Valuing Assets: The Clueless Cadre

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 |  Includes: ABN, AIG
by: Tom Lindmark

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 (NYSE: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 (NYSE:RBS) with some help from Fortis, Santander (STD) and Bank of America (NYSE: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?