Valuation

So in Corporate Finance, we're talking about valuation - how to value a company or a capital project. I work in IT, so it's interesting to see how the financial end of the decision-making process is managed. So many technology projects are rolled out with no concern as to the initial or ongoing expenses, and no regard as to what processes they are replacing, it's wasteful. 

Our case for last night's class had some interesting nuances to it. It revolved around a pharmaceutical company considering an opportunity to license an unapproved drug from another company. The pharmaceutical company would pay the costs to test and shepherd the drug through the FDA approval process. What was interesting to me was how to factor in the chances of successfully getting through each trial, along with the potential for the drug to have more than one benefit. 

Once the options were laid out in a decision tree, it was just like game theory: start at the end, and work backwards to see which branches were profitable. As it turned out, they all were, though some were more profitable than others.

My own company is engaged in the same process, but in reverse. We are divesting one of our flagship business units. How do you place a value on that? According to class, we'd have to look at the net present value of the company, which, based on their business model to date, would be diminishing (this is my speculation, and not a representation of my company's position, or based on any information not already public). What are the employees worth - thinking back to Strategy II, is this business unit an EVP or AVP proposition? From where I sit, they're on the cusp, and that makes the valuation all the more awkward.