“Valuation – Measuring and Managing the Value of Companies” (by Tim Koller, Marc Goedhart and David Wessels) – a Financial Book Review

It is hard at least not to have a look at this book if you find it on a library shelf. This is valid for multiple reasons:

– “Valuation – Measuring and Managing the Value of Companies” is a book written from a practical perspective by McKinsey practitioners (among the best in the world in the non-bank investment advising for M&A’s)

– The book covers almost any aspect of the corporate valuation, from a stock market perspective to an internal projects point of view;

– “Valuation” comes inside the rigorous “Wiley Finance” collection where you can expect a detailed approach on most of the finance topics.

These said, my expectations were quite high – also the promises made were substantial. And after all, I was just curious why “Valuation” is the bestselling guide on corporate valuation.

The book has a logical system building approach. It starts from the foundations of value, where the authors try to dispel some of the misconceptions about how to measure the worth of a company (e.g. the permanent focus on revenues compared to cash flows). Then it moves on to the core valuation techniques, with lots of explanations and examples. Afterwards, the reader is armed with the key techniques and from the page 348 the book goes into the realm of the practical value measurement. “Valuation – Measuring and Managing the Value of Companies” digs into the stock market and the intrinsic value measures, then looks at how corporate managers manage their companies for increases in value. The book even contains a special chapter on special situations, such as valuing banks or cyclical companies.

“Valuation – Measuring and Managing the Value of Companies” is a technical finance book – do not expect to go through it during your late evenings and as a supplementary reading. Its benefits are quite substantial – as a corporate finance practitioner myself, I appreciated the twists and turns the book took in going into the fine details of what happens in reality. This should help a lot when meeting with various situations – and when you want to perform your due diligence correctly and unbiased.
On the other hand, this is an American book – the approach is often global, ignoring the peculiarities of different cultures. Although a great deal of effort is put into considering multiple stakeholder perspectives, I found that there was some extra work to be done here. At last (but not at least), the book tried to be an objective assessment tool, which does not work always in practice. The latest advances in behavioral finance are often quite intriguing and worth considering. This is not a bad thing – and after all, why would we need anymore the McKinsey consultants if we would apply exactly the recipes from the book and get the best results?
All in all, I found this book a highly informative supplement to the repetitive and theoretical courses of corporate finance.
So much about the book itself. Here’s the content of it and… enjoy.

The book was published by Wiley Finance.
Table of contents:

About the Authors.

Preface.

Acknowledgments.

Part One Foundations of Value.

1 WhyValueValue?

2 Fundamental Principles of Value Creation.

3 The Expectations Treadmill.

4 Return on Invested Capital.

5 Growth.

Part Two Core Valuation Techniques.

6 Frameworks for Valuation.

7 Reorganizing the Financial Statements.

8 Analyzing Performance and Competitive Position.

9 Forecasting Performance.

10 Estimating Continuing Value.

11 Estimating the Cost of Capital.

12 Moving from Enterprise Value to Value per Share.

13 Calculating and Interpreting Results.

14 Using Multiples to Triangulate Results.

Part Three Intrinsic Value and the Stock Market.

15 Market Value Tracks Return on Invested Capital and Growth.

16 Markets Value Substance, Not Form.

17 Emotions and Mispricing in the Market.

18 Investors and Managers in Efficient Markets.

Part Four Managing for Value.

19 Corporate Portfolio Strategy.

20 Performance Management.

21 Mergers and Acquisitions.

22 Creating Value through Divestitures.

23 Capital Structure.

24 Investor Communications.

Part Five Advanced Valuation Issues.

25 Taxes.

26 Nonoperating Expenses, One-Time Charges, Reserves, and Provisions.

27 Leases, Pensions, and Other Obligations.

28 Capitalized Expenses.
29 Inflation.
30 Foreign Currency.
31 Case Study: Heineken.
Part Six Special Situations.
32 Valuing Flexibility.
33 Valuation in Emerging Markets.
34 Valuing High-Growth Companies.
35 Valuing Cyclical Companies.
36 Valuing Banks.
Appendix A Economic Profit and the Key Value Driver Formula.
Appendix B Discounted Economic Profit Equals Discounted Free Cash Flow.
Appendix C Derivation of Free Cash Flow,Weighted Average Cost of Capital, and Adjusted Present Value.
Appendix D Levering and Unlevering the Cost of Equity.
Appendix E Leverage and the Price-to-Earnings Multiple.
Index.

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