holdings would be $500 million. In fact, this
approachcanbegeneralizedtoestimatethevalueof
complexholdingswhereyoulacktheinformationto
estimatethevalueforeachholdingoriftherearetoo
many such holdings. For example, you could be
valuing a Japanese firm with dozens of cross
holdings. Youcouldestimatea valuefor thecross
holdingsbyapplyingamultipleofbookvaluetotheir
cumulative book value.
Note that using the accounting estimates of the holdings,
which is the most commonly used approach in practice,
shouldbealastresort,especiallywhenthevaluesofthecross
holdings are substantial.
Valuing Cross Holdings in Other Firms—Relative Valuation
Muchofwhatwassaidaboutcashanditseffectsonrelative
valuationcanbesaidaboutcrossholdings aswell,but the
solutions arenot as simple. To begin with, consider how
different types of holdings affect equity multiples.
- Minority passive investments. Only dividends
receivedontheseinvestmentsareshownasearnings
in theincome statement.Sincemost firmspay out
lessindividendsthantheyhaveavailableinearnings,
thisislikelytobiasupwardtheprice-earningsratios
forfirmswithsubstantial minoritypassiveholdings
(since the market value of equity will reflect the
value of the holdings but the net income will not). - Minorityactiveandmajorityholdings.Theseareless
problematic, because thenetincome should reflect
the proportion of the subsidiary’s earnings.