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Prof. Damodaran's Perspective on Valuation of Finance Firms - Interview continued...

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Indian companies have done some large foreign acquisitions in the last 2 or 3 years at high valuations. Will those deals increase shareholder value in the long run?

Acquisitions in general are value destroyers. Most of them are generally done in a hurry. So I am not a fan of an acquisition-based growth strategy. It doesn’t matter who does them or who they are buying. I think the bad outcomes outnumber the good ones.

If you have to choose between US Equity market and the Indian Equity market, where would you invest?

I don’t invest in markets but I invest in companies. So rather than investing in markets, I’ll try to find good companies. You have good companies in both the markets. So unless you are buying an index fund, you need to analyze individual companies.

Should small investors rely on analyst reports and stock ratings? Can they really benefit from recommendations from sell-side analysts?

No, I don’t think they help any investors, big or small. I don’t think there are many research analysts who have made money on their own recommendations. However, there is a subset of investors who do have special insights into the capital markets.

What will be your suggestion to someone who is preparing for a Corporate Finance/M&A career? How should he/she differentiate in this competitive market?

Do it for the right reason and do it because you enjoy finance and not because you are thinking about making a lot more money. If you are going to get a job you hate, what have you gained, even if it pays well? I think a lot of people are going into finance just because they think that they can make a lot more money. I think those people are setting themselves up for a lot of disappointment.

What would you advice someone who is launching his career in this economy? Which industries and sectors do you think have the highest potential?

I think that’s a tough question. Different parts of the same company can grow at different rates. You could be in an entertainment company and your online movie business might be growing by 50% but your newspaper magazine business might be shrinking. So rather than thinking about the company you want to work for, you need to think in terms of business that you would like to work in.

It also depends on which part of the world you are in. If you are in an emerging market and in a traditional manufacturing company, then you have a lot of potential growth. But again rather than pick a company that is growing, pick a company that you like because even in a mature company you are going to find a lot of interesting work to do. You have to discover what you would like to do and what businesses you would like to get involved in. There’s plenty of demand in every business for finance professionals. 

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