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

from thisgrowthand ignoreacquisitionsatthesametime.
Thiswillresultinanovervaluationofthefirm,sincewehave
countedthebenefitsoftheacquisitionsbuthavenotpaidfor
them.Note,though,thatwhenweignoreacquisitions,weare
assumingthatallacquisitions areatfairvalue—thereisno
valuecreatedordestroyedintheacquisitionprocessTothe
extent thatnotall acquisitionsarefairlypricedand not all
synergyandcontrolvalueendsupwiththetarget company
stockholders,ignoringthecostsand benefitsofacquisitions
willresultinanundervaluationforafirmlikeCiscothathas
established a reputation for generating value from
acquisitions. However, ignoring acquisitions canovervalue
firms that routinely overpay on acquisitions.

ILLUSTRATION3.9:TheEffectof Acquisitions:Ciscoin
2005

Sinceitsinception,Cisco’sgrowthstrategyhascenteredon
acquiringsmallfirmswithpromisingtechnologiesandusing
itsmarketingmuscleandmarketknow-howtoconvertthese
technologiesintocommerciallysuccessfulproducts.Sincewe
intendtoconsiderthegrowthfromacquisitionsinrevenues
andearnings,wehavetoconsiderthecostofmakingthese
acquisitionsinthecapitalexpenditures.Thefollowingtable
summarizes the acquisitions made during the most recent
fiscalyear(endingJuly2005)and thepricespaidonthese
acquisitions.

Company

Cash/Shares

Issued

Acquisition Value

($millions)

Actona TechnologiesCash 90