Why Do Sell-side Investment Bankers Need DCFs?
Dumb question
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If you don't make your own valuation as a seller (or their adviser), how can you tell that the offer you are receiving is fair? You need to apply all valuation methods to (a) determine what you consider a fair value and (b) what a potential buyer could come up with in the same type of valuations.
But does that really matter? You can make the numbers look better than they appear. For example if we're selling an asset that has been historically losing money we can project the cash flow to growth at 20% if we wanted to.. I'm just saying our measurements are biased we can project really aggressively and show lots of growth. So whats the point of even doing a DCF if we're trying to make the numbers look as good as possible - the buyers (i think) don't trust the sell sides numbers
And also if the offer is substantially below the ask price I'm pretty sure our client would reject the offer...
Questions like this from someone who purports to be in the industry baffle me.
Just to clarify I'm interning...
This is not as dumb a question as everyone here seems to think it is and there's quite a bit of misunderstanding about how sell-side actually processes work. The answer is: usually they don't.
Particularly in private sell-sides, rarely will you ever look at a DCF of the company after the pitch. The process is the process and you get the bids you get. DCF says $1.2bn but top bid is $800m. How valuable is your DCF? Sure, you might not sell, but you'll have to have a fundamentally different view of the world than all your buyers if that is the case. If you ran a good process and your valuations are way above the bids you got - that probably says more about your analysis than anything else. Public is a little different since you'll need to do an FO - but most deals don't need FOs.
Sharing DCFs/valuations back and forth and arguing about inputs? Never seen or heard of this. Why would either side want the other to know how they are valuing it? If I'm a buyer and I know you think its worth $600m because of the DCF you sent me and I was ready to pay $800m...well guess what I'm paying now. Diligence is there to convince me that the growth rates, margins, etc in your corp model are realistic - but I'll keep my valuation to myself and based on the my valuation, competitiveness of the process, your desire to sell, etc - I'll give you a number. You can tell me my number is low because other bidders have given you higher numbers, but tell me my number is low because your DCF has a higher value or I'm valuing it at 9.5x LTM and it should be 10x NTM and see what kind of reaction you get.
Many fail to consider the notion that many models are amplified DCF models. An LBO has a DCF built in and the crux of both are the same. You just have more useful tools at your disposal to test credit statistics and returns.
If you approach valuation like this then it's no wonder that buyers don't trust your business plan. That is not to say that they would ever trust it... I'd just like to see a sell-side adviser coming into a client meeting and answering the "what is our ask price?" question with "Does it matter? Buyers anyway won't believe us so just sit in tight for a few weeks and let's see where the offers come in." That would maybe be honest but you can't even imagine how quickly they'll hire someone else.
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