Tuesday, September 24, 2013

Decline and Denial: Thoughts on Blackberry Endgame and Microsoft as Value Trap

The last few days have been filled with reminders for me of both the destructive and the redemptive powers of life. The weekend started with a family outing to a Yankee game. As a fan, it was wrenching to see Mariano Rivera and Andy Petite, two players who I have watched for almost two decades, pitch for the final time in Yankee stadium, but it was redeemed at least partially by a young Yankee pitcher, Ivan Nova, pitching a complete game on Saturday. Yesterday was my birthday, a joyous day marred only by the realization that putting as many candles on the cake as my age merited would likely set off fire alarms. Before I could feel sorry for myself, though, my eighteen-year old daughter, a freshman in college, called, exhilarated about getting a hundred on her first college exam. Towards the end of the day, the story that Blackberry had an offer to be taken private by Fairfax Financial for $4.7 billion crossed the newswires, an occasion for mourning not just by longtime Blackberry users but for anyone who appreciates life changing technologies, but that story was accompanied by one from Apple, announcing that the company had sold nine million iPhones over the weekend. 

A Life Cycle view of Business
A Chinese saying, that we are all born, grow old, get sick and the die (, , , ), which provides an unvarnished assessment of the cycle of human life, can be extended to businesses as well. Businesses too are born, grow with vigor, mature, decline and die; some, of course, die early and never see growth and some live longer, more productive lives. If the fundamentals of corporate finance can be boiled down to a investment choices of a business (the investment decision), how those choices are financed (the financing decision) and how and when cash is returned to the owners of businesses (the dividend decision), those decisions can be framed in terms of the business life cycle:

The business life cycle also shapes how we approach valuation, with the principles not changing, but the focus shifting at each stage of the cycle. When valuing young, growth companies, the drivers of value are almost invariably in the investment choices that the company makes and the effects of those choices on both growth and profitability. Thus, with Tesla and Facebook, it is the revenue growth and target operating margins that determine value and not how much debt they have in their capital structure or how much they pay in dividends. When valuing mature companies, the focus in valuation changes to valuing existing assets (and their earning power) and to the effects on value of better financing and dividend choices. Thus, for Apple, as much of the discussion of value is focused on whether the company will gain from its use of debt and buying back stock as it is on the future growth of the company. When valuing declining companies, the focus is on winding down portions of existing businesses, while repaying debt due and returning as much cash as possible, in a timely fashion, to stockholders. In my December 2011 post on Blackberry, I estimated a value of about $ 9 billion for the company, on the assumption that the best course for the firm was to narrow its focus to a niche product (I called it the Blackberry Boring, a phone for security-conscious corporates that would prevent games, apps or other distractions from getting in the way of employees checking their email) and liquidate itself over time (five years) in an orderly fashion. I followed up by looking at Blackberry (RIM) and Nokia as potential contrarian plays in June 2012, but luckily, I went with Nokia as my pick. That option play paid off partially because Nokia recovered from its lows but the big payoff came, ironically, when Microsoft bought them early this month.

Reactions to Decline: Anger, Denial and Acceptance
If aging is part of being human, it is just as human to fight aging and businesses seem to follow the same script. Rather than accept maturation and decline as inevitable parts of the business life cycle, businesses seem to go through their version of the stages of grief, starting with anger (at markets), denial (about being mature or in decline) and final acceptance. 

Stage 1: Anger
When growth companies transition to becoming mature companies, the market responds by lowering the multiples that they are willing to pay for earnings and some investors demand that the company behave like a mature company, borrowing more and returning more cash to its stockholders (in dividends and buybacks). In many of these companies, managers respond first by accusing markets (and by extension, their own investors) of being short term and ignorant of the facts. While that characterization may fit some (or even many) investors, it still remains true that markets are often more perceptive than managers are. 

Stage 2: Denial
Managers, angry at investors for treating their companies as mature or declining, make it their mission to prove the world wrong by going for more growth, and in the process, often do further damage to themselves and their investors. The impetus to fight maturation and decline is fed by four factors:
  1. The emotional connection: In the midst of the Second World War, when it was clear that Britain could no longer hold on to its far flung colonies, Winston Churchill was quoted as saying that "I have not become the King's First Minister in order to preside over the liquidation of the British Empire." Many managers at iconic companies that have fallen into decline tend to go along with this sentiment, especially if (like Churchill) they were involved in building up the companies in the first place. That explains why a Michael Dell would leave a comfortable retirement in 2007 to return to his namesake company as CEO, in a futile attempt to turn the company around. 
  2. Fountain of youth ecosystem: Just as there is a lucrative ecosystem that makes money of the desire to stay young (cosmetic surgery, magic supplements, hair transplants etc.), there is an even more lucrative ecosystem of bankers, consultants and turnaround experts who promise mature and declining companies that they will lead them back to everlasting growth. They play to management egos and offer them hope, while eating through billions of dollars of stockholder money, with little to show for it.
  3. Analyst Growth Obsession: Many equity research analysts are obsessed with earnings growth, judging companies on how much they grow rather than on how much value that growth adds. Thus, a declining company that invests badly to grow at a low rate is viewed as better than a declining company that shrinks, while paying out large dividends. Not surprisingly, managers feel the need to feed this obsession for growth.
  4. The PR problem: If your business is declining and your growth prospects don't look good, the right thing for you to do as a top management is to accept that reality, convey it to your employees and start shrinking the business. However, that is not painless and people will lose jobs, employees will see their paychecks shrink and customers will lose their favorite products. If you are in the public eye, you (as the CEO) will be labeled a Scrooge or worse. It is no wonder, therefore, that companies that are serious about facing up to decline prefer to do so as private businesses rather than as public companies.
While denial is understandable, it is also costly to investors. As I have noted in a prior post, growth can be value destructive, if it is expensive. In fact, to illustrate the effects of “value destroying” growth, I have taken a base case of a mature company, with no growth prospects and $100 million in after-tax earnings that pays out its entire earnings as cash flows. If you attach a cost of capital of 10% for this company, its value is $ 1 billion (=$100 million/.10). Now assume that the managers of this company decide to push for growth, though that growth requires them to invest immense amounts of capital (in acquisitions, R&D and new projects) with a return on capital of 5%. In the figure below, I have the value of the company at different growth rates. 

You can consider the difference between $1 billion and the estimated value of a company at any given growth rate to be the cost of denial to investors in the company. Thus, at a 5% expected growth rate, the value of the company is $792.47 million and the cost of denial by managers (and for stockholders) is $207.53 million. (You can play with the spreadsheet by clicking here).

This analysis should open investors eyes to a clear and an ever-present danger when investing in mature and declining companies that look cheap (on a value basis or even based on a PE or PBV ratio). Those companies are cheap, only if their managers don’t try too hard. In fact, the more activity there is on the part of management to "fix" the growth problem, the less cheap the companies become. To me, this is the key to understanding “value traps”, companies that look cheap on every metric but stay cheap forever. To offer you three examples, consider Cisco, Microsoft and Merck’s stock prices over the last decade:

These are companies that I have seen tagged as cheap companies repeatedly over the last ten years, but none of them would have delivered much in terms of returns. These three companies had management teams that have tried  hard to return them to growth status, spending billions of dollars in that venture: Merck in R&D, Cisco on acquisitions and Microsoft on “new” products. I know that I have the benefit of hindsight here, but I would wager that investors in these companies would have been better served, if they had lowered their sights on growth and focused on delivering the most earnings from existing investments and returning the cash back to stockholders. 

I decided to take a shot at valuing Microsoft by breaking it down into the value of assets in place (Microsoft Office and Windows, for the most part) and expected value of growth. In the fiscal year ended June 30, 2013, Microsoft reported $26,764 million in pre-tax operating income on revenues of $77,849 million; revenues increased by 5.60% over the previous year but operating income was down 4.26%. Using the company's effective tax rate of 19.2% for the year and attaching a cost of capital of 8% to the company (in the 60th percentile of US companies), you can value Microsoft assuming no growth in the future:
Value of assets in place (with no growth, no reinvestment) = $26,764 (1-.192)/ .08 = $270,316 million
Adding their cash balance of $ $77,022 million on June 30 to this value and subtracting out the debt outstanding of $15,600 million yields an estimated value of equity of $331,738 million, about $61,198 million higher than the market cap of $270,540 million. Put briefly, assuming no growth in earnings, Microsoft is worth about 22% more than its market capitalization. You can take give the spreadsheet a try, if you are so inclined. (I know that I may be overstating the value of assets in place by assuming that Office and Windows will generate earnings in perpetuity, but using a fifteen-year annuity yields a value close to the market price.)

It is no wonder then that Microsoft keeps looking cheap using all the standard metrics (PE, EV/EBITDA etc,) but there may be a core problem that we are ignoring. For most of the last twenty years, Microsoft has spent billions on new technologies and products and has little to show for it. While it is difficult to isolate the return on capital on just these new investments, it is quite clear that it has been less than the cost of capital. I think I am being generous to Microsoft in assuming that its'  new ventures have earned an average return on capital of 6%, but with that assumption, it is quite clear that if Microsoft continues to keep trying for growth, it will be value destructive, as shown in the figure below:

The intrinsic value of Microsoft drops with every increment in growth and at a growth rate of 7% for the next decade, the intrinsic value converges on the actual market price. This may explain the horrific reaction that the market had to Microsoft's announcement that it would acquire Nokia for $7.2 billion, and Microsoft's market capitalization dropped by more than $15 billion. It may not have been the acquisition per se that triggered the drop off but the signal that it sent to investors that Microsoft with its new CEO (from Nokia) would keep trying to grow. The best news, if you buy int this analysis and you are a Microsoft investor, would be an announcement by the firm that they are disbanding their R&D department, stopping all new product development and appointing Larry the Liquidator as their new CEO.

Stage 3: Acceptance
Ultimately, no matter how hard you fight aging, reality sets in. For individuals fighting middle age, the moment of awakening may be a torn muscle from trying to run a fast break on a basketball court, but for businesses, it may take a longer time. In some cases, it may require pressure from activist investors and in some, a new top management who has no emotional connection to the company's history. In some, though, it will be forced upon the business by external factors, difficulty making a debt payment or an inability to retain employees. 

What form will acceptance take? If the business is mature, it will start behaving like a mature firm, tilting its capital structure towards more debt and increasing cash returned to investors. For many followers of Apple, that capitulation seemed to happen in their March earnings report, where the company ratcheted down its forecasted growth, announced its first debt issue and increased its stock buybacks. 

If the business is in decline, it may be the acceptance that the future will not only be less rosy than the past but also a plan for gradual or partial liquidation. That, to me, seems to be the message in the proposed Blackberry deal. Fairfax Financial is the largest stockholder in Blackberry and its chief executive, Prem Watsa, has been labeled the “Canadian Buffett”. His plans seem to be to focus on Blackberry’s business services and to throw in the towel on the smartphone and tablet businesses. Will he succeed? I hope so but I think he has his work cut out for him. The company has done significant damage to its orderly liquidation prospects in the two years since my last valuation and it may be too late to turn this ship around.

It's really not too bad
On a personal note, I am older today than I was yesterday but given the alternative, I am okay with that. I really don't want to be eighteen, twenty three or twenty five again, not because those were not great years, but so was my most recent year. I could tell you that I know more today than I did three decades ago, but that is really not true, but I do know more about what I don't know today than I did three decades ago (if that makes any sense). Keeping with the theme of this post, I know that my Tesla/Facebook days are way in my past (I am not sure that I had them), that my Google days are in my rearview mirror, that I am probably in the Apple days of my existence (which is really not too bad) and that I will one day be in my Blackberry/Microsoft phase of life. I can only pray that when that phase arrives,  I will have the grace to do an orderly winding down of my activities and not keep reaching back in time for the glory of bygone days. In the meantime, I will get my revenge on time by using it as productively as I can.


Aditya said...

First of all a very happy birthday to you and I wish your wish of leading a productive life by using your time productively gets fulfilled. I want to ask you a couple of questions regarding the options that are available for a declining firm!!
1) Is it always the only option available for the mature firms to accept their fate and commit early suicide by not looking for new and better investment?Doesn't it make sense that firm should also try its hands on the new technologies and try internally to develop game changing products ala Apple in late 1990s?
2) My second question is, I dont know whether it makes sense to ask here, but what does these financial buyers like prem watsa do once they buy the firm? Seriously it has always been beyond my comprehension how do these buyers approach at arriving the decision of purchasing something as dead a technology as BBRY (of course I am contradicting my own hope of a turnaround)
Kindly share your thoughts and your philosophical touch at the end of this blog post was quite graceful..Guess it comes as you age ;)...happy birthday sir

Rohit said...

Your trade is knowledge. Knowledge is cumulative. You share it freely and benefit a lot of people. So I don't think you will have the luxury of liquidating like the rest of us. Your teachings will always remain with us once imparted, so at worst you are going to just plateau, a permanently high plateau.

Regarding the businesses discussed this time, I couldn't agree more with you regarding Microsoft. It's a capital allocation disaster. But it is still a wonderful business. Especially the enterprise part. The consumer space is a bottomless pit which not only destroys capital but adds to negative publicity. It must be "peer pressure" otherwise I can't think of a reason why they would knowingly do such a thing. The fix is simple though. Get a sensible capital allocator, or even someone who does nothing in that CEO seat. The business adds value automatically.

Regarding BlackBerry, which is also one of my investments ( liquidation value is 6-7b in my estimate) , what is your estimate of value? Do you think the $9 offer is fair, too high or too low at this point?

And finally before I forget. Happy birthday.

One of these days you will need to value expected life of a value investor. For a relatively small cohort they seem to beat the averages pretty comfortably.

Jona said...

Great post and happy birthday!
On the topic of mature companies, do you think it is inherently difficult for tech companies to accept decline because their industry is fundamentally very dynamic and driven by disruptions?
Also, I believe the capital markets overall still view the tech sector as high risk (compared to say consumer staples), and these companies may not be able to leverage up their balance sheets as other mature companies. Thoughts?

Akhil Parekh said...


In my opinion, this is one of your best written article. There is so much to learn from your writings. I hope and pray that your writings continue this way for many many more years to come. Belated Happy Birthday !!!


Anonymous said...

Happy Birthday

Sreeram said...

Happy birthday Sir.

Perhaps, this is the pick of last 3 years ever since started following your blog.

Inspiration has been pumped like an adrenaline and got the message what people ( businesses ) could do nearing the lateral stages of life.

Salute your wisdom and wish you share your knowledge and wisdom in the many years to come till we grow older :)

Thank you,

Corporate Finance Blog said...

Prof Damodaran
A Very happy Birthday to you Undoubtedly it is one of the best blogs since I have started reading it! Unlike product/company life cycle ,human valuation in mu humble opinion, increases with time and in your case more so. Given your generosity in sharing all your knowledge freely with abundance,your 3rd metric (Arianna Huffington's term)is and will continue to be highly "valued" by all of us who have and will continue to benefit from the same

Anonymous said...

wat a great post sir, Happpy Bday Sir :)

Geetha said...

Happy Birthday! Quite a profound post on the "not so profound" blog. Thank you for the uncanny comparison of human life with corporate life.

These are interesting times for investors, academicians, observers and of course, the media who are waiting to watch if BB & Dell will raise like a phoenix from ash.

Anonymous said...

One of the best calls I've seen was around 2008, when a guy with a moniker similar of applelover (so, no possible bias there, then) called MSFT a value trap that will be worth at most $35 in 5 years. Roll forward to today, and that is exactly the situation we see. The bull case hasn't changed much in the intervening period, and I'm sure all investors, either value-focussed or not, could easily trot them out. It does goes to show that when the market knows what you know, there's usually no real value to the information.

I was reading, some time ago, a book which discussed the history of innovation and those companies that were able to position themselves as monopolies within new technologies. The book discussed canal systems, steam engines, telegraphy, and so on - all cutting-edge technologies of their day. A major conclusion of the book was that companies, in seeming unassailable monopolies, have about 20-30 years to enjoy their position, before some new disruptive tech starts obsoleting them.

This is pretty much the position that MSFT is in today. They've had 20-30 of being able to dominate the computing industry through vendor lock-in on the OS and Office products. You can see cracks starting to appear, though. The rise of smartphones, and more recently ultra-cheap computers like the Raspberry Pi, is starting to render the concept of a specific OS "irrelevant", or at least a non-Windows OS useful in its own right. Google is taking us down the road of "the web browser is the OS", and providing everyone with spreadsheets and word processors for free. Admittedly, reports of Microsoft's death are currently greatly exaggerated. I think that we are in very exciting times in the world of computing.

Anonymous said...

One of your best blog posts

Unknown said...


In addition to life and business, do you think such scenarios play out in terms of countries and their economies? My biggest fear with the US is that our economy/GDP is so large in absolute terms that it will be difficult to create substantial growth over the long term. At some point it seems we will reach some terminal value for goods and services which will be difficult to increase continually year over year. Of course there will always be business cycles of growth and contraction, but couldn't one argue that the US is in the mature growth or decline stage of the business life cycle?

Unknown said...

Most and current valuations discount and do not include new technologies. This, in my opinion, makes their stock undervalued. I also agree that historical capital allocation for the MSFT has been week, and hence you see a dead money cycle in the stock.
But, as mentioned earlier, all it takes is 1 device, innovation, and suddenly the company looks like an APPLE.
Except APPL built their software around one device their computer, which could then translate well to the phone, now the ipad.
On the other hand Google started out as a search engine, and developed an Op system, just because it could. Google then developed more means of monetization through Google store.
But, people use Microsoft tools everyday.... already. Some of which, the barrier to entry is so high, it makes it difficult to justify for any business not to have MSFT Office.
Also, with this new acquisition, they can tinker with toys on their own terms. Perhaps MSFT is on its life line (their stock sure seems to reflect market's sentiment that it is),
but comparing it to BlackBerry and RIM is ridiculous. BlackBerry built and inferior operating system for a phone that had more tools than the competition... at first. It was a one hit wonder, and didn't horde cash like Msft, aaple, google, to continue to innovate and be relative.
Although, I wouldn't be surprised if both stocks ended higher by years end, in any market. BBRY has a lot of acquisition potential, and is a classic case of NOT being worth the sum of its parts. MSFT while tied to the market, will demonstrate something by years end. Look at all the hype of AAPL, AMZN, and others, that followed MSFT unveiling Surface2/Pro2. That to me, is a clear follow the leader mentality.
Does anybody actually want to acknowledge MSFT as a leader?

Happy Birthday! This is an interesting way to spend the day, but I could see myself doing something similar.
Enjoy some time with friends n family!

JD Signing off...

I have a long position of MSFT with a price target of 52.
I have been long GOOG, AAPL, BBRY in the past, but currently hold no positions.
While I'd like to say I'm short AMZN and their 50+P/E ratio, but I was raised not to stand in front of a moving bus.

UniverseofRisks said...

Great Post!, I wouldn't call MSFT a value trap but just a blue chip with stable(dare I say perpetual) growth. MSFT is a sluggish company its with the burden of a large PC division. This somehow always creeps into their management decision making. But that being said MSFT has the network effect going for it. Which it can leverage when implementing new technologies. I think a good way to look at MSFT's performance would be by using an EVA measure,

Net Operating Profit After Taxes- (Capital * Cost of Capital)

Anonymous said...

Prof, Just a clarification:

You have considered cash flows at year 6 = 100*(1+0.05)^5 and from this you have reduced reinvestment = g / ROC, i.e.3%/10%. It seems 3% growth rate in cash flows is not considered.

Since after year 5, g = 3%, shouldn't your cash flows at year 6 = 100*(1+0.05)^5 *(1+0.03)? From this reinvestment of 30% is deducted.

If we did this continued PV of terminal value comes to 816.24 instead of 792.47.

Can you please clarify?


Unknown said...
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Varadha said...

Good post professor. I started reading your blog about 18 months back and I've become much wiser about "growth" and "profitable growth".

Keep up the good work and may your "iPosts" have more life than the blackberries (the fruit I meant, for diplomacy !) and help "connect more people" to real world finance than a Nokia.

Tom Henderson said...


Thank you for your thoughtful post on the life cycle of a business and for the reminder that teachers of complex subjects can also find time to be delighted by birthdays, baseball, and sharing the joy experienced by their children.

Andy said...

Microsoft's operating income was up in 2013 from $21,763 to $26,764, however, it is down slightly from 2011 at $27,161.

Anonymous said...

Before adding in the cash of $77 billion, it needs to be tax adjusted, as the vast majority is held offshore.

Anonymous said...

Thank you for your post. I shared many of your assumptions on Microsoft history and future until I started studying it in earnest. I was surprised by the outcome. Are you aware that Microsoft has had $150B+ in GAAP net income over the last nine years (inclusive of the write-downs on bad investments) and has used more than that amount on dividends and repurchases? Absent repurchases at exorbitant prices, this isn't obvious bad capital allocation. Over the same period, with only $20B in retained earnings, the company doubled the business division revenue from $13B to $25B, total revenue from $40B to $78B, and nearly doubled net income.
Further, both Google and Microsoft have appeared to overpay for acquisitions, though Google's have worked-out much better than Microsoft's. But Microsoft's acquisitions over the last nine years equal only $23B, which is modest relative to net income. R&D has been $75B over the last nine years (pre-tax cost), which obviously was “paid for” before the $150B in net income. One can add the losses from Xbox, Bing, etc. to the R&D number, but they are modest relative to the size of the enterprise.
Summing it all up, Microsoft's management appeared to have an embarrassment of riches, perhaps 1/5 of which they squandered, depending on what one estimates was required R&D to sustain the core business versus bad venture investment. The current perception is Microsoft is not as well positioned as it was in the past, which is true, and that they have made many bad investments, which is also true. But the further belief that the business is a "value trap" or all its growth is "value destroying" is erroneous and not supported by the historical numbers, in my opinion. But I welcome others’ corrections to my thinking.

And happy birthday.

Susanne Oliver said...

Here is wishing you very many happy returns - and thank you for sharing so many insightful comments with us. You are very generous!

Anonymous said...

Thanks for sharing your knowledge...Sir, few queries.How could we identify a company in mature stage or in Grown up stage.Can we go by the numbers of year of its started or the amount of investments and growth.

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QI said...

Wish you a Belated happy B'day!!!!!

This is one of your best article how company born and dead. I would like to thank you for sharing knowledge.
I have learned alot just by following your blogs and attending webcasts.

I hope and pray that your writings continue this way for many many more years to come.

Anonymous said...

Agreed, one of your best blog posts and one of the most interesting things I have read.

Jason DaCruz said...

Happy Birthday, Professor

I was wondering why an activist like ValueAct would get involved with a company like MSFT, and this breakdown. I have difficulty believing that companies (especially in the tech space, though MSFT may be an exception) can maintain current earnings in perpetuity without spending money on what may look like growth-seeking ventures. In the case of MSFT in particular, mobile and tablet OS's look to be supplanting Windows and therefore eroding current revenue. Admittedly, Windows 8 probably wasn't a great response -- but it is not too difficult to rationalize its aspirations as conservative (Surface was an outright mistake).

Jb said...

Happy birthday prof

Re MSFT ponder this: you cannot prepare all those fine spreadsheets without Microsoft excel can you? The PC is still the major business tool of choice. For all the tablets and phones in the world when it comes to to the humble spreadsheet there is only the PC & excel, millions rely on it daily. MSFT may be maturing but it's far from dead and still forms the basis for many business systems eg bloomberg & capital IQ. In both cases an Apple just won't cut it.

Best jb

Aswath Damodaran said...

I am not giving Microsoft a value of zero. I am giving it a value of $250 billion, just from selling its Office and Windows programs. I think I am being generous in my estimate, don't you? That's a lot of upgrades that you, I and millions of others will have to buy on our ever-fewer PCs.

Anonymous said...

Prof, As a continuation of my earlier comment I have now elaborated:
1) Your calculation based on 5% growth for 5 years and 3% growth thereafter:
CF at year 6 = 100*1.05^5 * (1 - (3%/10%)) = 89.34;
89.34/(0.10 - 0.03) = 1276.28;
PV of terminal value = 1276.28/1.10^5 = 792.47.

2)Calculation based on 5% growth for 5 years and 3% growth thereafter:
CF at year 6 = 100*1.05^5 * 1.03 * (1 - (3%/10%)) = 92.02;
92.02/(0.10 - 0.03) = 1314.57;
PV of terminal value = 1314.57/1.10^5 = 816.24.

Shouldn't CF at year 6 be growing at 3% which should be considered? If so,shouldn't PV of TV be 816.24?

Your response will clarify my doubts. Thanks.

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Bin Das said...

Belated Happy birthday!
and great post as always

Aswath Damodaran said...

I checked the terminal value spreadsheet that accompanies this post and I think I do have (1+ stable growth rate) in my terminal value calculation. (in cell B24). Remember that risk free = stable growth rate in perpetuity.

Anonymous said...

Prof, Sorry to bring this up again.

I am looking at the spreadsheet - (valueofgrowthMod).

Within this spreadsheet I am looking at sheet (Value of growth)which shows PV of terminal value of 792.47.

I could not locate any number in cell B24.

May be we are looking at 2 different sheets?


Aswath Damodaran said...

You are right on the valueofgrowthMod and I will fix it, but it was never intended as a general spreadsheet. The spreadsheet that I am talking about is the more complete spreadsheet (growthbreakdown.xls) that I used for Microsoft. Use that for real companies.

Aswath Damodaran said...

The valueofgrowthMod.xls spreadsheet is fixed now. Thank you for the catching the (1+g) in the terminal value.

Anonymous said...

Thank you for clarifying my doubts, Prof.

I will use the spreadsheet (growthbreakdown.xls) as suggested by you.

Unknown said...

Hello Sir,

A very interesting read indeed. Companies have the option of rebirth without dying and hence the quest for growth, is would imagine.

However, what would be your opinion of IBM which i believe has revived again and again after living the life cycle you have just explained.

Truly appreciate.
RP. - FMS MBA student. email id for the answers: pandya.rupal@gmail.com

Unknown said...
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Unknown said...
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Unknown said...

These statistical data are the one very important platform for competition between the two electronic giants.

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Balaji said...

Belated birthday professor

Balaji said...
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Balaji said...
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Balaji said...
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Balaji said...
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John Woods said...


First I would like to say that I am watching your courses with great interest and I am learning, but I would like to respectfully challenge the whole underlying premise here.

On what grounds do you put forth the theory that all businesses have an inevitable decline?

It seems to me a logical leap to compare all companies to biological organisms.

Unlike the human body, a business is founded on a set of ideas, which are infinite and which can be perpetually renewed by coming up with new formulations.

While I agree, for instance, if you look at some of Professor Christensen's work in the Innovator's Dilemma, that large businesses have little incentive to cannibalize their cash cow to break into new territories.

This does not mean that you won't have a Steve Jobs type person show up in one of these companies, and pull a set of hard core engineers to the side and launch another project that carries the company even higher? So that history shows that it can be done.

There is nothing which says that decline is inevitable? Yet that seems to be the whole premise of your post. "Give up". "Don't try." "Stop researching." "Return capital."

Unless you meant to say that the probabilities are against something like that happening, in which case I agree.

Your thoughts?

Unknown said...

Great publication!
Thank you for your diligent post on the life-cycle of a company.
Microsoft open value

KV said...

Many a times, companies reinvent themselves after near death experiences. Forcing Ballmer out is the first step in reinventing Microsoft. I wish the board moves faster and restructures MSFT asap. Office, Windows in a cloud is pretty decent start and if it were to add "security of the data" from the prying eyes of governments, the sky - or at least cloud - is the limit.

Unknown said...
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Unknown said...

On the topic of mature companies, do you think it is inherently difficult for tech companies to accept decline because their industry is fundamentally very dynamic and driven by disruptions? Click Here

Anonymous said...


Apart from "it'll never happen", I wonder what you think of the idea of Microsoft "creating value" for shareholders by spinning off, say, their Windows and Office divisions as separate companies with a heavy debt structure.

I would imagine that investors in such spinoffs have the potential (the caveat being price, of course) to make a packet from a cash cow/leveraged situation.

Also, how do you view Windows as a franchise in future? Structural decline, cyclical, straight annuity?

Unknown said...

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Unknown said...

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Sams said...

Dear Professor,

Human mortality is inevitable but how does companies like IBM,GE, Pepsi, Coca cola, Canon, fit in your view? How the IBM elephant could able to dance?

Android TV Player said...

I have found this blog very helpful for me. If i talk about myself then according to me it has always been beyond my comprehension how do these buyers approach at arriving the decision of purchasing something as dead a technology and more that Microsoft is not as well positioned as it was in the past, which is true, and that they have made many bad investments, which is also true. But the further belief that the business is a "value trap" or all its growth is "value destroying" is erroneous and not supported by the historical numbers, in my opinion.

Anonymous said...

I seem to recall that Apple was a fast-declining business not so long ago and it staved off backruptcy only because of a large equity injection from Microsoft.

That was shortly before the launch of the iMac line of desktop computers, which bought Apple a little more time, until it hit the jackpot with its new iPod business. Apple later went on the bigger (and more garish) things.

Your thesis suggests that Apple's management should have paid attention to the writing which was so obviously on the wall in the late 1990s and they should have simply managed the company into an orderly liquidation.

Have I misunderstood?