DCF: Gold Standard or Fool’s Gold?
In their new article for Asia – Pacific Arbitration Review 2020, Montek Moyal and Alex Davie discuss the pros and the cons of discounted cash-flow as a method of valuing a growth business. They also explore the reasons for the apparent divergence between the attitudes of tribunals and investors to the differing approaches of DCF and cost-based valuations, recognising that this is at least in part a matter of law.
"In disputes in which the claimant has suffered substantial economic losses, for example the loss of a valuable business or of an ongoing stream of cash flows, questions arise as to how to quantify that loss. In investment treaty arbitration the appropriateness of the use of discounted cash flow (DCF) analysis as a basis for calculating such losses is often at issue.
DCF analysis is a widely adopted business valuation approach among investors, business managers and corporate finance professionals. However, tribunals in investment treaty disputes are sometimes reluctant to rely on it. Conversely, cost-based valuation methods are rarely used in valuation practice while tribunals frequently make awards of damages based on them."