Aswath Damodaran - The Dark Side of Valuation: Valuing Young, Distressed, and Complex Businesses

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Valuing Young, Distressed, and Complex Businesses

Third Edition

Aswath Damodaran

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2018 by Aswath Damodaran
Pearson Education, Inc.

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ISBN-10: 0-13-485410-1
ISBN-13: 978-0-13-485410-6

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Library of Congress Control Number: 2017960302

To Noah Henry Damodaran, who arrived just in time for this book on February 20, 2018, and is perfect in every way.

This book is dedicated to all those analysts, students, and investors who have challenged me with an unusual or uncommon valuation scenario, usually with the refrain of You cannot really value this with a DCF model, can you? My answer has always been Of course, you can! and the scenarios have added up over time to create both the dark and light sides of this book.

Aswath Damodaran is Professor of Finance at the Stern School of Business at New York University. He teaches the corporate finance and equity valuation courses in the MBA program. He received his MBA and Ph.D from the University of California at Los Angeles. He has written several books on corporate finance, valuation, and portfolio management. He has been at NYU since 1986 and has received the Stern School of Business Excellence in Teaching Award (awarded by the graduating class) eight times. He was profiled in BusinessWeek as one of the top twelve business school professors in the United States in 1994 and was chosen the most popular business school professor in 2012.

The first edition of this book is showing its age and origins. The idea for this book was born at the end of 1999, toward the end of the Dot-com boom, and was triggered by two phenomena: the seeming inability of traditional valuation models to explain stratospheric stock prices for technology (especially new technology) companies, and the willingness of analysts to abandon traditional valuation metrics and go over to the dark side of valuation, where prices were justified using a mix of new metrics and storytelling. The publication of the first edition coincided with the bursting of that bubble. The second edition came ten years later, just after the 2008 crisis, precipitated by a housing bubble bursting and banks behaving badly. With that crisis came the realization that the dark side of valuation beckons any time analysts have trouble fitting companies into traditional models and metrics, and the book reflected that broader perspective. Rather than focus on just young, high-tech (internet) companies as I did in the first edition, I expanded the discussion to companies that are difficult to value across the spectrum, including distressed companies, commodity firms, and banks.

In the eight years since the second edition was published, there are three macro phenomena that have confounded analysts trying to value companies. The first is that interest rates around the world, and especially so in developed markets, have not only hit historic lows but have become negative in some parts of the world. That has resulted in some analysts giving up on valuation, arguing that it does not work when rates are this low or negative. The second is that global market crises have become almost an annual occurrence, with each year bringing a fresh outbreak in a different part of the world, making risk premiums much more volatile in all markets. Finally, the journey to globalization, which a decade ago seemed unstoppable, has been not only slowed but perhaps even been pushed back in some parts of the world. In the third edition of this book, I look at how best to deal with low interest rates, volatile equity risk premiums, and political risk in valuation.

The first part of this book reviews the basic tools you have available in valuation. In particular, it provides, in compressed format, a summary of conventional discounted cash flow models, probabilistic models (simulations, decision trees, and so forth), relative valuation models, and real options. Much of what is included in this section has already been said in my other books on valuation.