deal is seriously overpriced and recommend rejection, in
which casetheanalyst receivestheeternalgratitudeofthe
stockholdersoftheacquiringfirmbutlittleelse.Theotheris
tofindthatthedealmakessense(nomatterwhatthepriceis)
andtoreaptheamplefinancialwindfallfromgettingthedeal
done.
Manifestations of Bias
Therearethreewaysinwhichourviewsonacompany(and
thebiaseswe have)canmanifest themselvesin value.The
firstisintheinputsthatweuseinthevaluation.Whenwe
value companies, weconstantly come to forksin theroad
where we have to make assumptions to move on. These
assumptionscanbeoptimisticorpessimistic.Foracompany
withhighoperatingmarginsnow,wecanassumeeitherthat
competitionwilldrivethemarginsdowntoindustryaverages
veryquickly(pessimistic)orthatthecompanywillbeableto
maintainitsmarginsforanextendedperiod(optimistic).The
pathwechoosewillreflectourpriorbiases.Itshouldcomeas
no surprise then that the end value that we arrive at is
reflective oftheoptimisticorpessimistic choiceswe made
along the way.
Thesecondisin whatwewillcallpostvaluationtinkering,
where analystsrevisit assumptions after a valuation in an
attemptto getavaluecloserto whattheyhadexpectedto
obtainstartingoff.Thus,ananalystwhovaluesacompanyat
$15pershare,whenthemarketpriceis$25,mayrevisehis
growthratesupwardandhisriskdownwardtocomeupwith
a higher value, if he believed that the company was
undervalued to begin with.