Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

ComponentValuation Guidelines

Control

premium

Value the company as if optimally managed.

This will usually mean that premium

investment,financing,anddividendpolicywill

be altered:

• Investment policy: Higher returns on
  projects and divesting unproductive
  projects.


• Financing policy: Move to a better
  financingstructure(e.g.,optimalcapital
  structure).


• Dividend policy: Return unused cash.
  Status quo
  valuation

Valuethecompanyas is,with existinginputs

for investment, financing, and dividend policy.

Byseparatingthevalueofcontrolfromthevalueofsynergy,
weaccomplishtwoobjectives.First,weensurethatthereis
nodoublecounting.If,forinstance,afirmhasalowreturnon
capitalbecauseitsassetsareinefficientlydeployed,weshow
theincreaseinvaluethataccruesfromredeployingtheassets
andincreasing thereturnon capitalaspartofthevalue of
control.Forsynergytocreatevalue,therehastobeafurther
increaseinreturnoncapitaltothecombinedfirm.Second,we
can devise strategies for acquisition bidding that can
differentiatebetweencontrolandsynergyvalue.Wemaybe
willing to pay close to 100 percent of the control value
(arguingthatthetargetfirmcouldhavemadethechangeson
itsown)butonlyaportionofsynergyvalue(sincesynergy
could not have been created without the acquiring firm).

Talking aboutpayingforsynergy alsoshouldhighlight the
importanceofnotonlyvaluingcontrolandsynergy,butalso