I recently bought a magic deck of cards. I was wandering around a shopping mall in a foreign city and out of curiosity walked into a magic shop. I walked out with something called a Tapered Deck.

 

The Tapered Deck is exactly what it sounds like, a deck in which the cards are tapered. The cards are all slightly wider at the bottom and narrower at the top.

 

The difference is so slight though, that on picking up the cards you wouldn't really notice it.

Turn one card 180 degrees and reinsert it in the deck though and it is clear that the cards aren't symmetrical. The one that is rotated sticks out at its wide end just enough that it's obvious if you're looking for it, but not enough that an unsuspecting audience member is unlikely to notice.

Once you understand the simple properties of the Tapered Deck, it doesn't take much to imagine the magic tricks that could be performed with it. The magician can fan out the cards, ask an audience member to pick one, look at it and insert it back into the deck. All the magician has to do is rotate the deck while the audience member is looking at the card so that the card is reinserted in the opposite direction to the rest of the deck. The magician can then amaze everyone by finding the correct card by magic.

It took someone pretty clever to come up with the Tapered Deck, but it's very simple to use once you see how it works. I can do this trick with virtually no practice and if you were watching you would not be able to work out what I did, unless you had read this column.

This is of course a nice metaphor for the finance industry. All the fancy products, the leveraged finance structures, even the capital-raising strategies all took some very clever folks to dream them up, but once that was done, practically anyone could sell them to their clients. What's important is the performance.

The magician doesn't just come out on stage and show you some clever illusion. He puts on a tuxedo, he talks about his mystical powers and he produces all sorts of props and explosions and perhaps even has music to accompany his act. The audience is impressed, not just by the magic, that's the easy part, but also by the magician.

A client came to me recently to ask my advice on the value of one of its subsidiaries. The company, Chepperphonica Corp, is a telecommunication business that buys bulk time from telecom companies and then sells it to individuals who want to make cheap international phone calls. The client was interested in the value of Chepperphonica as they were thinking of selling it.

There are three things that bankers do to value businesses. First, we estimate the future cash flow of the business, apply an annual discount rate and come up with what we call a net present value. Second, we look at how much similar companies trade at on stock exchanges around the world and we extrapolate from that how much the business would be worth if it too was listed on those stock exchanges. Third, we dig up all the values of the recent sales of similar businesses and extrapolate from them, too.

The methods to reach at these numbers are relatively simple and once you understand the formulae, it is not a great deal more complicated than plugging in the numbers. But that's not how it tends to be explained. When we presented our valuation report on Chepperphonica, we showed the client a lot more that the three numbers we had come up with. We produced a 125-page document full of industry updates, analysis of market trends, and a discussion of the relative merits of alternative valuation methodologies.

The report was long and detailed and it certainly gave the impression that the valuation exercise was a complicated process that required the skills of a team like us to pull it off. The graphs and tables and the photographs we dug up of telecommunications equipment were particularly good.

There were three senior managing directors wearing their costumes of dark suits, light shirts, striped ties and matching cufflinks at the presentation. And we of course concluded that the value of the business was at a level now that made perfect sense to sell, and that, given the complexity of the market and the business, it was necessary to hire a bank like us to execute the transaction. It was quite a good performance and even though there was really only one audience member, he seemed to be impressed.