The message boards are abuzz with the news of Steve Jobs’ (possibly) temporary medical leave of absence from Apple. The obvious question is the impact of this news on Apple’s valuation. For most large public companies with deep management, this is not an issue. Relatively speaking, a single person’s importance usually affects only smaller companies, where valuation key-man discounts are much more prevalent.
Steve Jobs is generally believed to be the visionary who drives Apple’s innovation. In the past, Apple previously suffered a relatively brief valuation decline upon news of his temporary leave. But overall, Apple continues to prosper.
As would always occur in the calculation of a key-man discount, detailed analysis is required to assess all of the various factors (many of which are occurring simultaneously) that affect Apple’s valuation. Here are some specific issues:
- Jobs’ anticipated length of this current leave is a substantial but unknown factor. A permanent or lengthy departure could affect future product development and enterprise growth.
- A simple of assessment of Jobs’ key man discount is impossible because Apple simultaneously announced great earnings (see the January 20 post on this topic). So, how much of the stock movement is due to Jobs, and how much to the details of the earnings report?
Here are factors that should be considered when assessing the existence and valuation of a key man discount:
- The person’s level of involvement and responsibilities
- The existence and strength of a succession policy
- Any additional net investment or costs needed to fill the void left by the key man
- The overall risk to the business created by the changes in the succession plan.
In this case, the last item is the most challenging. What would the future of Apple be without Steve Jobs? Can he be replaced?
There are two main ways to identify the impact of key man discount. The first is to adjust future earnings to incorporate lowered expectations (if any). The second method involves altering the firm’s overall risk profile and related discount rate. Courts have historically recognized the propriety of a key man discount as high as 25%, but these rulings are only what a specific judge ruled regarding what are probably a unique set of facts. Both approaches require detailed analysis best performed by an expert.