More academics
The next class we shall cover in the "MBA Under The Microscope" series is "Financial Markets and Valuations". This particular specimen is taught by a German. At the risk of promoting exceptionally poor stereotypes, the similarity between him and a certain character in the bastion of political correctness that is "'Allo 'Allo" is uncanny.
He has a tendency to add a "hmm" or a "yes" or a "good" to every other sentence. For example:
"So we can calculate the NPV which gives us the IRR rate. Hmm. Using this we can reach a company valuation, yes? Good."
The course itself seems to resolve firmly around the principle of Net Present Value. Or in other words how much I have to give you tomorrow to get you to give me some money today. It seems to be an amazingly flexible thing this simple concept. We've used it to find out all manner of things from how bonds get valued to what's a fair price you should pay for a company. In fact only now do I start to feel like I know what all those important banker M&A types actually do at 3AM. In the process I've chalked up yet another reason why I don't want to be a banker.
The morally objectionable bit is that so far every time we've done a case on valuing a company the answer which invariably turns out to have the highest NPV is buying the company and then immediately shutting it down and selling all the assets off. I keep thinking about all these people made unemployed cause a spreadsheet in Excel said so. Clippy has a lot to answer for.
He has a tendency to add a "hmm" or a "yes" or a "good" to every other sentence. For example:
"So we can calculate the NPV which gives us the IRR rate. Hmm. Using this we can reach a company valuation, yes? Good."
The course itself seems to resolve firmly around the principle of Net Present Value. Or in other words how much I have to give you tomorrow to get you to give me some money today. It seems to be an amazingly flexible thing this simple concept. We've used it to find out all manner of things from how bonds get valued to what's a fair price you should pay for a company. In fact only now do I start to feel like I know what all those important banker M&A types actually do at 3AM. In the process I've chalked up yet another reason why I don't want to be a banker.
The morally objectionable bit is that so far every time we've done a case on valuing a company the answer which invariably turns out to have the highest NPV is buying the company and then immediately shutting it down and selling all the assets off. I keep thinking about all these people made unemployed cause a spreadsheet in Excel said so. Clippy has a lot to answer for.
posted by The Apprentice at 8:31 AM
5 Comments:
Does that mean that all the case studies have been specially chosen i.e. aren't representative of an average company? If all companies would be better to shut down and sell on rather than continue as a going concern, then there wouldn't be a market for the assets i.e. no other company would be able to put the assets to more efficient use therefore no company would be prepared to pay more for the assets than the first company would generate by using them. Does that just mean that only the best in the sector survive? If so, guess that's bad because you don't give companies the chance to improve/learn unless they do it quickly. Bit like natural selection. Is that right? Guess the argument for it is that the most efficient companies surviving means that the economy/work force benefits overall, but you're saying that on the day-to-day level the upheaval created for individuals needs to be taken into consideration? Just checking.
Thanks Dave.
What I actually mean is that you end up building an Excel sheet, which takes roughty around 100 numbers as assumptions to spit out a single number as an output (namely net present value).
In the real world, this glamorous job is giving to investment banker types. Now you probably don't know this, but investment banker types are paid to do glamorous "Wall Street" type deals, otherwise they get fired. So then the investment banker types go in and do the little Excel, and try and guess what values to put into their 100 assumptions, there is a slight tendency to want to show something or tother that's more likely to get a deal done.
And having seen what those people do on Countdown with just 5 numbers, I can quite safely tell you that if you have 100 numbers to play with you can make any dream come trye.
Now, myself, I find that quite humourous, but I have a nagging feeling that Dave is less likely to see the funny side - complete econo-novice mistaken for econo-meister at Her Majesty's service no less...ouch. ;)
As I suspected, there is a rational answer to the mistaken identity conundrum - your friendly Apprentice had not in fact read my posting before responding to it. Faith in the big man's judgement returns!
It's not just investment banker M&A types that use NPV; us actuarial types use it too... but not until 3am ... and for far less pay.
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