company retain the cash and re-invest it at the weighted average cost of capital. In this way, a stock trading at 10/share cum dividend (meaning the dividend belongs to the buyer of the share and not the seller) would trade at R9/share ex dividend (meaning the dividend belongs to the seller of the share and not the buyer), once the R1/share dividend has been paid, and the investor would be equally happy holding the R10 share without the prospect of a dividend. This school of thought, known as the dividend irrelevance proposition, has strong theoretical backing in a world where taxes are ignored, securities are fairly priced, and the cost of issuing new stock is negligible. An investor is indifferent to receiving returns in the form of dividends, stock appreciation or a combination.

Dividends do matter

However, in practice, the relationship is not always so simple. Several asset managers have stated their preference for dividend paying shares, as it is often indicative of a company which is stable and has matured to the point where sufficient free cash flow is being generated to justify a cash distribution. Certain types of investors, such as pension funds, have a need for regular  distributions (to cover either administration costs or the monthly income needs of its clients, especially the elderly) and have a
preference for dividend paying stocks. The market often takes a dim view of companies which are sitting on large cash reserves, especially where management has neither a credible plan for the investment of the funds nor the intention to return the funds to shareholders. It is not uncommon for management teams in this position to squander excess cash resources on overpriced acquisitions, or ventures not related to the core business of the company.

Investors prefer a consistent (and preferably increasing) regular dividend pattern, and building up a good track record in this respect can help a company achieve confidence in the management team which translates into an increased share price. Indeed, accounting earnings can be manipulated but cash dividends are cash. The level of the dividend payout ratio would typically be determined after examining the stage of the company’s life cycle. Mature, established business would have far higher dividend payout ratios than start-up or fast growing companies (which may not pay dividends at all for several years).

In industries which are cyclical or in the event that an unusual gain is realised by the company which is unlikely to be repeated, it
makes sense to return the surplus funds to shareholders by manner of a special dividend. The occasional use of a special dividend allows the company to maintain a consistent regular dividend history, without sacrificing the flexibility of maintaining an optimal capital structure.

Several companies which had historically been consistent regular dividend payers and decided to forego or reduce such a dividend (BP and Anglo American come to mind), have seen their share price decline following such an announcement, not necessarily because of the cash retention but rather the signal sent to the market that senior management and the directors foresee difficult times ahead and are choosing to retain the cash. This uncertainty about the future translates into a weaker share price. Dividend policy may send a signal to the market which is more powerful than the actual amount of dividend paid (or withheld), because management and the directors are the ultimate company insiders. They have intimate knowledge about the company’s affairs, and are thus effectively communicating non-public information by their dividend decisions.

Total shareholder return

According to Standard & Poor’s, the dividend component was responsible for 44% of the total shareholder return of the last 80 years of the index. Our internal research reveals that, measured over a 10 year period on the JSE, the equivalent statistic is 36% in dividends.

Thus, to the investor, dividends constitute a significant portion of their investment return.

Conclusion

Empirical studies have not provided a conclusive link between dividend policy and valuation. The chief consideration in determining a suitable dividend payment policy should be the availability (or lack) of suitable reinvestment opportunities which have a positive net present value (NPV). If such opportunities exist, the company should reinvest its surplus funds into these projects, failing which the cash should be returned to shareholders by way of a dividend. As an alternative, a share buy-back could also be considered if the company’s shares appear undervalued.

Article compiled by Johann Rawlinson (Senior Manager at Deloitte Corporate Finance) and David McDuff (Partner at Deloitte Corporate Finance).

This article, authored by Duane Newman (lead director for Deloitte Tax Management Consulting), explains how  the R25 billion allocated by National Treasury will be used to support growth in South Africa. You may contact Duane at dnewman@deloitte.co.za

Click Here to access the original article published on MoneyWeb

Grants and incentives will be a national focus over the next six years

The Medium Term Budget Policy Statement (MTBPS) issued by Finance Minister Pravin Gordhan on 25 October 2011 announced that the Medium-Term Expenditure Framework (MTEF) will introduce an economic support package to encourage improvements in competitiveness and promote structural change within the South African economy.

Following the contraction of capital expenditure during the 2009 recession, private capital investment has started to revive, expanding at an annual rate of 4% during the second quarter of 2011. The growth is largely attributable to purchases of machinery and transport equipment. Despite the capital investment recovery, real investment during the second quarter of 2011, remained 8% below pre-recession peak levels.

In response to the slowdown in the global economy South African’s fiscal and monetary policy remains supportive of growth. The employment gains and poverty reduction that government aspires to achieve require structural reforms to set the economy on a different growth path that increases labour absorption, improves international competitiveness, ensures a more equitable distribution of wealth and a transition to a green economy.

To achieve these goals government will make R25 billion available over the next six years through various grants and incentives to assist enterprises, boost industrial development and accelerate job creation. 

The primary focus of the R25 billion grants and incentives fund is to facilitate investment that attracts employment intensive industry and services to South Africa.  The incentives will build on the current incentives on offer for industrial investment, technology and training. Current incentives have not achieved the jobs creation estimates as initially planned. In many instance less job opportunities have been created. Also the incentives have not been widely accessed. Incentives for IDZs will be improved. At the moment there are no real incentives for investing in an IDZ.  The goal is to develop the IDZs into competitive logistics hubs participating in global supply chains and entrenching South Africa as a crucial gateway for trade into Africa.   Also very important is the alignment of trade, investment and energy policies to support the transition to a green economy.  Policy coherence in this instance is required to successfully transition to a green economy. 

Government acknowledges that investment in economic infrastructure has to coincide with a more competitive labour market that supports higher economic growth.  Transforming the South African labour market can only be achieved through adequate job creation, training and community works projects. These objectives are being pursued by means of the recently launched Jobs Fund administrated by the Development Bank of Southern Africa. The Jobs Fund was established at the beginning of the year with a value of R9 billion. So far only R352 million has been spend. A far more effective administrative system is required going forward to assist with job creation. 

The transition of South African economy to a green economy can only be achieved through major investments in renewable energy by the private sector. To facilitate the required investment the Industrial Development Corporation and the Development Bank of Southern Africa will have a specific focus on funding green projects.

The Department of Energy has moved away from a capital subsidy systems. It will rather provide appropriate feed in tariffs.  Other initiatives include reducing carbon emissions through government’s integrated resource plan, the proposed carbon tax and the introduction of a dedicated fund for green economy initiatives. 

Grants and incentives will be a national focus over the next six years as government attempts to achieve the country’s economic goals through incentivising investment that correlates with these objectives.

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This article, prepared by the Deloitte Financial Services Tax Team, discusses FATCA compliance for South African financial institutions. If you have any questions, contact Nazrien Kader at nkader@deloitte.co.za

Foreign Account Tax Compliance Act (FATCA) for South African financial institutions

FATCA requires Foreign Financial Institutions (FFI) to obtain information about every holder of every account across all of their affiliated entities, to comply with verification and due diligence procedures to identify US accounts and to report annually with respect to any US account or suffer the new 30% withholding.

Under newly proposed U.S. Treasury Code Sections 1471 through 1474, effective for payments after December 31, 2012, all foreign financial institutions (FFIs) will be required to enter into disclosure compliance agreements with the U.S. Treasury, and all non-financial foreign entities (NFFEs) must report and/or certify their ownership or be subject to the same 30 percent withholding. This new reporting and withholding regime will ultimately impact current account opening processes, transaction processing systems and “know your customer” procedures utilised by foreign banks. Chief compliance officers, tax reporting heads and other key players within your organisation will need to evaluate the potential impact of these regulations and develop a plan for managing and remediating any potential risk associated with Foreign Account Tax Compliance Act (FATCA) non-compliance.

Relevance and impact

The legislative intent of FATCA is to ensure there is no gap in the ability of the U.S. government to determine the ownership of U.S. assets in foreign accounts. As such, this revenue raising provision, which was originally enacted as a part of the Hiring Incentives to Restore Employment (HIRE) Act (Pub. L. No. 111-147), is expected to significantly impact the systems and operations of both U.S. and non-U.S. companies.

While the regulations have not been finalised to date, companies will likely need to make modifications to their internal systems, control frameworks, processes and procedures for timely compliance with these regulations on or before their effective date of January 1, 2013.

Practical considerations

If a financial institution enters into an agreement with the IRS there are some immediate considerations, including:

• How will US persons be managed? Will they be held in specific entities, jurisdictions and will they be offered all products?
• How will US persons be identified? FATCA does, in effect, require checking the whole of the customer base to identify a relatively small population.
• What are the systems implications? There are likely to be system enhancements required to flag and track US persons as well as linking to Know-Your-Customer information.
• Will account opening procedures be changed in order to positively identify US persons in accordance with their IRS definition?
• How will the project be managed throughout a group? The IRS will expect common compliance benchmarks and it may be effective to open a dialogue with the IRS to discuss plans and scope, etc.
• What controls will be put in place to ensure compliance? There is a separate independent audit requirement. The IRS could terminate the agreement with the consequent 30% withholding tax applied on all proceeds from financial investments in the US.
• What exemptions and possible negotiations with the US Treasury should be considered?

Download the full article . . . .  Foreign Account Tax Compliance Act for South African financial institutions

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Our previous blog article focussed on the mantra that “Cash is King” and the importance of cash flow management. This week, we encourage business owners and managers to admit when their company is facing emerging problems and seek help from independent specialists.

The challenge for management teams is when to admit that the company is facing problems. The major reason for management teams not wanting to admit this sooner, relates to basic human nature –individuals do not like to admit that there are problems or that businesses may already be in trouble due to the perception of failure.

Management teams need to appreciate that the sooner they admit the challenges facing the business and its finances, the greater the options available to address the emerging problems.

One of the first steps after admitting financial challenges in the business is to perform a detailed assessment of business’s financial and operational health. An independent business review (“IBR”) is a useful tool to assist management to perform this financial health check and with establishing the nature and extent of the emerging challenges and to advise management on appropriate options to address potential problems. An advantage of having independent specialists involved in performing this review and a possible restructure and/or turnaround is their specialised skills and experience in dealing with these matters, ultimately allowing management to focus on the day-to-day running of the business.

A comprehensive IBR will cover the business’s short term cash requirements, funding availability and the working capital and trading cycles. There is a key focus on highlighting any stress points or risk areas, and translating these issues into assessing both the shorter and longer term funding requirements of the business.

Furthermore, the IBR will determine the business’s “negotiating platform” when it comes to discussions with funders relating to any additional funding requirements, as well as assisting management to identify the appropriate path to follow.

Following the completion of an IBR, a business is generally categorized in one of the following three categories or levels of emerging problems:

• Underperformance – where the company has good business practises, with its markets in place but is failing to reach performance targets and budgeted net profits. Funders are generally not involved in a restructure and/or turnaround as management tends to steer these.
• Stressed performance – where a company now experiences cash flow problems, struggling to make payments at month-end and generally drawing the attentions of its lenders. The lenders get involved in the restructure and/or turnaround of the business.
• Distress – is where the business is technically insolvent. With share price eroded and mounting debt, the funders and now, investors show concern for the future of the business and get involved in a restructure and/or turnaround.

In our experience, the general trend is for management to call in the assistance of an independent specialist when they have their backs against the wall and the company is already in the distressed stage. At this point the chances of success are less than 50%. However, for those management teams that called in the specialist after the first wobble, the success rate is significantly higher, and can increase to above 90%, due to the early implementation of corrective actions and cooperation of all stakeholders.

In those instances where management has been pro-active, funders tend to be more accommodating as the business is not in distress and credit committees can be convinced of the funding case. Shareholders have more options as their equity is generally still well within the money and the call for additional equity is less likely at this early stage. Shareholders are able to prepare themselves for these emerging problems and act accordingly, by guiding management or preparing for potential future capital injections, for example.  Acting pre-emptively in this manner is appreciated by both funders and shareholders and generally not received as a shock to the system, as in the case of an already distressed situation.

So, face the music, and understand the financial state of your business and the options available to address any potential threats. In the worst case scenario it might just save the business, and in the best case scenario it might position the business to scale new heights.

Article compiled by Fredre Meiring (Associate Director in Deloitte Corporate Finance) and Joseph Zita (Senior Manager in Deloitte Corporate Finance)

Over the last few  months you will have undoubtedly come across articles in the Financial Mail or other financial magazines reporting on mind-boggling valuations for social media companies such as Facebook, Twitter, and Skype to name but a few. These “implied” valuations pegged the value of Facebook at $50 billion and the value of Skype at $8.5 billion and most recently, Twitter’s valuation of $7 billion.

Before we consider Facebook’s implied valuation, let’s look at why potential investors would like to get their hands on Facebook equity, which is currently privately held by Mr Zuckerberg and a few other select investors:

• Facebook has more than 600 million active users. If Facebook was a country in its own right, it would be the 3^rd most populated country in the world, surpassed only by China and India, each having a population of more than a billion people

• 50% of these estimated 600 million active users log on to Facebook on any given day

• The average Facebook user has 130 friends

• Facebook users spend over 700 billion minutes per month on Facebook, which translates into each active user spending approximately 55 minutes daily logged on to the social media site.

These numbers are quite astounding, but how do these figures translate into revenues and ultimately investor returns, especially given the fact that registration and actual usage of Facebook is free of charge?

It all comes down to one word- “advertising”. To an advertiser, the ability to specifically target its potential customer base is more important than blanket advertising.

Consider the following scenario: when you create your “free” Facebook account you divulge personal information such as your age, relationship status, current employer, current hometown, music and movie interests among other information. As an advertiser having access to this information is invaluable as it allows you to launch an effective, targeted advertising campaign to your potential market.  So, for example, you could target your advertising to say: single males between the ages of 27 to 35 who reside in the Sandton area, which would imply a higher earning potential, all of whom share a common love for a luxury German sports saloon.

The ability to effectively target your likely customers presents a higher return on advertising spend than a campaign that might reach a greater audience that may or may not include your potential customers.

The recent suspects

During May 2009 Digital Sky Technologies acquired a 1.96% stake in Facebook for $200 million. This would imply a valuation of roughly $10 billion for a 100% stake in Facebook (ignoring a control premium).

As recently as January 2011, investment banker Goldman Sachs acquired a 1% stake in Facebook for $500 million. This would imply an equity valuation of $50 billion for a 100% stake in Facebook (ignoring a control premium). This valuation appears excessive when taken in the context that revenues for Facebook for 2011 are estimated to be roughly $2 billion.  This implies a 25 times revenue multiple.

Aswath Damodaran, a professor of finance at the Stern School of Business at NYU and a world-renowned valuation expert raises the following two major concerns to bear in mind when looking at these transactions and their implied values in isolation, viz:

Question 1: Can one extrapolate from a single transaction amount to an overall value?

Answer (a): Yes, as long as the transaction is at arm’s length and all that you are getting for your investment is a share of the equity in the company.

Answer (b): It is possible that Goldman Sachs might stand to gain from the following additional benefits that through extrapolation could result in a misleading estimate of value:

• Investment opportunities for Goldman’s clients: As part of the deal, Goldman will be raising $1.5 billion from its clients to invest in Facebook. While this may seem to be a favour that Goldman is doing for Facebook, the reality is that Facebook is a hot company to invest in and this will allow eager investors an exclusive entrée into the company.

• A front seat for the Facebook IPO: If at some point in time, Facebook decides to go public, Goldman is likely to be the lead underwriter and reap a big share of the commission.

• Private wealth management services to Facebook’s potential billionaires and millionaires: When Facebook goes public, Mark Zuckerberg and a number of other executives will have the capacity to sell their shares in the market. While the wholesale cashing out of equity positions immediately after the IPO is unlikely, it is likely to happen over time, at which point these very wealthy individuals will need some private banking help and Goldman will be there to provide that help.

Question 2: Why would a company worth billions choose to stay private, when it clearly has the option to go public?

Answer: Conventional wisdom has always been that companies like Facebook should get a more favourable response from offering shares in the public market place than from private offerings to venture capitalists and large investors, but yet Facebook remains reluctant to go public. Damodaran believes that the following reasons, rational or otherwise, might be why Facebook is holding back with the IPO:

• Extending the tease: Based on the favourable publicity that Facebook has got from the Goldman deal, it does not look like waiting to go public is hurting Facebook, at least for the moment. In fact, it may be making Facebook an even more desirable investment to those who cannot invest in it right now.

• “Proprietary” information: While this might not be a big factor for Facebook there are some companies that choose to stay private because they are afraid of revealing proprietary information about their products/services to the general market. Instead, they can provide the information, with sufficient restrictions on disclosure, to a few wealthy investors who can then invest in the company.

•  Founder idiosyncracies: If the founder and majority shareholder in a company decides that he does not want the company to go public, the company will not go public. In the case of Facebook, it is entirely possible that Mark Zuckerberg has decided that he does not want to take the company public and he does not seem the kind of person who can be dissuaded easily.

•  Regulatory and information disclosure concerns:  From Sarbanes-Oxley to SEC restrictions, public companies are constrained in ways that private businesses are not.

• No valuation scrutiny: As a publicly traded company, no matter how well regarded it may be, the market valuation will be questioned by sceptical investors. Scaling value to earnings or book value, investors will argue that the company is overpriced, relative to other companies in the market. (Take a look at Apple, Google and Netflix, all big winners over the last year, and you will see this phenomenon at play). Facebook has the best of both worlds, at least for the moment. We get glimpses of its immense value, each time a transaction is made, and no real way to examine whether the value makes sense, since we do not have access to much of the information we need.

Is that another dot.com bubble I smell?

In a recent interview with The Daily Maverick, Antonie Roux, CEO of MIH Holdings, commented that media giant Naspers hasn’t been taking out the cheque book as often as it used to in earlier years. Roux further comments that he believes that the market capitalisation of Facebook is “unrealistic”.

This is a very interesting comment, especially considering that Naspers owns approximately 29% of DST which, in turn, is rumoured to own approximately 10% of the share capital of Facebook.

If we cast our minds back to 1999/2000 most of us will remember the massive multiples on which Technology companies were trading before the correction that subsequently followed.

As was the case with Apple and Amazon that survived the previous correction, a few companies will emerge as winners from the looming correction, but undoubtedly there will be more technology companies that won’t be as lucky as the select few.

In conclusion, the true value of Facebook will only become apparent once it files for an IPO. Subsequently the value of the shares will be dictated by the price that a willing buyer and a willing seller is prepared to pay for the share on the open market. Until then, we will be waiting with bated breath,

Article compiled by Burger Nieuwoudt (Manager at Deloitte Corporate Finance) and Suvir Rambritch (Associate Director at Deloitte Corporate Finance)

References:

Aswath Damodaran blogspot – Musing on Markets, The Facebook valuation!

The Daily Maverick – “Antonie Roux on Naspers’ success – and the new tech bubble” 27 June 2011