InChapter 13 onvaluingcontrol,wenotedthatthevalueofa
firm can be substantially higher if we assume that it is
optimallyrunthanifitisrunbyincumbentmanagement.A
questionthatweareoftenfacedwithinvaluationiswhether
weshouldvaluethefirmwithincumbentmanagementorwith
optimalmanagement.Theanswerissimpleinsomecasesand
complicated in others.
- Ifyouareinterestedinacquiringthefirmandintend
tochangethemanagement,youshouldvaluethefirm
with the optimal management policies in place.
Whetheryouwillpaythatamountintheacquisition
willdependonbargainingpowerandhowlongyou
think it will take to change the way the firm is run. - Ifyouareasmallinvestorlookingatbuyingstockin
thefirm,youcannotchangeincumbentmanagement
yourself but you can still pay a premium if you
believethatthereisapossibilityofchange.Ifthere
are strong mechanisms for corporate
governance—hostiletakeoversarecommonandpoor
managersgetreplacedquickly—youcanassumethat
thevaluewillquicklyconvergeontheoptimalvalue.
If, on the other hand, it is difficult to dislodge
incumbentmanagement, you shouldvalue thefirm
based on their continue stewardship of the firm. - Ifyouareaninstitutionalinvestor,youfallbetween
thesetwoextremes.Whileyoumaynotintendtotake
overthefirmandchangethewayitisrun,youcould
play a role in making this change happen.
CHOOSING THE RIGHT RELATIVE VALUATION
MODEL