If we needed more evidence that valuation is as much an art as it is a science, we only need to look at the acquisition of Bear Stearns by JP Morgan. The initial share price was set at USD2 per share. A few days later, JP had to sweeten the offer to USD10 per share, a fivefold increase! How can a company be valued five times as much within such a short period of time? That's where the art factor comes into play. This particular deal had many underlying forces, including some parties that really should stay out of the M&A business such as the Fed. Bear Stearns had to agree to the USD2 offer that weekend if it didn't want to file for bankruptcy on Monday morning. It also would have sent the financial markets into chaos. So Bear Stearns' management agreed to the low offer because they had no other chance. When in subsequent days the stock traded well above the USD2 mark, it send a clear signal that investors believed the offer to be too low, forcing JP to increase it significantly. I am sure that if we had a chance to take a look at the cash flow models, that JP still predicts a very healthy return even at this price. We do not know where the "make-or-break" value for JP is based on the cash flow models, but what we do know is that in this case, the science part of valuation clearly took a backseat to the art part.
