Book Review: Corporate Valuation for Portfolio Investment

Corporate Valuation for Portfolio Investment: Analyzing Assets, Earnings, Cash Flow, Stock Price, Governance, and Special Situations (2010, Bloomberg Press), is an ambitious effort by coauthors Robert A.G. Monks, a renowned shareholder rights activist, and Alexandra Reed Lajoux, an M&A expert. They cover a lot of ground in around 540 pages, and state at the end of Chapter 1 that the book is intended primarily for institutional investors, adding that they would be honored if professors recommend their book along side other classics such as Security Analysis.

The book favors breadth over depth in many instances, but is rich in footnotes for further research. Students of finance and practitioners will find Corporate Valuation for Portfolio Investment a great book to read reference, while individual investors with no formal background in finance will in fact have much to gain from the chapters on financial statements, valuation methods, and the coauthors’ “philosophical framework” for valuation.

Contained within their introductions to, and descriptions of, effectively the A-to-Z of valuation, there are numerous comment boxes throughout that feature Monks at his best. Of the short and sweet variety:

Accounting Antiquity: One can understand financial statements only by imagining that the figures are in Roman numerals and the footnotes in classic Greek.

Inquisitive:

Cash Conundrum: I have long pondered the unresolved conundrum of the lack of value of cash in the largest companies. Focusing on importance of P/E (price-earnings ratio), what does $1 billion more or $1 billion less mean to Exxon’s market value? The Delaware Chancery Court in the Disney decision held that the $150 million payment to former CEO Michael Ovitz was not “material.” Could it be that in the largest companies, cash has no real value?

And:

In a letter dated April 14, 2010, that he wrote to Lloyd C. Blankfein, chairman and CEO, Goldman Sachs:

The marketplace is a Commons. The ancient need for all who use the Commons is to contribute to its upkeep and avoid its abuse. We are passing through a period of time in which the cost of the “bailout” of the Commons exceeds $3 trillion…. It now appears clear that many of the transactions accepted by banks had no commercial purpose beyond the generation of fees. These transactions created huge losses. Should the taxpayers be responsible entirely for these losses, or should the banks (and their principal officers) who collected fees for their origination and trading share in the loss?

There’s plenty to ruminate on in Corporate Valuation, from their discussion of valuing intangibles, IFRS, Ben Graham, Soros’ concept of reflexivity, Tobin’s Q, and building valuation models. In addition, Chapter 7 (Market Value Drivers of Public Corporations: Genius, Liberty, Law, Markets, Governance, and Values), is one that shareholder activists will appreciate. There is some excellent material discussing what is “good” corporate governance. Consider the following: “[...] good governance is not additive but essential.” Regarding disclosure, they say it is not only about what, but also how (information is disclosed), noting the dilutive effect of ever more disclosure and the cost (time) to companies.

Closing out this review, let me say again that Corporate Valuation is an ambitious effort by the coauthors given the complexity of the subject. I think they did well given the ground they covered and valuable insight each added respectively from decades worth of hands-on experience. Intended for institutional investors, a lot of material is accessible to individual investors as well. While I was surprised to see typos and some errors appear throughout the book, I don’t think these are a deal breaker. I finish with their perspicacious conclusion:

There is therefore no absolute definition of valuation. Valuation exists to serve particular functions; it has validity at particular times and applies only to the dynamics of a specific situation.