By equating price and value in Malik v. Falcon Holdings, LLC, 2012 U.S. App. LEXIS 5336 (March 14, 2012), Frank Easterbrook, Chief Judge of the U.S. Court of Appeals for the Seventh Circuit seems to have caught the attention of some rather esteemed valuation analysts.
"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."
"Pricing is an exercise of gauging demand and supply, reading investor moods and determining what people will pay for an asset, rather than what it is worth. Valuation is about estimating what an asset is worth, given its earning potential, growth and risk. You can tell whether an investor or analyst is a 'pricer' or 'valuer' by looking at the tools that he or she uses. The tools of choice for most pricers are relative valuation (multiples such as PE or EV multiples), [which] assess how much you will pay for an asset by looking at what others are paying for similar assets (usually other companies in the same business), and technical analysis (where you use charts and indicators to gauge shifts in demand). The tools of choice for 'valuers' are either discounted cash flow (DCF) or accounting-based (building off book value) models."
Chris Mercer applied the analysis to the Facebook IPO:
"Has anyone done the math?"