Value, be it the value of a house, a business, or a normal sized trading lot of shares of a public company is equal to the present value of all future benefits expected to be derived therefrom. Value, being point in time specific, changes with changing circumstances and conditions both internal to (i.e. within the control of the owner) and external to (i.e. outside the control of the owner) the asset. The determination of the value of any asset absent an actual open market negotiation where both buyer and seller have full knowledge (or at least access to full knowledge) of matters relevant to an asset’s value can be said to be determined in hypothetical market.

At first blush, transactions in normal sized trading lots in publicly traded shares seem to be open market transactions, and are transactions between arm’s length buyers and sellers. However, an important distinction to be made in respect of such stock market transactions is that they are made between parties that do not have access to all information relevant to making a fully informed decision as to the value of the shares being bought and sold. This shortcoming is equally applicable to both buyers and sellers, and results principally from the fact that stock market participants other than insiders have access (pursuant to applicable securities laws) only to corporate information that has been publicly disclosed. To better understand this, consider the difference between information available to a Corporate Acquirer who executes confidentiality and other restrictive agreements prior to doing due diligence when acquiring all the outstanding shares of a company. That Acquirer has access to all the information pertaining to that company it requests, including insider information, as well as full access to open discussion with management where management is able to fully and openly answer all questions put to them by the Acquirer – and indeed is asked to warrant the veracity of all information provided. While not a perfect analogy, the Corporate Acquirer can be compared to a football quarterback who is unfettered by an imposed handicap whereas buyers and sellers of normal trading lots in the public markets are akin to football quarterbacks who are obligated to wear devices that eliminate some or all of their peripheral vision. The fact that public market participants and their advisors typically have less than full information available to them also is relevant when evaluating the methodologies used by investors and analysts when determining whether to buy, sell or hold. Readers with contrary, different or similar views are invited to comment. In particular, comments as to whether the foregoing differentiation of information available to Corporate Acquirers and Public Market Participants is obvious to readers will be of particular interest.

This entry was posted on Sunday, September 23rd, 2007 at 9:45 am and is filed under Stock Research. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.