Why is it so hard to value cash-rich companies? - Article Critique

Running head: BUSINESS VALUATION 1
Valuation
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Institution:
Date:

BUSINESS VALUATION 2
Article Critique
Hennessy, C. (2017, November 8). Why is it so hard to value cash-rich companies? London
Business School Review .
Introduction
This paper is a critique of an article by Christopher Hennessey that talks about how
difficult it is to value cash rich businesses. The author argues that there is a great challenge
presented by companies that have minimal debt than the companies that have higher
borrowings and fewer financial assets. There are several arguments that the author makes in
his article(Hennessy, 2017). The purpose of the article is clear from the way the author has
presented his arguments. The reader is able to clearly comprehend the author’s arguments as
presented in the article.
Statement of the problem/ thesis
The topic is how valuation of big tech companies can be made easier. The author
states that “ valuation of companies with a financial structure that consists of huge operating
assets and a small portion of it being liabilities being difficult to be valued”.
Research problem
As the title of the article suggests, businesses with big profits and few debts should be
easy to value but the fact is that they are not. This statement may sound odd but the author
suggests that valuers encounter a big challenge when valuing businesses that are cash rich as

BUSINESS VALUATION 3
compared to businesses that have a higher proportion of debt and fewer assets( Hitchner,
2017).
Hypothesis
No specific hypothesis has been put forward but the author purpose is to show that big
businesses with a big proportion of assets and fewer liabilities pose a great challenge when
being valued.The author begins with an argument that there is a big challenge in valuing
companies that have too much cash ( operating assets) and little debt in their capital structure.
In many companies especially those in the manufacturing sector, the companies have a large
pool of operating assets and equity and debt being part of the liabilities(Ammann, 2013).
However, the author argues that in these companies financial apparatus would be comprised
of a large portion of debt. One argument that the author brings out is that for a cash rich
company is that they have large financial assets which is cash but actually are portfolios of
various assets and bonds.
The author’s continues to argue that the financial structure of cash rich companies is
different from the typical manufacturing companies hence applying conventional formulas
when valuing the cash rich companies would feel uncomfortable. He argues that the reason
why applying conventional formulas in valuing these companies is that they would not be
able to know the risk characteristics of their operating assets(Bernstrom, 2014). The author
should have put more emphisies on the methods that have been used in valuing of these
companies and have proved to be complex when being used in valuing these companies. The
author’s discusion is relevant as to the topic as he puts across the reasons why valuers can
find it hard to value cash rich companies( Hitchner, 2017).
However, the author has underemphasized the methods of valuation that may be used
and the article says so little on the methods which had been used to qualify the statement that