valuationtothevaluationsofotherdistressedcompanies.In
the second, we use healthy companies as comparable
companies,butfindawaytoadjustforthedistressthatthe
firm we are valuing is facing.
Choosing the Comparables
Tovalueadistressedfirm,wecanfindagroupofdistressed
firmsinthesamebusinessandlookathowmuchthemarket
iswilling topay forthem. Forinstance,we couldvaluea
troubled telecom firm by looking at the enterprise
value-to-sales (or book capital) multiples at which other
troubledtelecomfirms trade.Whilethereispromiseinthis
approach,itworksonlyifalargenumberoffirmsinasector
getintofinancialtrouble atthesametime.In addition, by
categorizing firmsas distressedor notdistressed firms, we
runtheriskoflumpingtogetherfirmsthataredistressedto
different degrees.
One possible way to expand this approach is to look at
distressedfirmsacrossthewholemarket,ratherthanjustthe
sectorinwhichthefirmoperates.Thiswillallowforalarger
sample, although there is the possible disadvantage that a
troubledgrocerystoremaybeinabetterposition(intermsof
generatingdistresssaleproceeds)thanatroubledtechnology
company.
ILLUSTRATION 17.5: Choosing Distressed Comparables
To value Global Crossing, we considered only telecom
service firms with negative operating income and high
leverage(marketdebt-to-capitalratiosthatexceed75%).We
measuredbookcapitalasthesumofthebookvaluesofequity