Dark Side of Valuation, The: Valuing Young, Distressed, and Complex Businesses, 2nd Edition

Financial professionals have long faced the challenge of accurately valuing companies that are difficult to value using conventional methodologies. Years ago, this challenge was most keenly felt in the “dot-com” industries, and many professionals fell victim to the “dark side,” creating values that were simply unsustainable. Now, amidst today’s global financial crisis, the same challenge applies to a far wider spectrum of enterprises and assets, ranging from Asian equities to mortgage-backed securities and financial services firms. Aswath Damodaran has thoroughly revised this book, broadening its perspective to consider all companies that resist easy valuation. He covers the entire corporate lifecycle, from “idea” and “nascent growth” companies to those in decline and distress, and offers specific guidance for valuing technology, human capital, commodity, and cyclical firms. Damodaran places special emphasis on the financial sector, illuminating the implications of today’s radically changed credit markets for valuation. Along the way, he addresses valuation questions that have suddenly gained urgency, ranging from “Are U.S. treasuries risk free?” to “How do you value assets in highly illiquid markets?”

• Vanquishing the “dark side”
  Overcoming the temptation to use unrealistic or simplistic valuation methods
• Revisiting the macro inputs that go into valuation
  What you must know about risk-free rates, risk premiums, and other macroeconomic assumptions
• Valuing idea and nascent companies: the first stages of entrepreneurial valuation
  Intelligent analysis for angel and early venture capital investing
• Special challenges associated with valuing financial services firms
  Includes new insights into projecting the impact of regulatory changes
• Best practices and proven solutions from the world’s #1 expert in valuation, Aswath Damodaran
• Now covers all industries and all stages of the corporate lifecycle
• Includes extensive new coverage of valuing financial services and commodities companies

What’s that company or asset really worth? The question is more urgent than ever: We’ve all discovered the havoc that can be caused by misvaluing assets and companies. But some assets are extremely difficult to price with traditional methods. To accurately value them, start with the techniques and best practices in this book.

Renowned valuation expert Aswath Damodaran reviews the core tools of valuation, examines today’s most difficult estimation questions and issues, and then systematically addresses the valuation challenges that arise throughout a firm’s lifecycle. Next, he turns to specific types of hard-to-value firms, including commodity firms, cyclical companies, financial services firms, organizations dependent on intangible assets, and global firms operating diverse businesses.

Damodaran’s insights will be indispensable to everyone involved in valuation: financial professionals, investors, M&A specialists, and entrepreneurs alike.

Preface     vi

Chapter 1 The Dark Side of Valuation     1

Chapter 2 Intrinsic Valuation     22

Chapter 3 Probabilistic Valuation: Scenario Analysis, Decision Trees, and Simulations     64

Chapter 4 Relative Valuation     90

Chapter 5 Real Options Valuation     114

Chapter 6 A Shaky Base: A “Risky” Risk-Free Rate     144

Chapter 7 Risky Ventures: Assessing the Price of Risk     168

Chapter 8 Macro Matters: The Real Economy     194

Chapter 9 Baby Steps: Young and Start-Up Companies     213

Chapter 10 Shooting Stars? Growth Companies     263

Chapter 11 The Grown-Ups: Mature Companies     312

Chapter 12 Winding Down: Declining Companies     361

Chapter 13 Ups and Downs: Cyclical and Commodity Companies     417

Chapter 14 Mark to Market: Financial Services Companies     449

Chapter 15 Invisible Investments: Firms with Intangible Assets     476

Chapter 16 Volatility Rules: Emerging-Market Companies     505

Chapter 17 The Octopus: Multibusiness Global Companies     535

Chapter 18 Going Over to the Light: Vanquishing the Dark Side     568

Index     576