There was a time when valuing a business was comparatively uncomplicated. It involved identifying physical assets and forming a view about what they were worth; usually by taking the cost of acquisition, applying a depreciation rate to it and adding in any financial assets.
But all that has changed. On average, only 10 per cent of the items on the balance sheets of the 25 companies with the highest market capitalisation listed on the London Stock Exchange are physical.
The rest are financial or intangible. They include goodwill, brands and intellectual property rights. For some of these items, there is no market benchmark. Valuation involves estimates. Critics say they are educated guesses at best.
The consequences can be devastating. In August, US rental company WeWork offered shares to the public at a total business valuation of $47bn. That was 11 times the value of tangible items on its balance sheet, in spite of the fact WeWork lost money in 2018. The figure was lampooned, cut in half, and then slashed to $12bn. In October, the initial public offering (IPO) was called off.
It must have been a relief for financial analysts when Saudi Aramco released a balance sheet ahead of its long-awaited IPO that showed almost 70 per cent of its assets were physical. Admittedly, these assets were worth almost $1tn at the end of 2018 and included some oil facilities that are more than 80 years old. But at least they could be physically quantified.
And yet estimates of Saudi Aramco’s value varied between $1.2tn and $1.5tn. The enormous range was almost exactly the market capitalisation in December of ExxonMobil, now the world’s second most valuable quoted oil corporation.
The next twist in the Saudi Aramco story came in November, when bids for 1.5 per cent of its equity floated in the IPO valued the company as a whole at $1.7tn. That was more than 10 per cent greater than the experts predicted, but still $300bn less than Crown Prince Mohammed bin Salman said the company was worth in 2016.
Undeterred, Saudi Energy Minister Abdulaziz bin Salman, the crown prince’s half-brother, said on 6 December that the target $2tn valuation will be achieved once significant trading in Saudi Aramco shares gets under way in 2020.
Analysts dismissed that forecast as impossible. But Saudi Aramco is the world’s most valuable company. Saudi Arabia will be its largest oil exporter for the foreseeable future. It is a powerful combination that has confounded sceptical experts in the past and will probably do so again.