Many a Slip Between the Cup and the Lip

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.