Damodaran on Valuation

13.1. MEASURING THE EXPECTED VALUE OF CONTROL

The value of controlling a firm derives from the belief that someone would operate the firm differently from the way it is operated currently. We begin this section by considering the dimensions on which management decisions can affect the value of the firm and how to measure the effect of replacing existing managers. We follow up by considering the probability that existing management policies can be changed. The expected value of control is the product of these two variables: the change in value from changing the way a firm is operated and the probability that this change will occur.

13.1.1. Value of Controlling the Business

The value of a business is determined by decisions made by the managers of that business on where to invest its resources, how to fund these investments, and how much cash to return to the owners of the business. Consequently, when we value a business, we make implicit or explicit assumptions about both who will run that business and how they will run it. In other words, the value of a business will be much lower if we assume that it is run by incompetent managers rather than by competent ones. When valuing an existing company, private or public, where there is already a management in place, we are faced with a choice. We can value the company run by the incumbent managers and derive what we can call a status quo value, or we can revalue the company with a hypothetical optimal management team and estimate an ...