Business valuation career advice

Water Cooler Careers
#21

I’m not familiar with Eric Nash, but his point seems to assume efficient markets, no poison pills, no transaction costs and etc. More importantly, if a public company becomes private, its cost of capital will probably be much higher, since the marginal investor may no longer be properly diversified and beta or whatever model one uses would be replaced by a total risk proxy or something in between. So private investors can’t instantly buy public companies because the value for them is actually differnt.

I am more familiar with Damodaran. In my opinion he does a pretty good job explaining how a change in control might increase value, even for minority holders, and I agree with most of his points.

Notice that control might add value. It might also not add any (in some cases it could even detract value).

If you pick a stupid company (severely underlevered, lots of non operating cash hanging around, growing with ROC below WACC, overpays for acquisitions, wasteful management, etc…), it’s not that hard to fix some of that stuff.

Take the case of a severly underlevered company that tries to “buy” grow by investing in negative NPV stuff. You may revalue it with a target leverage level and without the dumb growth - there you may have a few extra billions.

Investors can make it happen in practice, as long as they have control. If you’re Carl Icahn, you may just buy the company or buy 5% and start a big fuss - if you can influence the outcomes, the company will be worth more under you/your people than it was under stupid management.

If you’re some random guy from AF, the company may still be worth more, since the value of the company will be the (current value * the probability of nothing changing) + (optimized value * probability of stuff changing). The presence of activist investors, for instance, enhances the probability of things changing, and that enhances the value (and often the market prices - Damodaran has some data on this).

For a bad company, just the presence of activist investors may enhance value, since it enhances the probability of things getting better for the stockholders. Notice that activist investors such as Ackman, Loeb and Icahn don’t have to buy true control to have that influence.

Also, outside the US, a lot of crazy things happen and controlling shareholders can screw noncontrolling shareholders in a number of ways. When Inbev was formed, brazilians who owned the voting shares got all of the premium. Investors with non-voting shares got screwed.

The main point is that control is not valuable just because it’s control. Just like any other thing, it must be valued on a case-by-case basis. What it’s valuable is the ability to change the dumb stuff that happens in companies. For a well managed company, the control premium may very well be zero. Usually, the worse the company, the bigger the control premium.

Much better explanation if you have some spare time:

http://people.stern.nyu.edu/adamodar/pdfiles/papers/controlvalue.pdf

#22

I browsed the Damodoran paper. “It is our contention that the market value of every firm reflects the expected value of control…” (page 60). I agree with Damodoran. As I said previously, “publically traded shares are not priced on a non-controlling basis (i.e., they are already on a conrolling level)”.

#23

Correct me if I’m wrong, but you seem to imply that market prices should already incorporate the entire value of control. I believe that’s a different approach than Damodaran’s.

In his approach, Expected Market Value is a weighted average. For a minority shareholder it should equal:

Status Quo Value + (Probability of change in management * Excess Value added by the new management).

Only the second term includes the value of control. All things equal, the current prices only measure part of the control value. If the probability of a change in management increases, the value of control embedded in the price should also increase. In cases where control can’t be changed, the current stock price doesn’t incorporate any value for control (management is free to run the company into the ground).

This is a quicker read – slide 35 has a relevant example and the last slide sums up the expected value issue: http://people.stern.nyu.edu/adamodar/pdfiles/country/controlshort.pdf

#24

The crux of the matter is that publically traded shares, in practice, are not really on a controlling level. Maybe Nash argument is that the voting shares as a whole have the power to control the company. But if the CEO has 51% and likes riding fancy planes or gains in market share better than increasing value, the remaining stockholders are in for a rough ride. On Nash’s “instant bought” theory, it’s worth remembering that minority shares can’t be instantly bought at their current market prices. Ego-driven CEOs have created a tradition of huge premiums that, in many cases, surpass what the premium for full control should be. Doing an acquisition and applying the proper changes is much harder than just buying a bunch of shares at their current market prices. If you can buy a company by less than their Status Quo Value + Control Premium, you will do it – the PE industry is pretty much built around that.

#25

Update: they want me to interview in person… Will be interesting to finally meet some other valuation people and see what they got going on!

#26

Great job HP, good luck and make good use of your prep time!

#27

Thanks! Listening to damadoran’s valuation lectures on the commute, watching videos on YouTube , running over the schweser quick sheets, and reading everything I can on purchase price allocation!

#28

^ Damodaran is the man!

I just handled a purchase price allocation with an outside service provider for a large acquisition our company had. The short and sweet of it is the purchase price is separated into tangible and intangible assets. From there, the intangible assets are split into things like trade secrets, customer lists, premier pricing with a supplier(s), and finally goodwill. Majority of it is not rocket science, value has to simply be attributed fairly to each of the separate partitians of the acquisition. I mean, I probably could have done it myself, but we used an outside supplier to assess and attest the valuation allocation to supply to our external auditors.

#29

I find it strange there is a stigma. The head of our department is a former IB MD. Have you come across a pitfall when trying to make the move? In our group, the valuation is one thing. The transaction is another. There are very few overlapping hats between the two parts of the transaction.

#30

^ Not me personally, but I know others that have tried to jump up the food chain from BV to other careers. I actually know of just one colleague to successfully go from BV to one of these “higher level” careers, and he did so through a top-notch MBA program and is now doing great things in the hedge fund world. But even his story was one of struggle as he applied to 6-8 top schools, got rejected from all but one and that one wait-listed him! He eventually was able to enroll and the rest is history.

BV is a wierd profession. Once you’ve been in it for 5 years or so, and assuming you are good, it’s very easy to become content. The money can actually be quite good, particularly considering the workload, which is not overly stressful but yet still offers a challenge. It’s a consulting role, so each project is unique and that tends to keep things interesting. So if you’re moving up the ladder and making more money, plus you enjoy the work and also the work/life balance, it’s easy to get sucked in. Trust me, there are much worse careers out there.

#31

This project is exactly one of the services my firm offers and is definitely something that the OP will be working on at any Big 4 valuation gig (from either the internal or external client sides).

Which valuation firm does your company use? Are your external auditors one of the Big 4?

#32

^ I’d rather not disclose the name of the firm. It was a boutique. We do use a Big 4 for our external auditor. The Big 4 partner referred us to this boutique based on their business relationship and affirmation of workmanship quality.

#33

It has definately been an interesting field so far… I’ve only been doing it for about a year and a half but have learned about so many interesting types of busineses. I think I may be a little eccentric but even though I’m almost 29, I still have no answer to the “what do you want to be when you grow up?” question. Can’t say business valuation is my “passion” (despite what all the candidates say in their interviews haha) An option to do something else would be nice but I really don’t know what that would be. The only thing that would motivate me to change is money.

#34

^ You’re doing great bud. Just keep working hard. No one’s ‘passion’ is working. But you do want to land a job/career that gives you minimal distress, displeasure, and hopefully maximum interest/enjoyment.

A career in valution is very unique. You get the chance to be the outside guidance when the Officers and BoD need a helping hand. Not too many jobs have that high level exposure to the smartest guys in the room.

And I’m older than you, and I have no idea what I want to be. So far I’ve found working hard, doing your best, and remaining positive yields good results in the workplace.

#35

^ Thanks for the good advice, especially the last line. Things have got to work out if you do that.

#36

bump, so I went to the 3 hour long interview for a valuation position with one of the big 4. Met with one person at a time, 1 partner, 2 managers, then 1 partner for lunch, nice guys. Got a call this week, “you still interested? great, we’ll call and email you an offer next week.”

CFA definately opened some doors for me! Anybody have any words of advice or anything I should know before jumping on this offer if the numbers work out? It’s mostly doing O&G.

#37

Go get it bro. Make the AF inner sanctum proud!

#38

Congrats on the offer hp, seems like you had a good recruiting experience. Are the partners chill guys? I’ve found that at big 4, culture, attitude etc. really does flow from the top.

#39

Congrats on the offer! Do you know what level you’ll be going in at?

#40

Thanks guys! Going to update the process after the numbers get ironed out.

AfricaFarmer: They guys were chill. One guy asked me quite a few finance questions, which I think I answered them all right, “walk me through dcf” type stuff. They mentioned a busy season like BValGuy mentioned earlier.

BValGuy: I’ll be going in as an experienced hire, valuation associate.