DCF/Valuation Question

Mgmt projections in DCF are usually on the optimistic side.

I believe the answer is that transaction comps yield a higher valuation than a DCF due to the synergies / control premium built into them (assuming the comps represent strategic acquisitions).

The value of a DCF is the estimated "instrinsic" value of the company. This is the "standalone" value of that company. The stand alone value + the synergies of the acquisition would be the maximum amount a potential acquirer would be willing to pay. A transaction comp will generally incorporate some of the synergies (though not all), so while it is not the highest valuation possible (a standalone DCF + the added value of the total synergies would be), it is higher than just a normal standalone DCF (9 times out of 10).

Can someone elaborate what a "public comparable" is? Am I mistake to assume that it's just simply a comparison of market caps, P/E, P/E/G ratios etc? In any case, public comps and transaction comps can be manipulated to a degree because you can add or kick-off comps that you think are too low or too high. And I think, this often happens. But you can't really play with it too much.

DCF will often yield the highest valuation--- but the reason is quite surprising. The DCF model is built by the deal team, based on management projections and essentially "educated" guesses. Most deals are done on a commission basis for banks (7% in the US). So the higher the valuation for a company is (and the deal gets closed at this higher price), the more the bank earns. So obviously, there is a LOT of incentive to play around with 'assumptions' and projections until they yield a high valuation.

Honestly, most of the time a valuation number is targeted before the DCF even gets started. Basically you know where you want to go--- you just have to "adjust" the numbers until it gets there.

it's not "purposefully" designed to be complex. It's complex because it's complex to do a valuation.

The Market Cap of companies are all based on fluff valuations and the DCF of them are so complex because to value a company there are so many variables.

If only there are DCF for SIV on the otherhand...

Full disclosure, I've never built a complete DCF from scratch. But from my understanding, there are a ton of assumptions you have to make about growth rates and other variables. And as such, because the DCF is contingent upon so many variables, even slight changes in any of them or in any combination of variables can yield drastically different valuations, no?

DCF, IMO, is more of an art than a science.

In theory it takes into account future cash flow and growth, potential synergies, all that jazz.

In practice a DCF valuation can pretty much equal what the hell you want it to..

Here's your answer:

http://www.ibankingfaq.com/interviewing-technical-questions/valuation/o…

strictly financial acquisitions will have company valued at DCF/Public comps. Operational acquisitions have GW and control premium built in. Typically mgmt pays much more for a company than it's "worth" b/c they think they can realize synergies.

DCFs have a higher valuation in general b/c the assumptions are more optimistic as someone mentioned

Trading comps, etc have market elements built in and are generally lower

Perfect. Thanks fellows. I've got final rounds at a BB tomorrow so I am a little stressed