Fairness Opinions: Fix them or Flush them!

My post on the Tesla/SCTY deal about the ineptitude and laziness that Lazard and Evercore brought to the valuation process did not win me any friends in the banking M&A world. Not surprisingly, it drew some pushback, not so much from bankers, but from journalists and lawyers, taking me to task for not understanding the context for these valuations. As Matt Levine notes in his Bloomberg column, where he cites my post, "a fairness opinion is not a real valuation, not a pure effort to estimate the value of a company from first principles and independent research" (Trust me. No one is setting the bar that high. I was looking for biased efforts using flawed principles and haphazard research and these valuation could not even pass that standard)  and that "they (Lazard and Evercore) are just bankers; their expertise is in pitching and sourcing and negotiating and executing deals -- and in plugging in discount rates into preset spreadsheets -- not in knowing the future". (Bingo! So why are they doing these fairness opinions and charging millions of dollars for doing something that they are not good at doing? And there is a difference between knowing the future, which no one does, and estimating the future, which is the essence of valuation.) If Matt is right, the problems run deeper than the bankers in this deal, raising questions about what the purpose of a   "fairness opinion" is and whether it has outlived its usefulness (assuming that it was useful at some point).

Fairness Opinions: The Rationale

What is a fairness opinion? I am not a lawyer and I don't play intend to play one here, but it is perhaps best to revert back to the legal definition of the term. In an excellent article on the topic, Steven Davidoff defines a fairness opinion as an "opinion provided by an outsider that a transaction meets a threshold level of fairness from a financial perspective". Implicit in this definition are the assumptions that the outsider is qualified to pass this judgment and that there is some reasonable standard for fairness.  In corporate control transactions (acquisition, leveraged buyout etc.), as practiced today, the fairness opinion is delivered (orally) to the board at the time of the transaction, and that presentation is usually followed by a written letter that summarizes the transaction terms and the appraiser's assumptions and attests that the price paid is "fair from a financial point of view". That certainly sounds like something we should all favor, especially in deals that have obvious conflicts of interest, such as management-led leveraged buyouts or transactions like the Tesla/Solar City deal, where the interests of Elon Musk and the rest of Tesla 's stockholders may diverge.

Note that while fairness opinions have become part and parcel of most corporate control transactions, they are not required either by regulation or law. As with so much of business law, especially relating to acquisitions, the basis for fairness opinions and their surge in usage can be traced back to Delaware Court judgments. In Smith vs Van Gorkom, a 1985 case, the court ruled against the board of directors of Trans Union Corporation, who voted for a leveraged buyout, and specifically took them to task for the absence of a fairness opinion from an independent appraiser. In effect, the case carved out a safe harbor for the companies by noting that “the liability could have been avoided had the directors elicited a fairness opinion from anyone in a position to know the firm’s value”.  I am sure that the judges who wrote these words did so with the best of intentions, expecting fairness opinions to become the bulwark against self-dealing in mergers and acquisitions. In the decades since, through a combination of bad banking practices, the nature of the legal process and confusion about the word "fairness", fairness opinions, in my view, have not just lost their power to protect those that they were intended to but have become a shield used by managers and boards of directors against serious questions being raised about deals. 

Fairness Opinions: Current Practice?

There are appraisers who take their mission seriously and evaluate the fairness of transactions in their opinions, but the Tesla/Solar City valuations reflect not only how far we have strayed from the original idea of fairness but also how much bankers have lowered the bar on what constitutes acceptable practice.  Consider the process that Lazard and Evercore used by  to arrive at their fairness opinions in the Tesla/Solar City deal, and if Matt is right, they are not alone:

What about this process is fair, if bankers are allowed to concoct discount rates, and how is it an opinion, if the numbers are supplied by management? And who exactly is protected if the end result is a range of values so large that any price that is paid can be justified?  And finally, if the contention is that the bankers were just using professional judgment, in what way is it professional to argue that Tesla will become the global economy (as Evercore is doing in its valuation)? 

To the extent that what you see in the Tesla/Solar City deal is more the rule than the exception, I would argue that fairness opinions are doing more harm than good. By checking off a legally required box, they have become a way in which a board of directors buy immunization against legal consequences. By providing the illusion of oversight and an independent assessment, they are making shareholders too sanguine that their rights are being protected. Finally, this is a process where the worst (and least) scrupulous appraisers, over time, will drive out the best (and most principled) ones, because managers (and boards that do their bidding) will shop around until they find someone who will attest to the fairness of their deal, no matter how unfair it is. My interest in the process is therefore as much professional, as it is personal. I believe the valuation practices that we see in many fairness opinions are horrendous and are spilling over into the other valuation practices.

It is true that there are cases, where courts have been willing to challenge the "fairness" of fairness opinions, but they have been infrequent and  reserved for situations where there is an egregious conflict of interest. In an unusual twist, in a recent case involving the management buyout of Dell at $13.75 by Michael Dell and Silver Lake, Delaware Vice Chancellor Travis Lester ruled that the company should have been priced at $17.62, effectively throwing out the fairness opinion backing the deal. While the good news in Chancellor Lester's ruling is that he was willing to take on fairness opinions, the bad news is that he might have picked the wrong case to make his stand and the wrong basis (that markets are short term and under price companies after they have made big investments) for challenging fairness opinions.

Fish or Cut Bait?

Given that the fairness opinion, as practiced now, is more travesty than protection and an expensive one at that, the first option is to remove it from the acquisition valuation process. That will put the onus back on judges to decide whether shareholder interests are being protected in transactions. Given how difficult it is to change established legal practice, I don't think that this will happen. The second is to keep the fairness opinion and give it teeth. This will require two ingredients to work, judges that are willing to put fairness opinions to the test and punishment for those who consistently violate those fairness principles.

A Judicial Check

Many judges have allowed bankers to browbeat them into accepting the unacceptable in valuation, using the argument that what they are doing is standard practice and somehow professional valuation.  As someone who wanders across multiple valuation terrain, I am convinced that the valuation practices in fairness opinions are not just beyond the pale, they are unprofessional. To those judges, who would argue that they don't have the training or the tools to detect bad practices, I will make my pro bono contribution in the form of a questionnaire with flags (ranging from red for danger to green for acceptable) that may help them separate the good valuations from the bad ones.

Question	Green	Red
Who is paying you to do this valuation and how much? Is any of the payment contingent on the deal happening? (FINRA rule 2290 mandates disclosure on these)	Payment reflects reasonable payment for valuation services rendered and none of the payment is contingent on outcome	Payment is disproportionately large, relative to valuation services provided, and/or a large portion of it is contingent on deal occurring.
Where are you getting the cash flows that you are using in this valuation?	Appraiser estimates revenues, operating margins and cash flows, with input from management on investment and growth plans.	Cash flows supplied by management/ board of company.
Are the cash flows internally consistent?	1.     Currency: Cash flows & discount rate are in same currency, with same inflation assumptions. 2.     Claim holders: Cash flows are to equity (firm) and discount rate is cost of equity (capital). 3.     Operations: Reinvestment, growth and risk assumptions matched up.	No internal consistency tests run and/or DCF littered with inconsistencies, in currency and/or assumptions. -       High growth + Low reinvestment -       Low growth + High reinvestment -       High inflation in cash flows + Low inflation in discount rate
What discount rate are you using in your valuation?	A cost of equity (capital) that starts with a sector average and is within the bounds of what is reasonable for the sector and the market.	A cost of equity (capital) that falls outside the normal range for a sector, with no credible explanation for difference.
How are you applying closure in your valuation?	A terminal value that is estimated with a perpetual growth rate < growth rate of the economy and reinvestment & risk to match.	A terminal value based upon a perpetual growth rate > economy or a multiple (of earnings or revenues) that is not consistent with a healthy, mature firm.
What valuation garnishes have you applied?	None.	A large dose of premiums (control, synergy etc.) pushing up value or a mess of discounts (illiquidity, small size etc.) pushing down value.
What does your final judgment in value look like?	A distribution of values, with a base case value and distributional statistics.	A range of values so large that any price can be justified.

If this sounds like too much work, there are four changes that courts can incorporate into the practice of fairness opinions that will make an immediate difference:

1. Deal makers should not be deal analysts: It should go without saying that a deal making banker cannot be trusted to opine on the fairness of the deal, but the reason that I am saying it is that it does happen. I would go further and argue that deal makers should get entirely out of the fairness opinion business, since the banker who is asked to opine on the fairness of someone else's deal today will have to worry about his or her future deals being opined on by others.
2. No deal-contingent fees: If bias is the biggest enemy of good valuation, there is no simpler way to introduce bias into fairness opinions than to tie appraisal fees to whether the deal goes through. I cannot think of a single good reason for this practice and lots of bad consequences. It should be banished.
3. Valuing and Pricing: I think that appraisers should spend more time on pricing and less on valuation, since their focus is on whether the "price is fair" rather than on whether the transaction makes sense. That will require that appraisers be forced to justify their use of multiples (both in terms of the specific multiple used, as well as the value for that multiple) and their choice of comparable firms. If appraisers decide to go the valuation route, they should take ownership of the cash flows, use reasonable discount rates and not muddy up the waters with arbitrary premiums and discounts. And please, no more terminal values estimated from EBITDA multiples!
4. Distributions, not ranges: In my experience, using a range of value for a publicly traded stock to determine whether a price is fair is useless. It is analogous to asking, "Is it possible that this price is fair?", a question not worth asking, since the answer is almost always "yes". Instead, the question that should be asked and answered is "Is it plausible that this price is a fair one?"  To answer this question, the appraiser has to replace the range of values with a distribution, where rather than treat all possible prices as equally likely, the appraiser specifies a probability distribution. To illustrate, I valued Apple in May 2016 and derived a distribution of its values:

Let's assume that I had been asked to opine on whether a $160 stock price is a fair one for Apple. If I had presented this valuation as a range for Apple's value from $80.81 to $415.63, my answer would have to be yes, since it falls within the range. With a distribution, though, you can see that a $160 price falls at the 92nd percentile, possible, but neither plausible, nor probable.  To those who argue that this is too complex and requires more work, I would assume that this is at the minimum what you should be delivering, if you are being paid millions of dollars for an appraisal.

Punishment
The most disquieting aspect of the acquisition business is the absence of consequences for bad behavior, for any of the parties involved, as I noted in the aftermath of the disastrous HP/Autonomy merger. Thus, managers who overpay for a target are allowed to use the excuse of "we could not have seen that coming" and the deal makers who aided and abetted them in the process certainly don't return the advisory fees, for even the most abysmal advice. I think while mistakes are certainly part of business, bias and tilting the scales of fairness are not and there have to be consequences:

1. For the appraisers: If the fairness opinion is to have any heft, the courts should reject fairness opinions that don't meet the fairness test and remove the bankers involved  from the transaction, forcing them to return all fees paid. I would go further and create a Hall of Shame for those who are repeat offenders, with perhaps even a public listing of their most extreme offenses. 
2. For directors and managers: The boards of directors and the top management of the firms involved should also face sanctions, with any resulting fines or fees coming out of the pockets of directors and managers, rather than the shareholders involved.

I know that your reaction to these punitive suggestions is that they will have a chilling effect on deal making. Good! I believe that much as strategists, managers and bankers like to tell us otherwise, there are more bad deals than good ones and that shareholders in companies collectively will only gain from crimping the process.

YouTube Video


Attachments

1. The Fairness Questionnaire (as a word file, which you are free to add to or adapt)

Keystone Kop Valuations: Lazard, Evercore and the TSLA/SCTY Deal

It is get easy to get outraged by events around you, but I have learned, through hard experience, that writing when outraged is dangerous. After all, once you have climbed onto your high horse, it is easy to find fault with others and wallow in self-righteousness. It is for that reason that I have deliberately avoided taking issue with investment banking valuations of specific companies, much as I may disagree with the practices used in many of them. I understand that bankers make money on transactions and that their valuations are more sales tools than assessments of fair value and that asking them to pay attention to valuation first principles may be asking too much. Once in a while, though, I do come across a valuation so egregiously bad that I cannot restrain myself and reading through the prospectus filed by Tesla for their Solar City acquisition/merger was such an occasion. My first reaction as I read through the descriptions of how the bankers in this deal (Evercore for Tesla and Lazard for Solar City) valued the two companies was "You must be kidding me!".

The Tesla/Solar City Deal

In June 2016, Tesla announced that it intended to acquire Solar City in a stock swap, a surprise to almost everyone involved, except for Elon Musk. By August 1, the specifics of the deal had been ironed out and the broad contours of the deal are captured in the picture below:

At the time of the deal, Mr. Musk contended that the deal made sense for stockholders in both companies, arguing that it was a "no-brainer" that would allow Tesla to expand its reach and become a clean energy company. While Mr. Musk has a history of big claims and perhaps the smarts and charisma to deliver on them, this deal attracted attention because of its optics. Mr. Musk was the lead stockholder in both companies and CEO of Tesla and his cousin, Lyndon Rive, was the CEO of Solar City. Even Mr. Musk's strongest supporters could not contest the notion that he was in effective control at both companies, creating, at the very least. the potential for conflicts of interests. Those questions have not gone away in the months since and the market concerns have been reflected in the trend lines in the stock prices of the two companies, with Solar City down about 24% and Tesla's stock price dropping about 8%.

The board of directors at Tesla has recognized the potential for a legal backlash and as this New York Times article suggests, they have been careful to create at least the appearance of an open process, with Tesla's board hiring Evercore Partners, an investment bank, to review the deal and Solar City's board calling in Lazard as their deal assessor. Conspicuously missing is Goldman Sachs, the investment banker on Tesla's recent stock offering, but more about that later.

The Banking Challenge in a Friendly Merger

In any friendly merger, the bankers on the two sides of the deal face, what at first sight, looks like an impossible challenge. The banker for the acquiring company has to convince the stockholders of the acquiring company that they are getting a good deal, i.e., that they are acquiring the target company at a price, which while higher that the prevailing market price, is lower than the fair value for the company. At the same time, the banker for the target company has to convince the stockholders of the target company that they too are getting a good deal, i.e., that they are being acquired at is higher than their fair value. If you are a reasonably clever banking team, you discover very quickly that the only way you can straddle this divide is by bringing in what I call the two magic merger words, synergy and control. Synergy in particular is magical because it allows both sides to declare victory and control adds to the allure because it comes with the promise of unspecified changes that will be made at the target company and a 20% premium:

In the Tesla/Solar City deal, the bankers faced a particularly difficult challenge. Finding synergy in this merger of an electric car company and a solar cell company, one of which (Tesla) has brand name draw and potentially high margins and the other of which is a commodity business (Solar City) with pencil thin margins) is tough to do. Arguing that the companies will be better managed as one company is tricky when both companies have effectively been controlled by the same person(Musk) before the merger. In fact, it is far easier to make the case for reverse synergy here, since adding a debt-laden company with a questionable operating business (Solar City) to one that has promise but will need cash to deliver seems to be asking for trouble. The bankers could of course have come back and told the management of both companies (or just Elon Musk) that the deal does not make sense and especially so for the stockholders of Tesla but who can blame them for not doing so? After all, they are paid based upon whether the deal gets done and if asked to justify themselves, they would argue that Musk would have found other bankers who would have gone along. Consequently, I am not surprised that both banks found value in the deal and managed to justify it.

The Valuations

It is with this perspective in mind that I opened up the prospectus, expecting to see two bankers doing what I call Kabuki valuations, elaborately constructed DCFs where the final result is never in doubt, but you play with the numbers to make it look like you were valuing the company. Put differently, I was willing to cut a lot of slack on specifics, but what I found failed even the minimal tests of adequacy in valuation. Summarizing what the banks did, at least based upon the prospectus (lest I am accused of making up stuff):

Tesla Prospectus

Conveniently, these number provide backing for the Musk acquisition story, with Evercore reassuring Tesla stockholders that they are getting a good deal and Lazard doing the same with Solar City stockholders, while shamelessly setting value ranges so wide that they get legal cover, in case they get sued.  Note also not only how much money paid to these bankers for their skills at plugging in discount rates into spreadsheets but that both bankers get an additional payoff, if the merger goes through, with Evercore pocketing an extra $5.25 million and Lazard getting 0.4% of the equity value of Solar City.  There are many parts of these valuations that I can take issue with, but in the interests of fairness, I will start with what I term run-of-the-mill banking malpractice, i.e., bad practices that many bankers are guilty of.

1. No internal checks for consistency: There is almost a cavalier disregard for the connection between growth, risk and reinvestment. Thus, when both banks use ranges of growth for their perpetual value estimates, it looks like neither adjusts the cash flows as growth rates change. (Thus, when Lazard moves its perpetual growth rate for Solar City from 1.5% to 3%, it looks like the cash flow stays unchanged, a version of magical growth that can happen only on a spreadsheet).
2. Discount Rates: Both companies pay lip service to standard estimation technology (with talk of the CAPM and cost of capital), and I will give both bankers the benefit of the doubt and attribute the differences in their costs of capital to estimation differences, rather than to bias.  The bigger question, though, is why the discount rates don't change as you move through time to 2021, where both Tesla and Solar City are described as slower growth, money making companies.
3. Pricing and Valuation: I have posted extensively on the difference between pricing an asset/business and valuing it and how mixing the two can yield a incoherent mishmash. Both investment banks move back and forth between intrinsic valuation (in their use of cash flows from 2016-2020) and pricing, with Lazard estimating the terminal value of Tesla using a multiple of EBITDA. (See my post on dysfunctional DCFS, in general, and Trojan Horse DCFs, in particular).

There are two aspects of these valuations that are the over-the-top, even by banking valuation standards:

1. Outsourcing of cash flows: It looks like both bankers used cash flow forecasts provided to them by the management. In the case of Tesla, the expected cash flows for 2016-2020 were generated by Goldman Sachs Equity Research (GSER, See Page 99 of prospectus) and for Solar City, the cash flows for that same period were provided by Solar City, conveniently under two scenarios, one with a liquidity crunch and one without. Perhaps, Lazard and Evercore need reminders that if the CF in a DCF is supplied to you by someone else,  you are not valuing the company, and charging millions for plugging in discount rates into preset spreadsheets is outlandish. 
2. Terminal Value Hijinks: The terminal value is, by far, the biggest single number in a DCF and it is also the number where the most mischief is done in valuation. While some evade these mistakes by using pricing, there is only one consistent way to get terminal value in a DCF and that is to assume perpetual growth. While there are a multitude of estimation issues that plague perpetual growth based terminal value, from not adjusting the cost of capital to reflect mature company status to not modifying the reinvestment to reflect stable growth, there is one mistake that is deadly, and that is assuming a growth rate that is higher than that of the economy forever. With that context, consider these clippings from the prospectus on the assumptions about growth forever made by Evercore in their terminal value calculations:
   

   

   Tesla Prospectus

   I follow a rule of keeping the growth rate at or below the risk free rate but I am willing to accept the Lazard growth range of 1.5-3% as within the realm of possibility, but my reaction to the Evercore assumption of 6-8% growth forever in the Tesla valuation or even the 3-5% growth forever with the Solar City valuation cannot be repeated in polite company. 

Not content with creating one set of questionable valuations, both banks doubled down with a number of  of other pricing/valuations, including sum-of-the-parts valuations, pricing and transaction premiums, using a "throw everything at the fan and hope something sticks" strategy.

Now what? 

I don't think that Tesla's Solar City acquisition passes neither the smell test (for conflict of interest) nor the common sense test (of creating value), but I am not a shareholder in either Tesla or Solar City and I don't get a vote. When Tesla shareholders vote, given that owning the stock is by itself an admission that they buy into the Musk vision, I would not be surprised if they go along with his recommendations. Tesla shareholders and Elon Musk are a match made in market heaven and I wish them the best of luck in their life together.

As for the bankers involved in this deal, Lazard's primary sin is laziness, accepting an assignment where they are reduced to plugging in discount rates into someone else's cash flow forecasts and getting paid $2 million plus for that service. In fact, that laziness may also explain the $400 million debt double counting error made by Lazard on this valuation,. Evercore's problems go deeper. The Evercore valuation section of the prospectus is a horror story of bad assumptions piled on impossible ones, painting a picture of ignorance and incompetence. Finally, there is a third investment bank (Goldman Sachs), mentioned only in passing (in the cash flow forecasts provided by their equity research team), whose absence on this deal is a story by itself. Goldman's behavior all through this year, relating to Tesla, has been rife with conflicts of interest, highlighted perhaps by the Goldman equity research report touting Tesla as a buy, just before the Tesla stock offering. It is possible that they decided that their involvement on this deal would be the kiss of death for it, but I am curious about (a) whether Goldman had any input into the choice of Evercore and Lazard as deal bankers, (b) whether Goldman had any role in the estimation of Solar City cash flows, with and without liquidity constraints, and (c) how the Goldman Sachs Equity Research forecast became the basis for the Tesla valuations. Suspicious minds want to know! As investors, the good news is that you have a choice of investment bankers but the bad news is that you are choosing between the lazy, the incompetent and the ethically challenged.

If there were any justice in the world, you would like to see retribution against these banks in the form of legal sanctions and loss of business, but I will not hold my breath waiting for that to happen. The courts have tended to give too much respect for precedence and expert witnesses, even when the precedent or expert testimony fails common sense tests and it is possible that these valuations, while abysmal, will pass the legally defensible test. As for loss of business, my experience in valuation is that rather than being punished for doing bad valuations, bankers are rewarded for their deal-making prowess. So, for the many companies that do bad deals and need an investment banking sign-off on that deal (in the form of a fairness opinion), you will have no trouble finding a banker who will accommodate you.

If this post comes across as a diatribe against investment banking, I am sorry and I am not part of the "Blame the Banks for all our problems" school. In fact, I have long argued that bankers are the lubricants of a market economy, working through kinks in the system and filling in capital market needs and defended banking against its most virulent critics. That said, the banking work done on deals like the this one vindicate everyone's worst perceptions of bankers as a hired guns who cannot shoot straight, more Keystone Kops than Wyatt Earps!

YouTube Video


Attachments

1. Tesla Prospectus for Solar City Deal

The School Bell Rings! It's Time for Class!

As most teachers do, I mark time in academic rather than in calendar years and as September dawns, it is New Year's eve for me and a new class is set to begin. In just under a week, on September 7, 2016, I will walk into a classroom and face up to a roomful of students, not quite ready for summer to end, and start teaching, as I have every year since 1984. This semester, I will be back to teaching Valuation to MBAs at Stern, and as I have in semesters past, I invite you to join me on this journey, as we look at the mix of art, science and magic that makes valuation such a fascinating discipline.

Class Philosophy

I have always believe that to teach a class well, you have to start with a story and that the class is an extended serialization of the story. I also believe that to teach well, you have to, at least over time, make that story your own and mold the class to reflect it. In fact, the valuation class that I will be teaching this Fall has its seeds in the very first valuation class that I taught in 1986, but the differences reflect not only how much the world has changed since then, but also how my own thinking on valuation has evolved. The class remains a work in progress, where each time I teach it, I learn something new as well as recognize how much I have left to learn.

I could give you an extended essay on what this class is about, but I would repeating what I said at the start of the Fall 2015 semester in this post. In short, I said this class is not an extended accounting class (where you forecast entire financial statements for extended periods), or a modeling class (where you become an Excel Ninja) or a theory class (since there is so little of it in  valuation to begin with). Instead, here are the broad themes that underlie this class, all captured in the picture below:

If you find this picture a little daunting, I did do a Google talk that encapsulated these themes into about an hour-long session. 

In particular, this class is less about the tools and techniques of valuation and more about developing a foundation that you can use to build your own investment philosophy. I know that faith is a word that is seldom used and often viewed with suspicion by many in the valuation community, but it is at the heart of this class, both in terms of how you build up faith in your own capacity to value assets and businesses and how you hold on to that faith when the market price moves away from your value.  Since I still struggle on both of these fronts, I cannot give you a template for success but I will be open about my own insecurities both about my own valuations and about markets.

Class Structure

Since my objective in the class is that by the end of it, you should be able to attach a number to just about any asset, I will roam the spectrum. I will start with the basics of intrinsic value, partly because it is where I am most comfortable and partly because it provides me with ways of dealing with other approach. The mechanics of estimating discount rates, cash flows, growth and terminal value are not just simple, but easily mechanized. It is the specifics that we will wrestle with in this class:

• On risk free rates, usually the least troublesome and more easily obtained input in valuation, we will talk about why risk free rates vary across currencies, what to do about currencies that have negative risk free rates and whether normalizing risk free rates (as many practitioners have taken to doing) is a good idea or a bad one.
• On risk premiums and discount rates, we will wrestle with questions of what risks should and should not be incorporated into discount rates and the different methods of bringing them in. In the process, we will examine how best to estimate equity risk premiums and default spreads, and why even if you don't like betas or portfolio theory, you should should still be able to estimate discount rates and do intrinsic valuation.  
• On cash flows, we will focus on why accounting inconsistencies (on dealing with R&D, leases and other items) can lead to misstated earnings and how to fix those inconsistencies, examine what should and should not be included in reinvestment (capital expenditures and working capital) and what to do about stock based compensation.
• On growth, we will start with the easy cases (where historical earnings growth is a good predictor of future growth) but quickly move on to more difficult cases (of companies in transition) and to what some view as impossible cases (like estimating growth in a start-up)>
• On terminal value, the big number in every DCF,  that can very quickly hijack otherwise well-done valuations, we will develop simple rules for keeping the number in check and put to sleep many myths surrounding it.

We will apply intrinsic valuation to value companies across the life cycle, in different sectors and across different markets. We will value small and large companies, private and public, developed and emerging and discuss how to value movie franchises (like Star Wars), phenomena (Pokemon Go) and sports teams. We will talk about why start ups can and should be valued in the face of daunting uncertainty and how probabilistic tools (simulations and decision trees) can help.

About half way through the class, we will turn our attention to pricing assets/businesses, where rather than build up to a value from a company's fundamentals, we price it, based on how the market is pricing similar companies. Put simply, we will shine a light on the practice of using pricing multiples (PE, EV/EBITDA, EV/Sales) and comparable companies not with the intent of improving how it is done. We will also talk about why, even when you are careful and take care of the details, your pricing of a company can be very different form its value.

In the last segment of the class, we will stretch our valuation muscles by talking about how option pricing models can sometime be used to estimate the additional value in a business, such as undeveloped reserves for a natural resource company or expansion potential for a young growth firm, and sometimes to value equity in deeply distressed companies. We will close by looking at acquisition valuation, where good sense seems to be in short supply, and how understanding value can be critical to corporate managers.

Want to sit in?

If you are intrigued or interested, you are welcome to sit in on the class (online and unofficially). While my immediate attention will be reserved for the Stern MBAs who will be registered in this class, you will have access to all of the resources that they do, starting with the lectures but also extending to lecture notes, quizzes/exams and even emails. The bad news is that I will be unable to grade your work or give you a certificate of completion. The good news is that the price is right. There are three ways in which you can join the class:

1. My website: The most comprehensive and most updated center of all things related to this class at this link. You will find the webcasts, lecture notes, past exams, reading and even the emails I send on this class here.
2. iTunes U: Just as I am not an Excel Ninja, my capacity to deal with html is primitive and my website's design reflects that lack of sophistication. If you prefer more polish, you can try the iTunes U app in the Apple app store. It is a free app that you can download and install on your Apple device. Once you have it installed, click on the add course and enter the enroll code FER-SFJ-AKA. Like magic, the class should pop up on your shelf. If you don't have an Apple device, you can get to the course on your computer using this link. If you have an Android device, you can use a workaround by downloading this app first. Like all things Apple, the set up is amazing and easy to work with.
3. YouTube: The problem with the first two choices is that they presuppose that you don't have a broadband constraint, perhaps a phone internet connection or worse. My suggestion is that you use the YouTube playlist that I have created for this class at this link. The nice thing about YouTube is that it adjusts the image quality to your connection speed. So, it should work in almost any setting.

Since I have made this offer for almost 20 years now, predating the MOOC boom and bust, I can offer some suggestions. First, it is a lot of work to watch two 80-minute lectures a week, try your hand out at working through actual valuations and finish the class in fifteen weeks, if you have other things going on in your life (and who does not?). My suggestion is that you cut yourself some slack and take more time, since the materials will stay up for at least a year after the class ends. Second, watching a lecture online for almost an hour and a half can be painful and for those of you who find the pain unbearable, I do have an alternative. A couple of years ago, I created an online version of this class, shrinking each 80-minute session into 10-15 minute sessions and this class is also available on my website at this link, on iTunes U at this link and on YouTube. Third, whichever version of the class you take will stick more if you pick a company and value it and even more, if you keep doing it. 

The End Game

I would love to tell you that I live a life of serenity and that I am sharing for noble reasons, but that would not be true. I am sharing my class for the most selfish of all reasons. I am a performer (and every teacher is) and what performer does not wish for a bigger audience? If I am going to prepare and deliver a class, would I not rather have thirty thousand people watch the class than three hundred. If you get something of value from this class, and you feel the urge to repay me, I will make the same suggestion that I did last year. Learning is one of those rare resources that is never diminished by sharing. So, please pass it on to someone else! See you in class!

Links

1. Entry Page for the Valuation Spring 2016 (on my website)
2. Webpage for the Valuation Spring 2016 class webcasts (on my website)
3. iTunes U for the Valuation Spring 2016 class (Enroll code on device: FER-SFJ-AKA)
4. YouTube Playlist for the Valuation Spring 2016 class
5. Webpage for Valuation Online class (short sessions)
6. iTunes U for the Valuation Online class (short sessions)
7. YouTube for the Valuation Online class (short sessions)