Too often after completing a painstaking valuation, analysts will often be told that it is “common practice” to add a control premium of a certain percentage; or the target company is “cheap” if it trades below some arbitrary value (eight times EBITDA, fifteen times earnings, etc.) “Rules of thumb make us lazy,” says Aswath Damodaran (NYU Stern School of Business), who spoke to the gathering of the New York State Society of CPAs in Manhattan in May. His comments were not directed so much at appraisers as the “serial acquirers” who—despite or maybe because of the booming M&A market, may be in need of an intervention.
“Tell me, what is the average price for the market?” If you (or your client) can’t answer that, “then how do you know what is cheap?” On his website (click on the "Updated Data" menu), Damodaran continually updates datasets for U.S. (and global) firms with market caps greater than $50 million, including multiples on price and value to sales ratios, value to EBITDA, and more. “The data are useful the next time someone recites a rule of thumb,” he says, adding “most companies that look cheap deserve to be.”
A summary of the Professor’s complete presentation, “Acquirers Anonymous: Damodaran’s Seven Steps to Sober Valuations” will appear in the next (July) issue of the Business Valuation Update™.
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