Thursday, September 25, 2014

Common Errors in Valuation

The heart of merger analysis is valuation.  We spend considerable time in our acquisition finance course stressing best practices in valuation.  We've noted many times that value is estimated while price is paid.  Hence, errors in valuation can be crucial to deal success.  In this spirit, we note the article entitled 119 Common Errors in Company Valuations".  The abstract is below.  The complete article can be downloaded here.  

119 Common Errors in Company Valuations

Pablo Fernandez 

University of Navarra - IESE Business School

Andrada Bilan 

University of Navarra - IESE Business School 

This document contains a collection and classification of 119 errors seen in company valuations performed by financial analysts, investment banks and financial consultants. The author had access to most of the valuations referred to in this chapter in his capacity as a consultant in company acquisitions, sales, mergers, and arbitrage processes. We classify the errors in six main categories: 1) Errors in the discount rate calculation and concerning the riskiness of the company; 2) Errors when calculating or forecasting the expected cash flows; 3) Errors in the calculation of the residual value; 4) Inconsistencies and conceptual errors; 5) Errors when interpreting the valuation; and 6) Organizational errors."

All the best,


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