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Technology Stocks : Winstar Comm. (WCII) -- Ignore unavailable to you. Want to Upgrade?

To: limtex who wrote (8072)	9/1/1998 7:32:00 PM
From: silicon warrior	Read Replies (1) \| Respond to of 12468

L: IBs do that kind of stuff all day. As i said earlier, there are a variety of approaches, each potentially valid. In a takeover and IB opinion context, the IB usually uses at least three approaches: DCF, comparables (bbased on multiples of earnings, revenues or cash flows) and market (*sometimes based on comps.) They then often ad a factor for a "control" premium. As to strategic valuation, that game involves saying the company has unique value, allowing the acquiror to pay a higher multiple, or strategic premium. Thus, wcii is worth a lot more to , say, wcom, then to colgate. Plus, in valuations, IBs will also put it "savings". E.g., an acqiuror's lower capital costs will be factored into a reconstructed pro forma balance sheet. Basically, from what I've seen, you can justify just about any valuation, depending on whether you're defending a target or prowling for prey. One federal judge has said "a PHD may be found to swear to anything, no matter how false or foolish" Sorry about all the typos, too burned to correct

To: limtex who wrote (8072)	9/2/1998 2:39:00 AM
From: SteveG	Read Replies (1) \| Respond to of 12468

<..Does there really exist anywhere an absolute science of valuation...> Sure. On the bookshelves next to the absolute sciences of sociology, economics and religion. Ultimately, what the market agrees to value is subjective. But if you believe the writing on the comm wall, HBW is the near term future, and local loop HBW will be the major bottleneck.

To: limtex who wrote (8072)	9/2/1998 3:34:00 AM
From: wonk	Respond to of 12468

limtex: ...Does there really exist anywhere an absolute science of valuation. DCF and other technicals are I suppose one way and maybe valid but in my view even more valid is how much a third party would pay for the business. There definitely is but its subjective qualities have already been discussed in today's posts. Much of the time, confusion is injected into the discussion because terms are ill-defined. Fair market value, fair value, investment value, and intrinsic or fundamental value have different meanings. For example, "fair market value" is defined as the cash or cash-equivalent price, at which a property would change hands between a willing buyer and a willing seller, both being adequately informed of the relevant facts and neither being compelled to buy or sell. In contrast, "investment value" is generally defined to mean the specific value of goods or services to a particular investor or class of investor for individual investment reasons. Intrinsic or fundamental value has been defined as the amount that an investor considers, on the basis of the available facts, to be the "true" or "real" worth of an item, usually an equity security. Providing examples, whatever a stock trades at today is its fair market value. Of course its fair market value may be double that tomorrow. Yet, when IBs do a valuation for M&A, such a valuation would more properly be characterized as investment value, since the assignment is attempting to derive what the value of the property in question is to a specific buyer. Of course, intrinsic value and fair market value are critical to the M&A assignment as well. If the FMV is 1, the potential target believes the intrinsic value is 1.25 and the investment value is 1.5, an acquirer has the best of all possible worlds. Conversely, I think this example explains WCII's attitude on buy-outs and, in part, why none has been yet forthcoming -- the FMV of WCII is 1, the company believes its intrinsic value is 1.5, and its potential acquirers also think its investment value is 1.5 -- or less, at this moment in time. I suppose this is obvious but I'm just trying to put in the language of appraisal. "Intrinsic" or "fundamental" value is what the analysts are performing with a DCF. As sw pointed out there are 3 basic tools of valuation: discounted income (DCF or Discounted Future Earnings (DFE)),the asset appraisal approach and the comparable appraisal approach. The 3 methods are not mutually exclusive but in fact are inter-related: however which one is weighted more heavily is, in large measure determined by the circumstance. In regards to WCII, if the market lumps it together with the wired CLECs; its share price is strongly influenced by the day-to-day fluctuations of its brethren. Yet, the wired CLECs have traditionally been valued on multiples of Gross PPE (asset appraisal approach) which is dis-favorable to WCII because the CAPEX requirements for generating revenues and profits are so dissimilar. My opinion is that WCII is mispriced due to an over-reliance on comparables, which are not, due to differences in composition and value of assets. Too make a long story short, I would wholeheartedly agree with Steve that DCF is the best tool for valuing companies with negative cash flows. The analysts are calculating what they believe to be the intrinsic or fundamental value of the company, today. If the value predicted is divergent from the actual fair market value, it shows market inefficiency. As long as Winstar has sufficient cash (which it appears it does) to execute their business plan, the difference between the intrinsic value projected and the FMV is striking. ww p.s. Valuing a Business by Shannon Pratt is a good primer on appraisal. Also see Cashflow and Security Analysis by Kenneth Hackel & Joshua Livnat. There is a pretty good discussion on this thread. exchange2000.com p.p.s. Bernard, a DCF can be used to project future prices quite accurately -- assuming of course that the major parameters are reasonably accurate -- but there is an extra step. Its too late to go into now.