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yup, I've never seen a DCF model taken seriously unfortunately....
i can't count the number of DCFs i saw that ultimately had no influence on deal pricing.
lol @ the indian in the pic.
sounds like a really neat job.
make up some numbers and punch them into excel.
Investment banking's such a joke
Reasons why this is 100% accurate/sad:
1) Buyers/sellers like to think there's methodology behind their irrationalities. It gives them something to hold on to when the deal completely falls apart. 2) Nobody likes to be responsible for their own fuck-ups, so we pay huge fees to bankers so we can shift some blame on them if we have to. Whatup Zuck? 3) 21 year old kids are coming up with the rationale behind how multi-billion dollar companies should be valued and everybody is completely okay with that.
Reasons why we like to focus on DCF analyses on the buy-side:
...
Bankers can do the same thing with comps, cherry picking companies and making "pro forma adjustments" to arrive at the valuation they want.
[quote=ThunderRoad Bankers can do the same thing with comps, cherry picking companies and making "pro forma adjustments" to arrive at the valuation they want.[/quote]
On a related note, if you ever have to make league tables for a presentation, here's how to save yourself some iterations with your seniors:
1: Start with a list of all the deals that got done in your space. 2: Exclude everything your bank wasn't on.
It all goes so much more smoothly when you realize that the seniors only stop iterating when they see a version that places them at the top of the league table. (As a young and stupid monkey, I wasted at least half a day on this issue before I saw the light.)
Some clients have a lot of fun with this. A few years ago there was a presentation making the rounds that had league tables cut and pasted from several bulge-bracket firms wooing the same client. It showed that they were all #1 in the same industry for the same period.
What do you focus on instead?
Multiples, relative value Earnings yield Good economics?
valuation. more art than science; more bullshit than art.
haha Indian rockstar... beat it nerd
I don't know if I sound ridiculous, but I don't really think this is unethical. Everybody knows that IB's job is to sell. That's it. It's the acquirer's responsibility to have CFO types on staff who are smart enough to come up with their own valuations
but why bother with all this shit...
if i was the client id call all bankers into a room and just tell them:
"Ok so I think your all equally retarded and useless, because if you were smart you would be on the buyside, so just submit me your price, the lowest offers wins the mandate"
Wonder why ppl dont do this :p
I'm guessing they do. But here's what I'm guessing: Say you're a company trying to sell yourself. Your goal is to sell yourself for as much as possible and to minimize the fees you have to pay to the bank for doing the deal. But mostly your goal is to sell yourself for as much as possible. So bankers probably just compete on trying to find buyers that will pay the most - and however much more the buyer is willing to pay is the amount you can negotiate towards being your banks fees
I knew a guy in the corp dev team at a large corporate, and he said they used to play "banker bingo" whenever listening to pitches. Everyone would listen for buzz words and at the end they would compare.
//www.wallstreetoasis.com/forums/which-office-buzzwords-do-you-hate
Clients are generally smart enough to know what's BS and what's not. Many of them were bankers themselves earlier in their careers. To some extent it's a big kabuki dance. They know what their company is worth, they're just looking for a good salesman.
I would tend to agree with the sentiments here but, just to play devil's advocate, bear in mind that there is typically a buyside advisor AND a sellside advisor. Both have an incentive to push the valuation in opposite directions. The IB with the buyside mandate is going to tweak the numbers to push the valuation down. The IB with the sellside mandate is going to push it up. They use the valuations as arguments, in order to make bids and reserve prices.
Part of the negotiating process is looking at the other bank's model and trying to argue that your assumptions make more sense/are more realistic. I don't think anyone actually thinks that revenue in 2022 is going to be exactly 3% higher than the year before or that COGS are going to be an exact, constant percentage of revenue every year for the next 7 years. It's just a guess. It's a set of assumptions to be argued for or against during the negotiations.
My question for you is, what would be a better way of determining the worth of a company in an M&A transaction or equity raise? The exact future cash flows from a business are inherently unpredictable but at least with a DCF or other model, you're not just taking a shot in the dark.
Three words: perpetuity growth rate. Bumping 200 bps on that bad boy can get you just about any number you want.
I actually still like the DCF just to play around with scenarios and get a general idea of sensitivities - like say Olympus' camera division totally goes under or gets spun off, what might that do to the stock price? Or if margins compress at a given rate or more, what happens. It's not a totally useless exercise for valuation purposes.
But yes, if you are just trying to convince yourself of a number, it is useless.
If however you're valuing something for yourself (e.g. personal investing) and you make good conservative assumptions, I think it's a valid way to gut check the comps implications and see if you're getting good value for money. Just my two cents.
This makes sense and I agree, especially since you're talking about personal investing.
However, I can't help but play devil's advocate and point out that from the point of view of 95% of people whose job it is to run DCFs, this is analogous to having a Ducati and driving it at 10 MPH below the speed limit at all times. I propose that the DCF is well-suited... no, designed to rationalize irrational optimism.
Anyone been around long enough to notice the characteristics of economic cycles in which the DCF method is most popular? And the cycles when it's most ridiculed?
In an interview I was asked to discuss the nuances of the three methods (transaction, market mult, and DCF) and the other thing you gotta remember is the DCF is actually the only one that treats a company as unique. Otherwise, you are assuming that the subject company's cash flow is worth the same as the average of the other companies' cash flows, and there are tons of reasons why this might not be the case - focus on different geographies, price points, markets, etc. - I actually think the DCF is a great exercise in understanding how a company goes from sale to net income, and what might happen in the future and why.
In restructuring, when advising creditors, you are to get the right value, not the one people want to see. You can be convicted of perjury, because your valuation is submitted to the court and will be attacked by the other constituents' committees. I was involved in a ch 11 where we rep'd the unsecured creditors (fulcrum) and the old equity committee was trying to argue that it should get consideration. They argued ridiculously high representative EBITDA and IMO looked bad in front of a reputable judge and many big time lawyers, bankers and investors. We on the other hand stood by our valuation proudly. We ended up tipping old equity a little tiny slice of newco equity but basically nuisance value.
So at least in restructuring, you always use and rely on all three methods, no matter the cycle.
In M&A, the incentives to jack up a DCF valuation are quite clear. Ducati at ten mph below is spot on. It's a little sad how the tools are misused by the toolers and taints it for us legitimate users.
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