Valuing Assets: The Clueless Cadre

Value and whether or not any one has a handle on it is an idea that has been bouncing around in my head for about a month. Here are a couple of items that would indicate that everyone is guessing.

AIG (AIG) announced that it sold Hartford Steam Boiler for $743 million. It bought the company in 2000 for $1.2 billion. Hartford Steam Boiler, which I admit I had never heard of and by the way has a great name, is in the business of insuring industrial boilers, mechanical and electrical equipment around the world. The company was founded in 1866 and reportedly is a world-class franchise.

So, AIG, the world’s biggest insurance company and someone that should know something about valuing an insurance company, buys Hartford for $1.2 billion and sells it eight years later for 30% less. What gives? If anyone should have known how to value this company it’s AIG, but by all appearances, it screwed the pooch. I’ve seen nothing to indicate that Hartford’s cash flows were impaired or that its business was going downhill. Sure, there’s the usual apology that AIG is under the gun to sell things and that it’s a distress sale. Not sure I buy that.

Second piece of evidence. Take a look at this chart from Jake at EconomPIcData.com.

A year ago, ABN (ABN) was purchased by Royal Bank of Scotland (RBS) with some help from Fortis, Santander (STD) and Bank of America (BAC). The purchase price was $100 billion approximately. The chart dismally shows what you could buy today with that money. Once again, the people that should have known what something was worth, what the assets on the balance sheet were truly worth, vastly overpaid. It’s stunning.

I know the world has changed, but did it change that much? Did the executives that negotiated these purchases truly understand the worth of what they were buying? More to the point, does anybody truly have a means of assessing value? This is a backward looking glance at the issue. Sometime in the next week or so, I’ll get to what’s really on my mind: Does anyone have any idea of what value is going forward?

Comments

[Alan von Al...:]

Enron, Worldcom, Countrywide, Lehman, GM, RBS zero.
Minus TAF and TARP most of those banks are zero,

2008 Dec 23 10:55 AM

[Larry House:]

Going forward--only what a buyer will pay. We are entering a new economic age, and previous values have no bearing on what things will be worth. Everything changes with leveraging out of the picture. My 2003 Ford truck was worth $11K a year ago; now it is worth maybe $7K. Obviously it is depreciating, but the size of the drop is because of the contraction in credit and the growing unwillingness of people to spend cash. Money is worth comparatively more than "things" right now, and it appears that will continue for who knows how long. It is better, in my view, to invest for an income stream now rather than going for growth. Growth is not as valuable now as an income stream--cash. The next decade is going to be a doozy.

2008 Dec 23 11:03 AM

[headsup:]

you should stick to real estate, this asks questions that already have been hashed out ad nauseum.

2008 Dec 23 11:11 AM

[prudentinve...:]

Investment bankers have been encouraging all sorts of acquisitions and LBO's for their fees, and the easy money policies have allowed all sorts of assets to be purchased at outlandish valuations. Now that the time of reckoning has come, it seems like taxpayers around the world are going to foot the bills!

2008 Dec 23 11:27 AM

[driftwood2:]

HSB was bought for roughly 5 pe. A bargain by any measure for a reliable business like boiler insurance. It was obviously sold at such a low price because so few people are looking to buy in this environment. The thing that is causing people to price assets at such a low point is fear of an economic collapse. That's what's affecting people's pricing models. It's not about pricing the business, it's about pricing the economy and the future as a whole. Of course, no body has a real crystal ball unfortunately.

2008 Dec 23 11:51 AM

[Ricard:]

This is a rather strange article.

Regarding your Hartford Steam Boiler pickle, I'd say that it's AIG liquidating assets to conserve cash. Remember, Cash is King in recessionary times like this. Actually, Cash is King during all times, and AIG is sorely in need of a lot of cash. Why did AIG liquidate what I assume is a perfectly good company for less than it paid for it? Read Ben Graham's "Security Analysis," or any Economics 101 book. Institutions (or individuals for that matter) in financial trouble have a huge demand for cash, and are willing to give up the family jewels to do it.

Which brings us to your second pickle, bank stocks. Banks these days have one word attached to them - insolvent. That means they lack cash. Remember again - Cash is King. They have no cash. They thus have no value. Why did they run out of cash? Because they used it to buy Campbell's Alphabet Soup (TM) for $47 trillion dollars. Can you spell CDO, or MBS, or AIG? Well, banks couldn't, so they went out on a mad spending spree to get hooked on phonics. Now we all know how to spell "bankruptcy". Just ask Lehman and Mr. Fuld (fooled?).

Well, I hope this helped. If you're still looking for value, look for companies that are cash-rich, whether it be in actual cash sitting in an account, or large, unaffected profit streams. The former would explain companies like INTC, MSFT, and CSCO getting hit far less than their other tech brethren, and the latter would explain the fact that MCD and WMT have actually risen through all this.

2008 Dec 23 12:58 PM

[One AIG sha...:]

if you spend more time digging the news from other sources. you can find more details. since 2000, HSB's book value increased from 350-550M roughly. it also paid around $700M dividend to the parent AIG. AIG bought HSB using its stocks valued at $60/share or more in 2000. it is a great deal for AIG.

2008 Dec 23 03:53 PM

[Roger Knights:]

What this sale suggests to me is that buying assets from distressed sellers is an overlooked investment strategy. (Of course, it can only be employed very irregularly.)

2008 Dec 23 04:18 PM