The valuation of construction companies
The main objective of this thesis is to study the valuation of construction companies in mergers and acquisitions. The thesis is divided into three main parts; Mergers and Acquisitions, Valuation, and a Case Study. Mergers and acquisitions are at the forefront of discussions in the industry. This is in large part because of the way in which they characterize and contribute to the new economy; for the pressures that they impart on global competition and for their role in promoting globalization through the diminishing importance of traditional geographic boundaries. The number of studies in mergers and acquisitions in the construction industry are minimal when compared to other industries such as banking and telecommunications. Consequently, this first part identifies the general different types and reasons for mergers and acquisitions while attempting to tailor them to the needs of a construction company. The second part elaborates on the concept of valuation and on the different methodologies used by valuators when estimating the value of a construction company. The valuation approaches presented here can apply to all sizes and types of construction companies. Moreover, it is of fundamental importance that the valuator be familiar with the construction industry specifically as contractors typically retain the majority of their value in intangible assets. The theoretical concepts discussed in the first two parts of the thesis are then applied to a case study. The case study that will be discussed is the merger of HOCHTIEF AG with Turner Corporation. The M&A activity and diversification of businesses at HOCHTIEF AG is discussed, in addition to the computation of an estimate value of the Turner Corporation Finally this thesis proposes the use of the asset-based or earnings-based approach as the most appropriate methodology in quantifying the value of a construction company. It also recommends that the use of three different approaches to valuation be applied so as to derive a value for the company after an assessment and appraisal of the value of the company has been completed. However, it must be noted that this valuation process can only begin to be accurate and complete if the valuator has a great deal of familiarity with the construction industry. Thesis Supervisor: Professor Fred Moavenzadeh Title: Director, Center for Technology, Policy and Industrial Development ACKNOWLEDGEMENTS There are many individuals who contributed to the production of this thesis through their moral support, advice, or participation. First, I would like to extend my gratitude and appreciation to my thesis advisor and mentor, Professor Fred Moavenzadeh, for all the incredible and inspiring opportunities and ideas he shared with me while conducting this research under his tutelage. Second, I would like to thank the MIT community and my friends; Bassel Younan and Konstantinos Chadios, for making my stay in Cambridge a memorable experience. I would also like to thank Dana Bottazzo who proofread my thesis and sustained me through dark moments andjoyous occasions alike, always with greater devotion and patience than I possibly deserve. Last but not least, I dedicate this thesis to my parents Ramona and Jean, who supported me throughout my degree period. They were a constant source of encouragement to achieve this accomplishment and follow my goals and ideals; it is because of their confidence and love that I have been able to get this far in my life. It is my sincere hope that I have not omitted anyone who has helped or encouraged me while working on this thesis. If there are any omissions, I offer my apologies. Edmond Sassine May 7', 2004