The views on valuation in last week’s BVWire—from Mercer doing the math on the Facebook IPO to the 7th Circuit’s doing its best to define the “gold standard” of valuation—were a bit “schizophrenic,” says Mike Pellegrino (Pellegrino and Associates). “Well, which is it: Is it price, as the court suggests, or is it intrinsic value, which is what Chris [Mercer] was getting to? Or are they the same?” Predictably, Pellegrino agrees more with Mercer:
With all due respect to Judge Easterbrook, he confuses value and price when he states that the value of a thing is what people will pay. Nothing could be further from the truth. You can highlight it, emphasize it, bold it, or write it in another font color, but that won't make it so: Price and value are disjoint concepts. An entire sector of the financial community (arbitrage) emerged just to take advantage of this misperception. [In any given case], price and value may be the same, but such overlap may be coincidental and in many cases, they should not be the same.
Consider once again the Facebook IPO. “Was that $38 price the value of FB's share?” Pellegrino asks. Was the IPO price the fair market value of FB? “Of course not,” he says. Although the context of a valuation complicates matters, “FB's free fall since the IPO bolsters the fact that a price does not equal value—and I still do not believe that FB's stock price represents its value.” The bottom line: “It will be a great day when the courts and many in our profession stop confusing price and value,” Pellegrino says. “In the meantime, if we have to run to a value premise definition for cover, then maybe the value premise definition is wrong.”
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