We started this session by looking at the value of flexibility through the option pricing lens and concluding that the value of flexibility is greatest at capital constrained firms, with uncertain and lucrative investment opportunities. We then turned to looking at distressed equity as an option, focusing on money-losing companies with a lot of debt, and used that template to talk about why equity in deeply troubled firms can continue to trade in the face of financial adversity, how equity investors can shift risk at highly levered firms and why equity in conglomerates can become less valuable, even if you buy companies are fair value. I am sorry if you found the rest of today's session to be a downer. Don't get me wrong. Acquisitions are exciting and fun to be part of but they are not great value creators and in today's sessions, I tried to look at some of the reasons. While the mechanical reasons, using the wrong discount rate or valuing synergy & control right, are relatively easy to fix, the underlying problems of hubris, ego and over confidence are much more difficult to navigate. There are ways to succeed, though, and that is to go where the odds are best: small targets, preferably privately held or subsidiaries of public companies, with cost cutting as your primary synergy benefit. If you get a chance, take a look at a big M&A deal and see if you can break it down into its components.
Slides: pages.stern.nyu.edu/~adamodar...
Post class test:
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Post class test solution: pages.stern.nyu.edu/~adamodar...