MSFT recently agreed to buy Skype for $8.5 billion. This seems high, but is it? Thankfully Aswath Damodaran (NYU Finance Prof and Valuation expert) has done the heavy lifting and put together a valuation of Skype. You can download his spreadsheet from his posting.
I've taught valuation for several years and I think Prof Damodaran's model is a great example of what a good valuation should contain:
1. Clearly defined inputs and assumptions - don't make your model a black box. Make it transparent.
2. Sensitivity analysis. Accept that valuation is not a precise science so show the value changes over a sensible range of inputs.
3. No math errors!
I won't spoil the surprise of telling you what Prof D's valuation ended up at, but it isn't $8.5bn.
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