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This is an elaborate textbook on how to do business valuation using Discounted Cash Flows (DCF). But it is clear that the authors are financial consultants who have an interest in making their craft seem as complicated as possible. The trick to investing is to have a greater margin of safety in your buying-price.
valuation of multi-business, cyclical, and growing companies, as well as companies operating in highly inflationary countries.The aim of the book is to arrive at a rather precise measure of value for a business through detailed valuations. These theories are incorrect in my opinion and experience, and should therefore not be used in valuation e.g. It describes both the basics as well as many of the more advanced aspects of valuation incl.
But the authors dismiss that as being possible, as the book relies on academic theories such as the Efficient Market Theory, Capital Asset Pricing Model, etc., which claim that the stock-markets are good at pricing stocks correctly and great bargains cannot be found. The authors claim to have an error of some 15% in their valuations and this is my first complaint about the book: Their valuations are based on extrapolated future cash flows and even when multiple scenarios of the future are taken into account, there is no way you can achieve that kind of precision. Even Warren Buffett and Charlie Munger aren't that precise in their valuations and they have been doing it for many decades.
to determine the cost of capital.Overall I have given the book 3 of 5 stars because it does contain some interesting information and ideas for doing valuation. It takes much effort to read this book and I therefore recommend some more accessible books instead.For a practitioner who wants to understand cash flow analysis I recommend the book: Free Cash Flow by George Christy, and for understanding corporate finance I recommend: Analysis for Financial Management by Robert Higgins.PS: This review is for the 4th University Edition.
I think this criticism is off base:For example, a great management team should lead to a more valuable business. And sometimes it's all about misaligned incentives, ego, and empire building. However, a company's history is full of learnings that are key to assessing its future prospects. This way you force yourself to be specific about the impact of these factors, and rely on the mechanics of the DCF model to translate this impact into a number. However, the shareholders of the company being acquired usually sell for a premium over where their stock had traded before any deal announcement.
The authors state as much. Mechanically however, this works because a great management team will be better at driving growth, margins, capital efficiency, or all three -- in other words, cash flows. The model - and the value of a company in general - will be more sensitive to some variables than to others. A cash flow forecast is the best way to estimate the first of these. Its focus on core value drivers (growth, margin, and capital efficiency) is seminal.Some reviewers claim the book focuses excessively on cash flow modeling to the exclusion of important considerations such as the skill of the management team, the company's product lineup, etc.
It is not, however, about a methodological flaw in using cash flows for valuation.Ultimately, when you make an investment, there are only two ways to make money. This implies that the market fully prices any expected transaction synergies into the shares. What the data shows in fact is that, in general, public companies that buy other public companies do not see an increase in value after the transaction. By driving your assumptions through the model, you ensure the different factors' effects are properly scaled in your final value number.To criticisms about using past cash flows to help forecast the future, it is certainly true that to use a model that blithely carries past growth into future years is to develop a valuation based on fantasy.
Historical financials show what has been accomplished given the constraints of industry, business model, technology, management team etc. Most institutional investors at some point use a DCF model, so viewing the world through your potential buyer's lens is a useful exercise. This book is the definitive text on DCF valuation, combining theory, practice, and clear presentation as McKinsey should. So why do managers buy other companies. Sometimes there is a valid strategic rationale for future synergies that the market doesn't see and doesn't know to give them credit for. One is to extract cash while you own the business (i.e., dividends), and the other is to sell the investment to someone else for a higher price. Some historical variables, of course, won't show up in the financials at all, for example a pharmaceutical company's pipeline of drugs. Of course investors can also be irrational (viz.
In fact, all of these broader issues can and should be assessed in terms of the ways in which they influence the expected future cash flows of the business.For example, if you believe a management team is unusually strong in operational cost control, you can adjust your forecasted cost structure, but if you think they're far better in marketing, be more aggressive on the top line while potentially modeling a fatter cost structure. "New Economy" valuations in 1999). To imagine the future, start by really understanding the past, then methodically think about how each variable will most likely change going forward. With good reason, investors look beyond the books to assess such non-financial assets.Some point out that most M&A fails. Estimating the second depends on how you think potential buyers (i.e., the "market") will estimate the cash flows during their own hold time as well as their own future prospects for ext. Quantifying that irrationality remains one of the biggest gaps in the literature.
The contents of this book are absolute comprehensiveStep by step approach guiding you to thorough understanding.Good structure and easy to readOne problem is a lack of step by step question, have tobuy another separate workbook for practice
The best foundational text on understanding valuation for any business. Kenneth H Marks, lead author of The Handbook of Financing Growth: Strategies, Capital Structure, and M&A Transactions (Wiley Finance)
I work for one of the largest banks in the US, and we use this book as a reference when we need to dig into the more arcane details of a project. If you do a lot of valuation work, this is a recommended text, but it is tome-like and a bit laborious to use, and I've found much of the advice it contains is rather ivory tower and not-so-practical in real world situations. If you are studying valuation theory, or do a lot of this work, particularly on publicly-held companies, you'll definitely want this textbook, though over time it might not be the one you reach for everyday. To accompany it, I would suggest also buying Horn's "Unlocking the Value of a Business" for everyday use, which is a more concise and user-friendly manual on privately-held company valuation, with a more lighthearted, less-academic tone, and Horn's credentials as an acquisitions dealmaker yield advice that is decidedly more practical.
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