Here’s number two in our series of lessons from Aswath Damodaran’s three day course on valuation for executives at the Stern School of Business at NYU.Mergers and acquisitions are some of the highest profile and most prestigious deals on Wall Street.
According to Damodaran, the way the process works is screwed up and dangerous to shareholders.
His analogy is that asking an investment bank to fairly value an acquisition target is like asking a plastic surgeon to tell you your face is perfect.
From the lecture:
I think valuations in M&A are a waste of money and a waste of time. You know why? The value of a target company is always whatever you decide to pay plus $10. Why do we go through this charade? And think of why. You’re my investment banker right? I come to you for some advice. “I’m thinking about buying this company, should I buy this company?” Now think about the two possible answers you can give. “You know what, based on the numbers, the deal doesn’t make sense.” In this case what do you get? The undying gratitude of my stockholders. But try paying bonuses with that. The other is that you can tell me: “the deal makes sense.” In which case you make $50 million.
This is a no brainer. This is like walking up to a plastic surgeon: “Is there something wrong with my face?” What’s the plastic surgeon going to say? “You’re perfect.” His job rests on finding something wrong with your face. There’s too much bias in the process. And its not the investment bankers’ fault, because if the deal maker is also the deal analyst, you’re begging for this kind of conflict.
I’ve never understood. We’re going to talk about the acquisition process, which I think is the most screwed up process. More value is destroyed by acquisitions than any other single action taken by companies. And I think at its root the process is screwed up. Until we fix the process, the valuations are pointless. I guarantee you there is a valuation of AOL in some investment bankers folder somewhere that justifies what Time Warner… You take the worst deals in history, there is a valuation back there.
So what can we do about it? Check back later for our follow up interview.
Thanks to Stern Executive Education for allowing us to attend the lecture
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