Gravity Magazine_Final - Great Lakes

GUEST LECTURES
31
Many a Slip
Between the Cup and the Lip…
Prof. Aswath Damodaran
Prof Aswath Damodaran is the Professor of
Finance at the Stern School of Business, New York
University.
Prof Damodaran is recognized worldwide as the
leading mind and expert in the area of Valuation.
His website has enabled many students and
corporates to learn the concept concisely.
The audience was spell bound and engaged on the
intricacies of valuation. Prof Damodaran shared
with us his three fundamental rules of valuation a)
Remember when you are bidding against someone
and when u are not; b) Words like synergy, growth
potential have no value & c) Without Cash flows,
no valuation is possible. He advised us not to follow
the herd mentality like the way of the lemmings and
to stop and think and re-look the fundamentals and
value drivers. According to him, valuation gives us
a life vest i.e. it justifies perceptions.
He demystified the myth that valuation is a search
for true value by stating that valuation was biased
and it was only a question of how much and in
which direction. He also stated that the bias and the
magnitude to valuation are directly proportional to
the amount paid to the person doing the valuation.
Another secret he shared with the students when
doing a valuation was not to come back with a nice
round figure but to always end the final figure in
decimals as it has the potential to create an amazing
illusion.
He also lamented the sad state today of price being
paid arrived at first and then a valuation done to
justify the same. He stressed the importance of
liquidity and control by using the example of Mittal
Steel's bid on Arcelor. The real value of control is
because L.N. Mittal feels he can run Arcelor better
than the current top management. He also stated
that hostile acquisitions are no longer done on
financial terms but to quench one's emotions. He
also cited the case of Time Warner's acquisition of
AOL as among the worst in the history of M&A in
corporate America.
The second myth that he demystified was that a
good valuation provides a precise estimate of value
but in reality, there are no precise valuations. He
also stated that the payoff to valuation is greatest
when valuation is least precise. The third myth he
demystified was the notion that the more
quantitative the model, the better the valuation. The
fascination for a quantitative model by most
investment banks has led them to create complex
models but has later resulted in what he calls 'input
fatigue'. He provided examples of how simpler
valuation models do much better than complex
ones. He used the three methods of a) Discounted
cash flow model b) Relative valuation c)
Contingent claim valuation to value two Indian
companies Wipro and Tata Chemicals, to highlight
its practical use.