Investing in distressed assets requires great skill and talent. I would even consider investing in distressed assets to be a profession by itself! Our finance tutor has an excellent article today on the risks and rewards of investing in distressed articles.

As our MBA finance students consider the various opportunities in the world of finance, I would encourage you to explore the opportunities in investing in distressed assets. There are many ways to tap into the distressed assets space. Some of them  include

• Private equity firms that specialize in distressed assets;
• Distressed assets departments in investment banks;
• Directly investing in distressed assets;
• Banking departments that lend to distressed asset investors, etc.

Investing in distressed assets can be very profitable. Often the reason for distress is very clear, personal/specific and temporary. When the distressed situation blows away, the distressed assets gains tremendous value!  This article on investing in distressed assets highlights the profitability of the method when successful.

However, investing in distressed assets also has a high degree of risk. This risk is usually due to misreading the reason for distress or for misplaced or incorrect future expectations. The article also highlights an example of William Ackman’s (Perishing Square Capital Management) experience in investing in Stuyvesant Town and Peter Cooper Village.

If you are interested in learning more about investing in distressed assets, please do call or email us. Our finance tutors will be happy to assist you in learning how to evaluate and model opportunities.

Google’s recent bid to buy Groupon’s business offers interesting lessons in valuation. Rather than rewrite the story, I want to point you to a finance tutor‘s article on business valuation.

Finance Tutor addresses the article from the perspective of testing the valuation concepts you learn in business school. With their permission, I repost finance Tutor’s article here. This is the second part and focuses on explaining multiples based valuation methods.

Part 2

Valuation Multiples: Groupon’s $6 Billion value using multiples

Our last post on business valuation spoke about how you can approach business valuationusing the discounted cash flow method or the valuation multiples method.  Here we show you how you can estimate the value of Groupon’s business using the multiples valuation method.

Your first task when trying to arrive at a multiples based valuation is to find comparable companies. Comparable companies are similar companies or companies that are in the same business, companies with similar characteristics, growth rates, profit margins, etc. Often it is not possible to get an exact match so picking a company with similar characteristics, growth rates and profit margins is sufficient.

For Groupon, Google itself may be a comparable company to arrive at valuation multiples. Google is significantly larger and but its slower growth rates compensate for the size difference. Apple has shown great growth but is much larger and is not a purely service business. Ebay can be a comparable firm to arrive at valuation multiples too. Lets start with Google.

Sales Multiples (valuation multiple)

According to the NYT, Groupon’s revenue may top $1 billion a year. This is a good place to start.  Google has revenues of 27.55 billion and a business valuation of 149.21 billion (enterprise value) today according to yahoo finance. This works out to a sales valuation multiple of 5.4x (149.21/27.55).

Using this 5.4x sales valuation multiple, Groupon’s business value will be $1 Billion*5.4 = $5.4 billion! This business valuation is in the ball park of the rumored deal price!

Earnings Multiples (valuation multiple)

Google has a PE multiple of 23.23. PE stands for Price/Earnings per share. This indicates that its business valuation is approximately 23.23 times its earnings as Google has very little debt.  If we assume that Groupon has the same profit margins as Google (28.8%), we can estimate its potential earnings at 288 million (28.8%*$1 Billion).

Using the above estimates, we can arrive at Groupon’s business valuation of $6.69 billion (288*23.23). This business valuation is again in the ball park of the rumored deal price! At first sight, it looks like Google is overpaying for Groupon. But it may not be overpaying. It may be a steal!

So are the business valuation concepts you learn in class used in business valuations in the real world? Looks like a resounding YES! So make sure you get your MBA finance concepts clear. You may be called to use it in the near future!

Go ahead and try the same with EBAY or AAPL’s valuation multiples. Let us know what you would pay for Groupon business using valuation multiples.

Google’s recent bid to buy Groupon’s business offers interesting lessons in valuation. Rather than rewrite the story, I want to point you to a finance tutor‘s article on business valuation.

Finance Tutor addresses the article from the perspective of testing the valuation concepts you learn in business school. With their permission, I repost finance Tutor’s article here.

Part 1

You learn the about business valuation in business school. But are the business valuation concepts you learn in business school used in business valuations in the real world?  Lets check a current business valuation:

You must have heard about Google’s interest in buying Groupon’s business at a reported valuation of $5-6 Billion! How could Google arrive at this business valuation of Groupon’s business? Valuation principles direct us to use either the discounted cash flow method orvaluation multiples method to arrive at business valuations.

Business Valuations using the Discounted Cash-flow Method

To arrive at business valuation using the Discounted Cash-flow (DCF) process, we need to project out the cash flow of the business into the foreseeable future.  We discount this cash flow at the appropriate discount rate to arrive at the present value of cash flows for this valuation period. We then estimate a terminal value (present value of the cash flow beyond the foreseeable future assuming cash flow grows at a constant rate usually inflation rate or slightly higher).  The sum of the present value of cash flows for the foreseeable valuation period and the terminal value form the basis of the business valuation using the DCF method.

Can we estimate Groupon’s business value using the DCF method? We will need detailed projections of Groupon’s future cash flow which we do not have! We can try arrive at the business valuation with some estimates. But why do this when we have an easier approach?

Business Valuations using the Multiples

Business valuations using the valuation multiples is essentially looking at the business valuation similar companies have obtained recently and relating that to known business metrics like sales, earnings per share, customers,  etc. Groupon does not have any comparable companies with publicly available data. We therefore need to look at companies with similar business characteristics, growth rates, profit margins, etc to arrive at the appropriate valuation multiples.

Part 2 of this post shows you how valuation multiples can be used to arrive at the business valuation of Groupon.

Have we learnt our lessons from the economic crisis? Or do we still need more financial risk tutoring? What can MBA programs do to promote an understanding of financial risk in MBA students who will lead in the future ?

The economic crisis over the last two years has seen plenty of paper, ink and blog space being used to point fingers at almost everyone! Governments, political parties, organizations ( both private and public), individuals, leaders, society, habits, et al have been accused of contributing to the crisis. Economist.com has an interesting take on financial risk. In a special report on financial risk Matthew Valencia talk about various views. Read it in detail.

Much has been written and talked about. Have we learnt our lessons? Or do we still need more financial risk tutoring? I believe we still need more financial risk tutoring. Creative financial accounting, fancy economic models and financial modeling, etc are not the solution. Business schools must make financial risk management an integral part of their MBA programs.

The MBA program is a challenge for most of us! Juggling work, studies, family duties, extra curricular activities and other demands on your time is never easy. If you are from a non- business background you can add to that list subjects like accounting, finance, statistics and operations research which require great tutors and sufficient time to master. We hear this often and want to highlight this great quote from Roosevelt.

It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.

- Teddy Roosevelt, April 23rd 1910

Hang on and persevere. This MBA program will be over soon and you will enjoy the benefits of being an MBA graduate! In the meantime, if our MBA tutors including accounting tutors, finance tutors, statistics tutors, economic tutors, operations management tutors, etc can assist you in any way, please do not hesitate to get in touch with us. Private tutoring does make learning a lot easier and faster.

Today’s WSJ has an article on a trend in business schools these days. With jobs few, business grads are turning into entrepreneurship.

This is in our opinion, a good trend. Entrepreneurship will teach them a number of things that a regular job will not – and quickly. Business plans, cash-flow management, customer service, value to a customer, competition, recruiting, etc become not just terms or concepts these business school grads are familiar with but real issues to deal with directly! It also helps boost the economy as they generate net jobs and value to investors.

A quick bit of advice. Make sure you have a good business plan – We leave it up to you to decide if you want to write it out or just think it through. Here is a quick article on why it is very important to have a business plan.

The MBA tutors at GraduateTutor.com salute this trend and have been helping aspiring entrepreneurs with business plans in a variety of ways. If you are looking at developing a business plan, our MBA tutors can help you in a number of ways be it collaborating with you to write the entire business plan, reviewing your business plan to suggest areas to improve it, providing you research support to find critical data points or building a financial model for your business plan. Read more about our business plan services here. Our MBA tutors have helped a number of our customers who have included business school graduates who just want a second opinion or those who are unfamiliar with business and need a lot of help. We can also draw upon specialists from our pool of finance tutors, accounting tutors, economic tutors and other research specialists depending on your need. We are happy to assist and welcome more entrepreneurs into this world.

GraduateTutor will now provide tutoring for MIT’s Open Course Ware (OCW) program – Financial Management-15.414. Corporate Finance, Capital Markets, Managerial Decisions, Financial Assets, Financial Derivatives etc are few common titles that one come across very often in B Schools and for that matter in a corporate world. MIT’s Open Courseware via Sloan School of Business titled ‘Financial Management-15.414 (Summer 2003)’ includes all of the above!

MIT’s Open Courseware (OCW) via Sloan School of business is a generous innovation in the field of education. Graduate Tutor has been working towards its vision; to make learning easier than ever before by rendering homework help and tutoring services on various topics included in MIT’s OCW. ‘Financial Management-15.414 (Summer 2003)’ is the latest addition.

Graduate Tutor’s expert tutors consist of MBA, CPAs or CFAs with strong tutoring skills in accounting and finance among other topics. Currently we provide tutoring to finance students from a number of top business schools and we are confident with their ability to tutor ‘Financial Management-15.414 (Summer 2003)’

‘Financial Management-15.414 (Summer 2003)’ is just one of the many topics that we plan to provide tutoring in. We hope to widen our spectrum and provide tutoring support to more programs included in MIT’s open courseware.

Enjoy learning and look forward to it!