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Musings on Markets's Blog

Stay Private vs Going Public: Changing landscape

August 22, 2011 Comments (0)

For much of the last century, as public equity markets have grown, the choice for owners of private businesses that had growth potential was a simple one. Stay private, with limited access to equity capital or go public? In making the decision, the owner weighed the pluses and minuses of a public offering. On the plus side, liquidity increases and you have access to far more capital, generally at a lower cost, since the investors buying your equity tend to be more diversified (and thus...

Default and Bankruptcy: Black, white and shades of grey

August 22, 2011 Comments (0)

The talk of default is all around us, as we watch Greece and Italy struggle with impending disaster and the fight over debt limits in the United States fills the airwaves. But what is default? What are the consequences? And given a choice, when is default the best option? Let's start with the most basic question. What is default? Most people would view it as the failure to meet an obligated interest or principal payment. That may technically be true, but it does not capture the shades of grey...

From revenues to earnings: Operating, financing and capital expenses....

August 22, 2011 Comments (0)

A few days ago, Groupon filed an S-1 statement with the Securities Exchange Commission, officially signaling its intent to do an initial public offering. http://blogs.wsj.com/deals/2011/06/02/groupon-ipo-its-here/ I do know that there are valuation questions that will come up with the IPO but talking about them will lead me to repeat earlier points that I made about the Linkedin and Skype valuations: the value will depend upon revenue growth and potential operating margins. Instead, I want to...

There is an app for that....

August 22, 2011 Comments (0)

I have a healthy respect for technology. While I don't see it as the cure for any of our problems in valuation, it has made life a lot easier in terms of mechanics. I still remember trying to value companies in the mid-eighties, where data had to be collected by hand (in libraries) and computers were primitive (I started with Visicalc on a Kaypro and it was just a glorified hand calculator, with limited features). I have tried to stay on top of evolving trends, though I have never been...

Thoughts on intrinsic value

August 22, 2011 Comments (0)

I know this post will strike some of you as splitting hairs and an abstraction but it is a topic that fascinates me. A few weeks ago, I got an email asking a very simple question: How do you estimate the "intrinsic" value of gold? This, of course, raised two key questions: a. What is intrinsic value? b. Does every asset have an intrinsic value? On the first question, here is my definition of intrinsic value. It is the value that you would attach to an asset, based upon its fundamentals: cash...

Dual share structure: The Google model spreads

August 22, 2011 Comments (0)

Google rewrote the book for initial public offerings in two ways. One is that they bypassed the traditional investment banking syndicate for an auction (which is a good development) and the other is that they were unapologetic about the fact that they had two classes of shares and that the founders would hold on to the shares with the disproportionately large voting rights. While shares with different voting rights are par for the course in many parts of the world (Latin America, for...

Valuing young growth companies: A postscript on Linkedin

August 22, 2011 Comments (0)

So, that was quite an opening for Linkedin.. The stock opened in the mid-80s, almost double the offer price. I know that some of you have used the model that I attached to my last post to value Linkedin on your own and that was exactly my point. None of us has a crystal ball that shows us the future and your estimates are as good as mine. However, since we are on the topic of young growth companies, here is what I see in the base year numbers for Linkedin, as contrasted with Skype: a....

Is Skype worth $8.5 billion? An exercise in valuing young, growth companies

August 22, 2011 Comments (0)

Last week, Microsoft announced that it would buy Skype for $8.5 billion. The reaction was fast, furious and very predictable. First, there was the search for reasons for the deal and technology mavens listed a few. Second, there was the reaction from investors and analysts, which was generally not very positive. Third, it was noted that Bill Gates, the face of Microsoft for so long, was strongly in favor of the deal (thus providing cover for Steve Ballmer). Ultimately, though, the discussion...

The Little Book of Valuation

August 22, 2011 Comments (0)

I don't like to use this blog as a publicity front, but my newest book just hit the bookstores. It is part of Wiley's Little Book series and it is titled "The Little Book of Valuation". My motivation for writing the book was simple. While I have three books on valuation - Investment Valuation, Damodaran on Valuation and The Dark Side of Valuation", they are all written for valuation practitioners. They are dense, not easy to read and require work to put into practice. I have always...

Alternatives to the CAPM: Wrapping up

August 22, 2011 Comments (0)

Even as we agree to disagree about the usefulness or lack of the same of CAPM betas, let us reach consensus on a fundamental fact. To ignore risk in investments is foolhardy and not all investments are equally risky. Thus, no matter what investment strategy you adopt, you have to develop your own devices for measuring and controlling for risk. In making your choice, consider the following: a. Explicit versus implicit: I know plenty of analysts who steer away from discounted cash flow...