VALUATION PROJECT WORKBOOK CONFIDENTIAL SUMMER ANALYST PROGRAM – 2007 PRELIMINARY | SUBJECT TO FURTHER REVIEW AND EVALUATION THESE MATERIALS MAY NOT BE

PowerPoint PresentationVALUATION PROJECT WORKBOOK
PRELIMINARY | SUBJECT TO FURTHER REVIEW AND EVALUATION
THESE MATERIALS MAY NOT BE USED OR RELIED UPON FOR ANY PURPOSE OTHER THAN AS SPECIFICALLY CONTEMPLATED BY A WRITTEN AGREEMENT WITH CREDIT SUISSE.
CONFIDENTIAL
DRAFT
Table of Contents
2 Sample Project
B Company Profile
D DCF and WACC Analysis
E Merger Consequences Analysis
If you have any questions regarding materials in this book, or the valuation project in general, don’t hesitate to call us:
Anna Golynskaya Phil Kohn
Training Leader Training Leader
1. Overview of Valuation Project
CONFIDENTIAL
DRAFT
Overview of Valuation Project
Welcome to Credit Suisse! In addition to meeting a ton of new people and having fun for the next 10 weeks, we figured it would be helpful for you to return to college your senior year having learned something about what Investment Bankers do
Several analysts, associates, and Vice Presidents from across the division have worked hard to put the following materials together as your “one-stop shop” for banking how to’s
In addition to your group staffing assignments over the next two months, you will also be asked to complete a group valuation project to be submitted by Week 9 of your program. The submission will include the following:
A company profile
DCF valuation
Merger consequences analysis
At the end of the summer, August 2nd, your team will be asked to present, in a short session, your analyses and conclusions to a team of bankers
This project will be completed gradually over the course of the summer and we will be holding 4 sessions (1 every week) to cover each of the topics or analysis we will be asking you to do
You will be required to turn in you work for the topic covered each week at the following weeks session (i.e., you will go over profiles in first session and turn them in at the second session)
We plan to return your assignment within one week so you can see if you are on the right track and where you may need to improve
CONFIDENTIAL
DRAFT
Project Schedule and Key Dates
This schedule provides a set of guidelines to help you plan your final project.
Note: Due to the fact that the deal was announced on 3/13/06, for all valuations, please use all public information available as of then (latest filing would be the 12/25/05 10-K) and stock prices and research as of 3/10/06.
Date
· Creating a company profile
· Create Knight Ridder PIB
· Create Knight Ridder profile
· Find Knight Ridder trading comparables
· Find important average trading stats
· For given comparable acquisitions, find key multiples
Session 3
July 13
· Determine WACC based on comps
· Project free cash flows and discount at WACC
Session 4
July 27
· Create premiums paid and synergies sensitivity tables
PRESENTATION
2. Sample Project
USF Corporation – Company Profile
“Less-than-truckload” segment, carriers provide regional and inter-regional delivery throughout the United States
“Truckload” segment offers premium regional and national truckload services
“Logistics” segment provides dedicated fleet, cross-dock operations, supply chain management, contractual warehousing, domestic ocean freight forwarding and reverse logistics services
“Information Technology” segment provides support activities including corporate sales and various financial management functions
USF provide services to a wide variety of customers, with no single customer accounting for more than 3.3% of revenue
Management and Board of Directors
Company Overview
1/28/2005: USF Corporation reported fourth quarter and full year 2004 results, missed Wall Street earnings
12/13/2004: Announced opening of two new terminals serving the Southern Minnesota and Decatur, Alabama areas
11/2/2004: Richard P. DiStasio stepped down as CEO, Paul Liska was named interim CEO
10/22/2004: Reported third quarter 2004 results, missed Wall Street earnings
9/9/2004: USF Holland announced the opening of eight (8) Northeast terminals, service city includes: Baltimore, MD Albany, NY, Allentown, PA, Harrisburg, PA, Philadelphia, PA, Wilkes Barre, PA, Syracuse, NY, and Richmond, VA
Recent News
Website: www.usfc.com Employees: 21,000
Source: Company filings and Capital IQ.
Source: Company filings and FactSet.
Source: Company filings and ShareWorld.
Name
Edward R. Fitzgerald
Douglas R. Waggoner
Paul J. Liska
USF Corporation (Cont’d)
Note: EPS projections based on I/B/E/S consensus.
Market and Trading Data
__FDSCACHE__
DATA
FactSet Ticker
Page &P
El Grande: If this has the incorrect case, just type the Company name over it.
El Grande: Now it automatically calculates the percent change from Begin to End.
GRAPH
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MBD014C0A18.xls
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2/24/04
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35.44
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3/3/04
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3/4/04
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3/5/04
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3/8/04
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3/9/04
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3/10/04
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3/11/04
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3/17/04
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37.61
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37.15
151.06
1/4/05
36.75
222.09
1/5/05
35.64
267.98
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36.05
134.80
1/7/05
35.48
543.65
1/10/05
35.76
173.32
1/11/05
35.46
177.54
1/12/05
34.84
397.70
1/13/05
34.32
136.24
1/14/05
34.31
250.86
1/17/05
34.31
0.00
1/18/05
34.49
107.54
1/19/05
34.00
143.24
1/20/05
33.86
237.51
1/21/05
33.27
112.90
1/24/05
33.80
158.59
1/25/05
34.28
108.55
1/26/05
34.65
141.25
1/27/05
33.93
215.77
1/28/05
32.95
716.93
1/31/05
32.96
511.93
2/1/05
32.21
489.99
2/2/05
32.74
168.30
2/3/05
32.50
111.98
2/4/05
32.44
112.60
Comparable Company Analysis
(1) Based on 4Q '04 earnings releases.
($ in millions)
PRICE52-WEEKEQUITYENTERPRISEMULTIPLE OF SALESMULTIPLE OF EBITDA EPSOPERATING
COMPANY02/04/05HIGHVALUEVALUE2004E2005E2004E2005E2004E2005EGROWTHRATIO
Sirva Inc9.4036.2%6931,1651.1x1.0x6.9x5.2x11.1x7.4x20.0%94.6%
EGL Inc31.1889.1%1,4611,4750.5x0.5x19.1x14.7x27.7x23.1x17.4%97.2%
Hub Group56.4696.6%5295290.4x0.4x10.2x8.9x25.3x22.6x25.0%96.6%
Mean1.3x1.1x14.0x10.2x23.3x19.1x17.9%93.5%
Median1.0x0.9x11.2x9.8x27.7x22.6x17.2%94.6%
USF Corp
P/E
CONFIDENTIAL
DRAFT
Selected Precedent Transactions
Source: Securities Data Corporation, public filings and news reports.
(1) Enterprise Value = Value of Common + Total Debt – Cash.
(2) EBITDA, EBIT and Net Income exclude extraordinary items and accounting changes.
($ in millions)
Roadway Corporation (US)
LTL carrier providing freight services on major city-to-city routes in North America
Yellow Corporation
Union Pacific Corp.
Roadway Corp.
Investor Group (Estes)
Operates as a scheduled common and contract carrier transporting primarily less-than-truckload shipments of general commodities.
FedEx Corp.
Yellow Corp.
Management Group
FedEx Corp.
Arkansas Best Corp.
Central Freight Lines Inc.
Carrier of intrastate and foreign commerce within Texas, Arizona, and New Mexico
Roadway Services Inc.
Yellow Freight Systems
Viking Freight Inc.
Provides regional carrier services in California and 9 other Western States
Roadway Services Inc.
Kelso & Co.
WACC Schedule
Debt /
Debt /
Average
Levering
Levered
Debt /
Debt /
Levering
Unlevered
(7) Cost of equity premia based on equity market capitalization.
(2) Based on marginal tax rate
low-cap ($797mm - $1,167mm) = 1.59%. Amounts per 2004 Ibbotson.
(3) Levering Factor: 1 + [ ( 1 - Tax Rate ) * ( Debt / Equity ratio ) ]
(8) Levered Beta: (Beta * Levering Factor)
(4) Unlevered Beta: ( Beta / Levering Factor )
(9) Cost of Equity: Rf + B * ( Rm - Rf ) + Sp, or the risk-free rate plus the beta * the equity risk premium
(5) Yield on Interpolated 20-Year US treasury Bonds which corresponds to Ibbotson's long-term equity
(10) WACC: Rd = Return on Debt; Re = Return on Equity
risk premium (as of 2/04/05). Source: Bloomberg.
[ Rd * (1 - tax rate) * (D / (D + E) ) ] + [ Re * (E / (D + E) ) ]
(6) The average historic period between the return on stocks and L-T bonds (2004 Ibbotson Associates).
Randolph: Originally +$L$19
Arkansas Best Corp 0.83151,0691.4%40.1%1.010.82Target Marginal Tax Rate 38.0%
Cnf Inc 0.897142,45729.1%41.0%1.170.76Risk Free Rate (5) 4.330%
Old Dominion Freight 0.62818859.2%39.1%1.060.59Equity Risk Premium (6) 7.20%
Overnite Corp 0.9512785014.9%40.0%1.090.87Size Premia ("Sp") (7) 1.59%
Scs Transportation Inc 0.6312335434.7%37.6%1.220.52
Yellow Roadway Corp 1.007282,76926.3%39.1%1.160.86
Mean0.82 19.3%39.5%1.120.74
Median0.86 20.6%39.6%1.120.79
Debt /Debt /AverageLeveringLeveredCost of Pre-tax Cost of Debt
CapitalMkt EquityUnlev'd BetaFactorBeta (8)Equity (9) 5.0%6.0%7.0%8.0%9.0%10.0%
0.0%0.0%0.741.000.7411% 11.2%11.2%11.2%11.2%11.2%11.2%
10.0%11.1%0.741.070.7912% 10.7%10.8%10.9%10.9%11.0%11.1%
20.0%25.0%0.741.160.8512% 10.3%10.4%10.5%10.6%10.8%10.9%
30.0%42.9%0.741.270.9313% 9.8%10.0%10.1%10.3%10.5%10.7%
40.0%66.7%0.741.411.0413% 9.3%9.5%9.8%10.0%10.3%10.5%
50.0%100.0%0.741.621.1915% 8.8%9.1%9.4%9.7%10.0%10.4%
Schedule B (Sensitivity of Unlevered Beta)
Weighted Average Cost of Capital (10)
Debt /Debt /LeveringUnlevered Pre-tax Cost of Debt
CapitalMkt EquityFactorBeta 5.0%6.0%7.0%8.0%9.0%10.0%
0.0%0.0%1.000.65 10.6%10.6%10.6%10.6%10.6%10.6%
10.0%11.1%1.070.70 10.5%10.5%10.6%10.7%10.7%10.8%
20.0%25.0%1.160.75 10.3%10.5%10.6%10.7%10.8%11.0%
30.0%42.9%1.270.80 10.2%10.4%10.5%10.7%10.9%11.1%
40.0%66.7%1.410.85 10.0%10.2%10.5%10.7%11.0%11.2%
50.0%100.0%1.620.90 9.8%10.1%10.4%10.7%11.0%11.3%
(1) Barra US equity Book predictions (7) Cost of equity premia based on equity market capitalization.
(2) Based on marginal tax rate low-cap ($797mm - $1,167mm) = 1.59%. Amounts per 2004 Ibbotson.
(3) Levering Factor: 1 + [ ( 1 - Tax Rate ) * ( Debt / Equity ratio ) ] (8) Levered Beta: (Beta * Levering Factor)
(4) Unlevered Beta: ( Beta / Levering Factor ) (9) Cost of Equity: Rf + B * ( Rm - Rf ) + Sp, or the risk-free rate plus the beta * the equity risk premium
(5) Yield on Interpolated 20-Year US treasury Bonds which corresponds to Ibbotson's long-term equity (10) WACC: Rd = Return on Debt; Re = Return on Equity
risk premium (as of 2/04/05). Source: Bloomberg. [ Rd * (1 - tax rate) * (D / (D + E) ) ] + [ Re * (E / (D + E) ) ]
(6) The average historic period between the return on stocks and L-T bonds (2004 Ibbotson Associates).
CONFIDENTIAL
DRAFT
Discounted Cash Flow Analysis
($ in millions, except per share data)
Terminal Value EBITDA Multiple
960.0
1,066.7
1,173.3
1,280.0
1377.532376
1484.198656
1590.864936
1697.531216
0.4%
1.2%
1.8%
2.4%
917.1
1,019.1
1,121.0
1,222.9
1323.27791
1425.183079
1527.088248
1628.993417
1.3%
2.1%
2.8%
3.3%
876.6
974.0
1,071.4
1,168.8
1271.771186
1369.167999
1466.564812
1563.961625
2.2%
3.0%
3.7%
4.3%
(1) Based on share price of $32.44 as of 02/04/05.
5,600.0
8,000.0
5,000.0
7,000.0
4,200.0
5,300.0
1,000.0
5.6
8.0
5.0
7.0
4.2
5.3
1,600.0
3.5
5.0
3.1
4.4
2.6
3.3
&LCredit Suisse First Boston&CPage &P&R&F / &D / &T
DCF
2005E
2006E
2007E
2008E
2009E
Sales
2,581
2,763
2,961
3,050
3,142
% Growth
7.8%
7.0%
7.2%
3.0%
3.0%
EBITDA
250.7000734
278.4888751
307.1745818
317.5509393
328.2385875
% Margin
9.7%
10.1%
10.4%
10.4%
10.4%
(14)
(7)
(8)
(3)
(3)
WACC
($ in millions)
Discount Rate
960
1,173
1,387
0.4%
1.8%
2.9%
917
1,121
1,325
1.3%
2.8%
3.8%
877
1,071
1,266
2.2%
3.7%
4.8%
Source: Wall Street research projections and Credit Suisse estimates.
Terminal Value EBITDA Multiple
960.01,066.71,173.31,280.0Present Value of Terminal Value
$1,377.5$1,484.2$1,590.9$1,697.5Enterprise Value
(1)
10.0%
917.11,019.11,121.01,222.9Present Value of Terminal Value
(1)
11.0%
876.6974.01,071.41,168.8Present Value of Terminal Value
(1)
(1) Based on share price of $32.44 as of 02/04/05.
CONFIDENTIAL
DRAFT
Potential Merger Assumptions
Projections
· USF Corporation and Yellow Roadway projections based on Wall Street equity research; estimated marginal tax rate of 38%
· Prospective acquiror net income based on Wall Street equity research
Financing
· 50% Stock – 50% Cash Consideration assumed; financed by 100% bank debt at 3-Months LIBOR plus 100 basis points
Purchase Price
· Range of $1,015 – $1,410 mm, corresponding to 4.0x – 5.6x 2005E EBITDA
FMV Adjustments
· Fair market value adjustment estimated at 12% of book value; depreciated over 20 years
Goodwill
Fees
· Financing fees of 2.5% of debt raised
Synergies
· None assumed; pre-tax synergies required to achieve acquiror break-even EPS inferred
CONFIDENTIAL
DRAFT
Merger Consequences Analysis
($ in millions)
Premium to Share Price
13.3x
14.0x
14.7x
15.4x
16.1x
16.9x
17.6x
18.3x
19.0x
11.4x
12.0x
12.6x
13.2x
13.8x
14.4x
15.0x
15.6x
16.2x
5.25
5.25
5.25
5.25
5.25
5.25
5.25
5.25
5.25
5.59
5.53
5.48
5.43
5.38
5.33
5.28
5.24
5.19
1.6x
1.7x
1.7x
1.7x
1.8x
1.8x
1.8x
1.9x
1.9x
Yellow Roadway Acquisition of USF Corporation($ in millions)
50% Cash / 50% Stock Consideration
Premium to Share Price
Price Per Share $32.44$34.06$35.68$37.31$38.93$40.55$42.17$43.79$45.42
Equity Value / 2005E Net Income 13.3x14.0x14.7x15.4x16.1x16.9x17.6x18.3x19.0x
Equity Value / 2006E Net Income 11.4x12.0x12.6x13.2x13.8x14.4x15.0x15.6x16.2x
2005E Stand Alone Diluted EPS $5.25$5.25$5.25$5.25$5.25$5.25$5.25$5.25$5.25
2005E Pro Forma Diluted EPS 5.595.535.485.435.385.335.285.245.19
2005E Accretion / (Dilution)
Acc / (Dil) – $ $0.34$0.28$0.23$0.18$0.13$0.08$0.03($0.01)($0.06)
Acc / (Dil) – % 6.4%5.4%4.4%3.5%2.6%1.6%0.7%(0.3%)(1.2%)
Pre-Tax Breakeven Synergies –––––––$1.3$6.1
Pro-Forma Debt / LTM EBITDA
Debt-to-Capitalization (at closing) 45.28%45.36%45.45%45.53%45.61%45.69%45.76%45.83%45.91%
% Shares issued as currency 14.2%14.9%15.5%16.1%16.7%17.3%17.9%18.5%19.1%
ProForma Ownership% 85.8%85.1%84.5%83.9%83.3%82.7%82.1%81.5%80.9%
Source: Wall Street Projections, Credit Suisse Estimates.
(1) Net Debt numbers as of 12/31/04.
(2) Based on LTM EBITDA of $697mm.
CONFIDENTIAL
3. Weekly Assignments and
CONFIDENTIAL
DRAFT
Summer Assignment – PIB
Assignment
Prior to the June 30th training session, please assemble a PIB on Knight Ridder
Make sure that your PIB has all the sections outlined on the next page
Insert numbered tabs between each section “blue sheets” between each item in the same tab, if multiple items exist. For example, put a blue sheet between each research report
Have the Copy Center make a double-sided bound copy of your PIB
Key Takeaways
After completing this section, you should be familiar with most of the tools that are available to access public information
Research reports are expensive!!! Purchase only those that are appropriate
Be prepared to answer questions like:
1. Where do I go to get the latest SEC filing?
2. Where do I go to get an ownership run?
3. Have any major events occurred at the Company in the recent quarter?
CONFIDENTIAL
DRAFT
Public Information Book Resources
Sample Table of Contents

· Web Site
Company Website
2. Prospectus
· Usually follows a major event (M&A, Equity offering, Debt offering)
3. Annual Report
· Annual filing with the SEC, similar to an annual report
5. Form 10-Q
6. Proxy Statement
7. Research Report
CS Research & Analytics
8. News Run
Company Website
CONFIDENTIAL
3. Weekly Assignments and Resources
B. Company Profile
Summer Assignment – Company Profile
Assignment
In the format shown on the sample pages, create a two page company profile for Knight Ridder Corporation
Make sure you include:
Financial Overview
Current Ownership
Helpful Hint: The financial overview summary sheet in your Abacus shell (see Tab C) is a good template from which to copy and paste market stats and financial overviews
Key Takeaways
At the end of this section, you should be able to answer the following:
1. What are Knight Ridder Corporation’s primary business segments?
2. How has Knight Ridder Corporation performed in the last year with respect to:
Earnings?
Any relationship between the two?
3. Any important events occur at the Company over the past year?
CONFIDENTIAL
DRAFT
Agenda
CONFIDENTIAL
DRAFT
Know Your Audience
Demonstrate Industry Knowledge
Summarize Conclusions and Develop Follow-up Plan
A successful acquisition ideas presentation delivers a focused set of ideas with a point of view and a rationale.
CONFIDENTIAL
DRAFT
Considerations in Determining Fit
Product synergies
Management talent
General
Leverage
Signals of Availability / Lack Thereof
Parent is a LBO sponsor
Filed equity offering with large secondary component
Previous failed attempt to sell (“busted auction”) or spin-off (“busted IPO”)
Takeover speculation
Shareholder activism
Potential odd man out in rapidly consolidating industry or segment
Changes in senior management or aging senior management with no obvious successor
Dramatic revisions in corporate strategy
Need to expand internationally or to retrench
Need for capital
Failure or inability to grow new products organically
Parent reorganizing or realigning businesses, possibly in preparation for a sale
Division with no logical strategic fit with the parent (“corporate orphan”)
Division underperforming or less profitable than core business
Insiders control a meaningful percent of the stock and have no evident need for liquidity
Family-owned with the next generation preparing or prepared to assume leadership
Majority owned by another company that has obvious reason to hold onto the business
Strong and consistent stock performance
The current parent is the most obvious best owner for the business
The current parent has identified the business as a core business and/or the equity market is in favor of current parent owning the business
Consider the target’s defensive posture vis-a-vis a hostile offer, but remember … the valuation/rationale must be even more compelling to justify an unsolicited approach
Note: It is also important to review the valuation multiples of the publicly-traded Parent Company which owns the “target” subsidiary. If sale proceeds (after tax) imply lower valuation multiples (EBITDA, EBITA and Net Income) than those at which the parent stock is selling, the transaction would be dilutive to overall value and thus would probably be a non-starter as a sale candidate today
Signs of Availability
CONFIDENTIAL
DRAFT
Acquisition Screening – Information Sources
“Competition” sections of prospectuses and 10-Ks of comparable companies
Research reports relating to the Client and its core industry group competitors
Value Line for Client and its competitors
S&P Tear Sheets (with word search)
OneSource (U.S. Public, U.S. Private, and U.K. Public SIC Code Summary Analyses)
Industry trade association lists
FactSet “comp builder”
Creating a General Company Profile
Business Description
The Boeing Company is an aerospace firm. The Company operates in principal areas that include commercial airplanes, military aircraft, missile systems, space and communications and customer and commercial financing.
Business Segments
The Commercial Airplanes segment is involved in development, production and marketing of commercial jet aircraft and providing related support services, principally to the commercial airline industry worldwide.
The Military Aircraft and Missile Systems segment is involved in the research, development, production, modification and support of military aircraft including fighter, transport and attack aircraft, as well as helicopters and missiles.
The Space and Communications segment is involved in the research, development, production, modification and support of space systems, missile defense systems, satellites and satellite launching vehicles, rocket engines and information and battle management systems.
The Customer and Commercial Financing segment is primarily engaged in the financing of commercial and private aircraft and commercial equipment.
Competitors
The Company competes with Lockheed Martin, Raytheon, BAE Systems, Northrop Grumman, Matra BAe Dynamics Alenia and The European Aeronautics Defense & Space Corporation.
Company Overview
finance.yahoo.com business profile
Your PIB can be a great resource (See Tab A)
10K / Annual Report
Financial Overview
The projections will come from research
PIB
asset that might be of interest to your
Audience
10K / Annual report
Note: Currently there is no similar pie graph in USF profile but it is a possibility for your Knight Ridder profile (or other profiles you will be expected to do in your respective groups).
DATA (2)
1467.1%
GRAPH
Market and Trading Data
This should come from your equity comp shell (See Tab C)
Keep in mind, you may update this profile often (e.g. latest stock price or estimates) so keeping your comps flexible is key
Stock Price (2/4/05)
Stock Price Performance
Keep in mind, you may update this often
Plot either standalone or against peer group. If showing peer group, use the companies in your equity comps (see Tab C) but exclude the company you are profiling
__FDSCACHE__
DATA
FactSet Ticker
Page &P
El Grande: If this has the incorrect case, just type the Company name over it.
El Grande: Now it automatically calculates the percent change from Begin to End.
GRAPH
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MBD014C0A18.xls
graphdialog
2.5
Increment
1
Daily
HistoType
2
InLineRange
When formatting your graphs, be sure to have the window's zoom set to 100%
Calendar:
Fiveday
LabelChoice
2
Date
2/4/04
32.43
120.35
2/5/04
32.42
164.59
2/6/04
33.18
194.08
2/9/04
33.34
129.25
2/10/04
34.25
115.79
2/11/04
34.33
105.14
2/12/04
35.20
198.08
2/13/04
35.25
251.66
2/16/04
35.25
0.00
2/17/04
34.85
236.11
2/18/04
34.00
124.10
2/19/04
34.04
193.56
2/20/04
34.15
135.89
2/23/04
34.00
135.42
2/24/04
34.19
141.81
2/25/04
34.24
88.32
2/26/04
34.84
170.10
2/27/04
35.44
103.91
3/1/04
35.59
103.46
3/2/04
35.83
124.39
3/3/04
35.72
89.01
3/4/04
35.67
124.02
3/5/04
35.70
67.82
3/8/04
35.46
146.31
3/9/04
34.97
124.87
3/10/04
35.06
216.17
3/11/04
35.29
197.52
3/12/04
36.35
150.77
3/15/04
35.70
295.96
3/16/04
35.25
169.36
3/17/04
35.78
219.21
3/18/04
35.60
218.32
3/19/04
34.30
432.95
3/22/04
33.66
297.53
3/23/04
33.62
214.99
3/24/04
32.95
322.44
3/25/04
33.57
205.97
3/26/04
33.45
141.78
3/29/04
34.15
150.27
3/30/04
34.25
372.59
3/31/04
34.31
147.39
4/1/04
34.46
91.69
4/2/04
35.00
132.79
4/5/04
34.35
286.67
4/6/04
34.49
95.00
4/7/04
34.60
125.35
4/8/04
34.30
111.05
4/9/04
34.30
0.00
4/12/04
34.50
139.68
4/13/04
34.30
130.55
4/14/04
34.88
214.78
4/15/04
34.67
109.61
4/16/04
35.24
136.27
4/19/04
34.98
120.44
4/20/04
34.79
232.75
4/21/04
35.44
149.15
4/22/04
36.16
266.66
4/23/04
35.30
488.62
4/26/04
34.95
172.91
4/27/04
34.72
125.40
4/28/04
33.65
118.72
4/29/04
32.54
198.00
4/30/04
33.27
261.21
5/3/04
33.43
119.99
5/4/04
33.65
171.17
5/5/04
33.13
209.07
5/6/04
32.85
145.51
5/7/04
32.01
125.90
5/10/04
31.40
180.24
5/11/04
31.98
106.81
5/12/04
32.45
130.52
5/13/04
32.15
187.70
5/14/04
32.08
98.13
5/17/04
31.33
132.91
5/18/04
31.99
106.41
5/19/04
31.96
190.86
5/20/04
30.75
207.35
5/21/04
31.63
170.25
5/24/04
27.92
1398.35
5/25/04
28.41
1350.73
5/26/04
28.43
709.41
5/27/04
28.33
647.56
5/28/04
28.75
471.43
5/31/04
28.75
0.00
6/1/04
30.75
522.20
6/2/04
30.70
164.53
6/3/04
30.33
138.49
6/4/04
30.39
108.98
6/7/04
31.00
152.57
6/8/04
31.95
125.27
6/9/04
31.41
155.25
6/10/04
31.61
166.72
6/11/04
31.61
0.00
6/14/04
30.92
172.82
6/15/04
31.53
104.10
6/16/04
32.21
141.93
6/17/04
32.27
205.50
6/18/04
32.43
198.59
6/21/04
32.29
95.66
6/22/04
32.42
191.07
6/23/04
33.33
186.82
6/24/04
33.40
318.19
6/25/04
34.05
434.20
6/28/04
34.90
354.18
6/29/04
34.89
178.00
6/30/04
35.13
154.00
7/1/04
34.89
168.34
7/2/04
34.56
98.68
7/5/04
34.56
0.00
7/6/04
34.06
130.41
7/7/04
35.15
134.03
7/8/04
33.41
248.09
7/9/04
33.90
170.36
7/12/04
33.65
187.91
7/13/04
33.78
80.91
7/14/04
34.20
181.93
7/15/04
34.85
148.99
7/16/04
33.90
180.19
7/19/04
34.05
121.03
7/20/04
35.13
101.29
7/21/04
34.43
186.54
7/22/04
33.67
168.95
7/23/04
34.01
213.04
7/26/04
34.79
174.48
7/27/04
35.45
221.66
7/28/04
34.98
215.91
7/29/04
35.68
251.62
7/30/04
35.50
145.45
8/2/04
35.94
132.63
8/3/04
35.47
122.92
8/4/04
36.05
86.67
8/5/04
34.83
256.30
8/6/04
33.80
143.62
8/9/04
33.71
125.32
8/10/04
35.03
127.40
8/11/04
35.44
229.39
8/12/04
35.06
138.33
8/13/04
34.48
178.59
8/16/04
35.05
113.39
8/17/04
34.80
111.51
8/18/04
35.21
134.65
8/19/04
34.35
165.15
8/20/04
34.72
176.67
8/23/04
34.22
203.86
8/24/04
34.50
97.47
8/25/04
34.52
75.92
8/26/04
34.46
53.39
8/27/04
35.02
80.31
8/30/04
34.16
94.21
8/31/04
34.26
113.55
9/1/04
34.66
225.92
9/2/04
35.79
105.35
9/3/04
35.45
54.64
9/6/04
35.45
0.00
9/7/04
36.04
95.97
9/8/04
35.70
84.09
9/9/04
36.28
177.46
9/10/04
36.42
124.57
9/13/04
36.13
118.42
9/14/04
35.89
169.59
9/15/04
35.93
77.04
9/16/04
35.87
180.28
9/17/04
36.04
192.37
9/20/04
35.90
87.88
9/21/04
36.30
108.22
9/22/04
35.41
269.84
9/23/04
35.06
63.29
9/24/04
35.10
106.01
9/27/04
34.75
124.56
9/28/04
35.20
71.19
9/29/04
36.00
129.51
9/30/04
35.89
139.67
10/1/04
37.16
247.01
10/4/04
37.68
139.36
10/5/04
37.49
208.41
10/6/04
38.02
170.94
10/7/04
37.46
126.89
10/8/04
37.24
112.97
10/11/04
37.62
40.95
10/12/04
37.81
137.82
10/13/04
36.90
151.86
10/14/04
36.50
119.46
10/15/04
37.74
309.76
10/18/04
38.00
231.39
10/19/04
37.86
87.90
10/20/04
37.90
172.72
10/21/04
37.87
113.82
10/22/04
35.27
441.82
10/25/04
35.49
181.18
10/26/04
35.90
125.47
10/27/04
36.10
220.00
10/28/04
36.05
63.29
10/29/04
35.84
80.11
11/1/04
36.54
136.48
11/2/04
32.99
1699.22
11/3/04
33.70
685.40
11/4/04
33.62
247.37
11/5/04
33.78
424.88
11/8/04
33.59
238.94
11/9/04
33.29
198.46
11/10/04
33.94
208.53
11/11/04
34.61
108.39
11/12/04
34.15
214.38
11/15/04
34.20
244.70
11/16/04
34.55
268.49
11/17/04
35.35
312.21
11/18/04
36.00
349.05
11/19/04
35.30
158.88
11/22/04
36.07
167.58
11/23/04
35.87
154.39
11/24/04
36.60
105.70
11/25/04
36.60
0.00
11/26/04
37.02
62.18
11/29/04
36.93
214.66
11/30/04
36.97
195.95
12/1/04
37.43
140.31
12/2/04
36.87
112.26
12/3/04
37.00
175.64
12/6/04
37.11
229.48
12/7/04
36.40
243.99
12/8/04
37.14
189.62
12/9/04
36.65
178.96
12/10/04
36.40
121.52
12/13/04
36.78
108.21
12/14/04
37.50
269.10
12/15/04
38.06
105.67
12/16/04
37.78
188.12
12/17/04
37.76
165.87
12/20/04
37.74
300.26
12/21/04
38.20
249.71
12/22/04
38.22
298.72
12/23/04
37.92
64.73
12/24/04
37.92
0.00
12/27/04
37.61
99.96
12/28/04
38.39
171.28
12/29/04
37.97
278.92
12/30/04
37.84
181.32
12/31/04
37.95
73.61
1/3/05
37.15
151.06
1/4/05
36.75
222.09
1/5/05
35.64
267.98
1/6/05
36.05
134.80
1/7/05
35.48
543.65
1/10/05
35.76
173.32
1/11/05
35.46
177.54
1/12/05
34.84
397.70
1/13/05
34.32
136.24
1/14/05
34.31
250.86
1/17/05
34.31
0.00
1/18/05
34.49
107.54
1/19/05
34.00
143.24
1/20/05
33.86
237.51
1/21/05
33.27
112.90
1/24/05
33.80
158.59
1/25/05
34.28
108.55
1/26/05
34.65
141.25
1/27/05
33.93
215.77
1/28/05
32.95
716.93
1/31/05
32.96
511.93
2/1/05
32.21
489.99
2/2/05
32.74
168.30
2/3/05
32.50
111.98
2/4/05
32.44
112.60
Ownership
Equity research
1/28/2005: USF Corporation reported fourth quarter and full year 2004 results, missed Wall Street earnings
12/13/2004: Announced opening of two new terminals serving the Southern Minnesota and Decatur, Alabama areas
11/2/2004: Richard P. DiStasio stepped down as CEO, Paul Liska was named interim CEO
10/22/2004: Reported third quarter 2004 results, missed Wall Street earnings
9/9/2004: USF Holland announced the opening of eight (8) Northeast terminals, service city includes: Baltimore, MD Albany, NY, Allentown, PA, Harrisburg, PA, Philadelphia, PA, Wilkes Barre, PA, Syracuse, NY, and Richmond, VA
HOLDERS
SHARES
Management and Board
Company Web site
Sometimes you will see profiles with a brief biography of the directors and officers
Name
Edward R. Fitzgerald
Douglas R. Waggoner
Paul J. Liska
C. Equity Comps
Summer Assignment – Equity Comps
For your assignment, you are to submit an Equity Comp output page for Knight Ridder AS OF THE DATE OF THE ACQUISITION (3/10/06)
You must first find comparable companies. For this project, you need only Knight Ridder Corporation and three comparable companies
Include McClatchy Company and New York Times Co as comps and find one comp on your own
Input ABACUS shells for these comps using FactSet, the companies’ financials and Wall Street research to find the following multiples:
2006E and 2007EV/revenue
When necessary, make sure to calendarize the financials
Make sure to check your output and see if something looks abnormal
If so, you’ve likely made a mistake
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Summer Assignment – Equity Comps (Cont’d)
Helpful Hint #1: If you’ve inserted your data properly into the input pages, ABACUS will generate a formatted and linked output page for you: Go to ABACUS / New Summary Sheet / Forward Multiple Analysis
Helpful Hint #2: The output page converts all currencies to US$. If you are using a foreign company, make sure you input the proper exchange rate in the appropriate section of the shell
Key Takeaways
At the end of this section, you should be able to answer the following:
1. On what basis did you choose your one other comparable?
2. In retrospect, are they “good” comps? Why or why not?
3. How is Knight Ridder trading relative to its peer group?
4. Can you explain its relative valuation? Why does it trade at a premium or discount to its peers? Think of its relative earnings, margins, market share, size, etc.
5. What does this mean to a potential buyer?
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Agenda
What are Equity Comps and Why Do We Do Them?
Finding Comparable Companies
Collecting the Data
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What Are Equity Comps and Why Do We Do Them?
A big part of an investment banker’s job is to value companies
More than anything else, clients want to know what their companies are
worth – especially relative to their peers
One way to value companies is to infer (or compare) their value based on the public trading values of other companies with similar characteristics
Because not all companies are the same size or have the same capital structure, we need to establish universal metrics that can apply to all companies within a group
These metrics almost always take the form of a ratio or “multiple”, where the numerator is a measure of trading value (Enterprise Value; Market Value) and the denominator is an operating statistic (EBITDA, Net Income)
The most common metrics are Enterprise Value / EBITDA and Market Value / Net Income (or P/E)
The calculation and interpretation of these metrics is a Comparable Company Analysis, or Compco Analysis
Helpful Hint: The right terminology for this analysis is the Comparable Company Analysis, but since bankers like to complicate matters, this analysis is referred to differently by each group. Don’t get confused if you’re asked to do equity comps, compcos, comps, and a comparable company analysis all in one night: They all mean the same thing!
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OK, So What Are Enterprise and Equity Value?
Enterprise Value is the total dollar value of a business, represented by the sum of all of the ownership interests in the business
Note: Enterprise Value is sometimes referred to as Adjusted Market Value, Firm Value or (in early-stage biotech) Technology Value
In broad terms, there are two types of ownership interests in a business – Debt and Equity
The public market value of a business’ equity is referred to as its equity value, market value or market capitalization
We calculate a business’ Enterprise Value by summing the public market values of its debt and equity
Caveat: Because the trading value of debt securities is less volatile than equity securities, we typically use the book value of debt rather than the market value to save time
Enterprise Value is an important measure because it makes companies with different capital structures more comparable
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DRAFT
OK, So What Are Enterprise and Equity Value?
Enterprise Value = Value of All Business’ Assets = Equity Value + Net Debt(1)
Equity Value = Value of the Shareholders’ Equity = Current Stock Price x Shares Outstanding(2)
(1) Net Debt equals long-term debt + short-term debt + “out of the money” convertible debt + minority interest + preferred stock + capitalized leases – cash and cash equivalents.
(2) The proper way to calculate Equity Value is to use the diluted number of shares outstanding, which includes all “in the money” and exercisable stock options.
Enterprise Value
Net Debt
Equity Value
Enterprise Value
Fair Enough, But Help Me With This EBITDA Thing
EBITDA is an accounting measure of how much cash flow a business generates from its operations
EBITDA excludes interest, taxes and depreciation and amortization because these items vary from company to company – for reasons which generally do not impact value – making them harder to compare on a consistent basis
Interest is a function of capital structure
Taxes are a function of incorporation and tax structure
Depreciation is a function of depreciation policy / asset lives
Amortization is a function of how acquisitive a company has been
EBITDA = Earnings before Interest, Taxes, Depreciation and Amortization
We place emphasis on Enterprise Value / EBITDA because this metric excludes most variables which do not affect value (or can be easily changed) making companies more comparable for valuation purposes
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Let’s Recap
The absolute value of a business is expressed by its Enterprise and Equity Value
Enterprise Value is the total value of all ownership interests in a business
Equity Value is the value of the equity in a business
The relative value of a business is expressed by a “multiple” of its absolute value to its operating results
“GE is trading at 22x its 2006E projected EBITDA” – Translation: The ratio of GE’s Enterprise Value to its forecasted 2006E EBITDA is 22
“Walmart’s 2006E P/E multiple is 18x” – Translation: The ratio of Walmart’s equity value to its forecasted 2006 net income is 18
Enterprise Value / EBITDA is an important metric because it eliminates non-value impacting variables which otherwise make companies less comparable
Enterprise Value / Sales
Enterprise Value / EBITDA
Enterprise Value / EBIT
Equity Value / Net Income
Other Industry Specific Metrics
Finding Comparable Companies
Sources to check to initially select comparables:
Your colleagues (before you start, make sure someone hasn’t done it already!)
Associates and Officers – most of the time they will pick them for you
Proxy Statements
SIC code searches – FactSet, OneSource, Library
S&P Tearsheets
Margins (Gross Profit, EBIT, Net Income)
Leverage
Operational
Financial
Look for companies with characteristics similar to those of the business being valued:
Note: This rule does not apply to your summer valuation project – sorry guys!
Seasonality
Cyclicality
Strategy
Customers
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Most recent financial statements – LTM financials
10-K, 20-F or Annual Report (available 90 days after end of period)
10-Q quarterly or interim report (available 45 days after end of period)
Earnings Releases (typically available 2-3 weeks after the end of the quarter)
Don’t miss these – they are the most updated information available
Often have complete income statements and balance sheets
Other Press Releases
I/B/E/S
Why Do I Need It and Where Do I Get It?
Research analysts submit their EPS estimates to publicly available centralized databases (First Call, I/B/E/S)
The mean or “consensus” estimate represents the Street view of a Company’s expected performance
We use Street view to calculate P/E multiples
FactSet (First Call, I/B/E/S) on your PC
First Call website (InfoCentral)
Bloomberg terminals (Nelson's)
10-K / Annual Report
Pro Forma Information for Acquisitions or Other Transactions
Earnings Announcements
Thomson Research (from InfoCentral – IBD Internal website)
FactSet on your PC
OneSource on your PC
SEC Edgar Archives (www.sec.gov)
Disclosure workstations (in library)
Sedar.com (for Canadian companies)
Documents Library on EMA 28 at x5-4000 (use library as a last resort – they will always take longer to pull docs than you will)
Where Do I Get It?
10-Ks, 10-Qs, 8-Ks
Why Do I Need It and Where Do I Get It?
To calculate equity and enterprise value
FactSet on your PC
Bloomberg terminals
Research analysts project what a Company’s income statement will look like in the future
We use these models to calculate projected EBITDA
The research report you select is VERY important and will influence your valuation multiples
You should always select a research report which has an EPS forecast close to the consensus
Why Do I Need It?
CS Research & Analytics
Research Bank Web (Info Central) – for
non-CS research
Research Bank workstations (older reports)
Library request at x5-4000 (for older or hard to find research reports)
Where Do I Get It?
To calculate equity and enterprise value
FactSet on your PC
Bloomberg terminals
Operating Projections
Data Collection Best Practices (How To Keep My Associate Happy and Get a Big Bonus)
Keep a Record
Print out hardcopies of all source documents (10-Ks, 10-Qs, EPS Projections, Analyst Reports)
Leave a Trail / Be Organized
Highlight data and tab pages used from source documents and use folders for each company
Use “Comments” function in Excel to footnote items that need explanation (i.e., approximations, assumptions, calculations and unusual items)
Be Complete
Supply your Associate with all source documents, a printout of the equity comps and an electronic copy for all companies to be checked
Be Efficient
Work sequentially through companies, so that your Associate can start checking while you continue working
Be a Thinker
Check your results. If something looks wrong, it probably is
Never assume FactSet downloads or other people’s comps are correct
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1. General Company Information / User
The ticker identifies the company you are creating a comp file for and is used by Factset to select data to download
The financial statement dates identify which historical and projected years you are generating multiples for. These dates drive the model’s column headings
Note: The dates do not drive which data FactSet downloads; FactSet defaults to the most recently available data
It is important to fill out the user information so that other people using your model can call you with questions
General Company Information
38442.0
10-Q
38717.0
Primary Company Ticker CHRW
Latest Balance Sheet as of 3/31/05
Source of Latest Balance Sheet 10-Q
LTM Earnings as of 3/31/05
Source of LTM Earnings 10-Q
First
Projected
2. Diluted Share Calculation / Options and Convertible Debt Schedules
In general, Equity Value = Current Stock Price x Basic Shares Outstanding
However, most companies have securities which represent contingent shares – meaning they are not shares today, but can become shares if certain conditions are met – and as a result, we need to make adjustments to basic shares outstanding
The most common of these securities are options / warrants
Options are a price right or option granted to management to purchase their company’s stock at a pre-specified or strike price
Management profits if the market price of the stock exceeds the strike price when they exercise the options. Hence, Management is only likely to exercise his/her options under these circumstances
Options are reported in the 10-K. Companies typically disclose the number of options that are outstanding and exercisable
Exercisable options are vested and can be used to purchase shares today. Exercisable options, NOT outstanding, are relevant for equity comp purposes
The method we use for calculating the impact on basic shares outstanding of options is called the Treasury Stock Method
CONFIDENTIAL
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Calculating Diluted Shares Outstanding Using the Treasury Stock Method
($14.02 x 8.2) / $17.74
Scenario:
197.3 million basic shares outstanding 8.2 million exercisable options with a weighted average strike price of $14.02
Current stock price is $17.74.
Translation:
8.2 million options are “in the money,” meaning they are exercisable at a lower price than the current market price. This means the owner of these options has the right to buy stock from the Company at $14.02 and could sell it in today’s market at $17.74. If the owner of the options did this, he would pay the Company $14.02 for each share, sell it in the market for $17.74 and pocket the $3.72 spread.
Treasury Method Calculations:
The treasury stock method assumes the above transaction occurs and that the Company uses the $14.02 they receive to repurchase shares in the market at $17.74, thus:
Basic Shares Outstanding
8.2
205.5
(6.5)
What About Convertible Debt and Preferred?
Investment Bankers have created hybrid securities which pay interest like straight debt, but become common stock if certain conditions are met
Convertible Debt
Convertible Preferred
Convertible securities are NOT evaluated using the Treasury Stock Method
Most important thing to remember: Convertible Securities are treated as either debt or equity for valuation purposes – NOT both
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What About Convertible Debt and Preferred?
Example: A company has a convertible preferred security with a face value of $1,114 million that pays a dividend of 6.5% and has a conversion price of $18.00
Income Statement Effect
Income Statement Effect
Equity Value Effect
Additional shares outstanding from conversion (add $1,114/$18 = 61.9 to shares outstanding)
Net Debt Effect
Current Price < $18.00 Treated as Debt
Current Price > $18.00 Treated as Equity
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2. Treasury Method Diluted Share Calculation / Options and Convertible Debt Schedules
Treasury Method Fully Diluted Share Calculation
CONFIDENTIAL
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3. Debt & Preferred Schedule
Debt can be listed on the balance sheet under a variety of names
Notes
Credit Facility
Revolver
Loans
The ABACUS model allows you to calculate the net debt based on book or market values
If the Company issued additional debt or convertible securities since its latest filing, input these securities in adjustment rows (additional equity securities would increase shares outstanding and book equity)
For Credit Stats identify Seniority of the outstanding debt
1 = Senior Debt
2 = Sub. Debt
4. Historical / LTM Income Statement
Step 1
FactSet downloads the historicals automatically. Check downloaded FactSet information and make changes as required
Fill in Last Fiscal Year column exactly as shown on financial statement (we’ll get to adjustments later)
You will find all the line items on the income statement, except Depreciation & Amortization, which are on typically the cashflow statement
If the latest fiscal year end is the most recent quarter, you can ignore the other two columns
Step 2
Fill in the most current quarter and prior corresponding quarter to get to LTM
Make sure you use cumulative amounts (i.e. if the fiscal year end is 12/31 and you are looking at 9/30 10-Q, use “nine months ended” data)
Step 3
The model automatically calculates LTM for you. Make sure you set CS as the LTM source under settings/options so the output picks up your hard work
CONFIDENTIAL
DRAFT
Great, But What’s LTM?
LTM = Last Twelve Months
Companies report financial results on a quarterly basis (every 3 months)
LTM represents the sum of the last four quarters’ results
LTM is important because it shows what the company’s reported performance has been over the last year (though not necessarily a calendar year)
CONFIDENTIAL
DRAFT
5. Income Statement Adjustments – Unusual and Non-Recurring Items
Companies often report one-time gains or extraordinary charges in accordance with GAAP. As financial analysts, we do not view these charges as related to operations and thus exclude them.
Typical “non-operating” charges include gains/losses on sale of assets, inventory write-downs and restructuring charges
It is important to remember that not all unusual or non-recurring items will be broken out on the financial statements. This is the result of:
Accountants will not always allow companies to break-out certain charges on the financial statements because they are not unusual in the strictest sense
Some companies may not want to highlight that they “made their numbers” as a result of an extraordinary gain
Charges or gains not broken out in the financials can always be found in the MD&A – that’s why you need to read it!
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6. Projected and Calendarized Income Statement
Projected income statement data comes from the research report you have selected
This data generates your projected EBITDA
It is important to make sure your projected data is presented on the same basis as your historical data
Completing the equity comp projected data is similar to the historical / LTM data
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A Note On Calendarizing Estimates
Some companies do not have December 31 fiscal year ends. As a result, the earnings of these companies are not comparable to the earnings of companies with a December 31 year end. Therefore:
EPS estimates must be adjusted to a December year end to make companies with different fiscal year ends comparable on a P/E basis
First Call and I/B/E/S generally download a CYEPS (Calendar Year EPS)
This is intuitively clear when considering two companies – one with a fiscal year ending September 30, 2005 and the other with a fiscal year ending December 31, 2005
The 2005 earnings estimates associated with the “September” company have a higher degree of certainty than the “December” company and thus should receive a higher multiple than an identical “December” company
Our objective is to eliminate this artificial valuation differential by “calendarizing” the estimates
If you choose not to calendarize it, please set calendarization date equal to last fiscal year end
Helpful Hint: In the top right corner of your ABACUS shell, you have the option to calendarize manually (meaning you do all the work) or by formula (meaning FactSet generates the formula for you). In most cases, use the Formula option, but make sure you know how it is deriving its ratio.
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Calendarizing EPS Estimates
What does this mean?
It means that 9 months (or ¾) of the Company’s fiscal 2004 results (Jan. 2004 – Sept. 2004) are included in the 2004 calendar year with the remaining 3 months (or ¼) of the calendar year estimated in the fiscal 2005 results.
Illustration:
25%
75%
Display
Table
FACTOR
CALENDAR YEAR
The Sanity Check
How to avoid the dreaded, “This doesn’t look right” response
Take 5 minutes to look at the output when you’re done – the team will wait
Look for outliers in the data
Comparable companies usually have comparable multiples
If 9 out of 10 companies in your equity comps are trading between 8x and 10x EBITDA, and one is trading at 20x, you might have a problem
Possible explanations: 1. You’ve made a mistake, 2. This isn’t a good comp, or 3. There is something unusual about this company
In the unlikely event of Case 3, be sure you can explain the situation
Likewise, the relationship between Enterprise Value / EBITDA and P/E should be roughly the same across companies
Not always true, but be prepared to explain why it’s not
Check your multiples against research to be sure you’re in the right ballpark
If the business is showing momentum and estimated annual operating statistics are improving over current year figures, your consecutive multiples should be declining (e.g., 16.5x 2005E P/E vs. 14.6x 2006E P/E)
If the multiples are increasing, make sure you understand why
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Great Equity Comp Mysteries
What do I do with Minority Interests?
Include with total capital for Enterprise Value calculation, exclude from debt for credit statistics
Include with net income if it appears to be a “normal” part of business
What do I do with Equity Earnings when I am calculating Net Income?
Include if it is a “normal” part of the business
How do I know if a company has “done something” recently?
“Something’s not right”
Common “light bulbs” – dramatic change in stock price or shares outstanding, jump in sales or margins
Look in News Runs, SDC, Documents Library
What if a company has done something recently?
Pro forma the event, e.g., for equity or debt offerings, use the prospectus
Make sure your forecasts (EPS and operating) reflect the event
Footnote!
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What do I do with all those weird “extraordinary” charges?
Is it really extraordinary?
Don’t forget to adjust historical EPS
Can I trust FactSet (FDS) codes?
In general, no (exception is security prices)
Do I do anything different with options in an M&A situation?
Assume all in-the-money options are exercisable (change of control provisions)
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What do I do if a company has had a stock split?
Look in the Stock Guide, footnotes to financial statements, Bloomberg
Make sure historical and forecast EPS reflect the split
Example:
Definitions
Equity Value (also referred to as Market Value)
The market value of a company’s equity: (Number of fully diluted shares x current stock price) - option/warrant proceeds
Number of fully diluted shares = “What the market thinks is outstanding”
= Primary shares + “in the money” exercisable options/warrants + shares from the conversion of “in the money” convertible debt/convertible preferred stock
What to do with option/warrant proceeds – Subtract from market value
Enterprise Value (also referred to as Adjusted Market Value, or AMV)
The market value of the total enterprise
Market value of equity + net debt
Net Debt =
Long-term debt (including current portion) + short-term debt + “out of the money” convertible debt + minority interest + capitalized leases – (cash + equivalents)
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Interpreting the Results – A Few General Themes
A larger business is viewed as less risky than a smaller business. However, smaller entrepreneurial companies may get a premium valuation if they are growing quickly
Higher projected earnings growth implies faster stock appreciation potential and will positively impact valuation
Higher leverage implies less financial flexibility and will negatively impact valuation
Higher profitability margins imply better expense controls and better ability to stay price competitive and will positively impact valuation
The higher the economic cyclicality or seasonality of earnings, the riskier the stock
Dividend payments positively impact valuation. Dividends are usually paid by mature companies that need further incentives for investors. High growth companies do not need a dividend to get a high valuation
Higher trading multiples (e.g., price/earnings ratio) make the stock less attractive than a similar company with lower statistics
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Your Enterprise Value Is Not Correct
You forgot Minority Interest
Should be included in total capital for enterprise value calculation
Is not included in total capital when calculating credit stats
You missed a debt instrument on the balance sheet
You missed a cash equivalent on the balance sheet
The Company may have done a debt offering after the balance sheet date
You can find out in the “subsequent events” section of the 10-K or 10-Q, from a company news run or Bloomberg
Make sure that you check what the proceeds were used for – if they were used to pay down other debt, then you should not change anything
Your Equity Value is not correct
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Your Equity Value Is Not Correct
The Company has done a stock split
The Company has issued or repurchased shares after the 10-K or 10-Q date
The Company has additional classes of common stock outstanding
You forgot to include the stock options
You forgot to include convertible debt or convertible preferred stock
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Your LTM Data Is Incorrect
You forgot to pro forma for all the charges – make sure to thoroughly read the MD&A and financial notes
You forgot to use cumulative quarterly data (i.e. “three months ended” 9/30 vs. “nine months ended” 9/30)
You forgot to adjust your income statement for acquisitions/divestitures
You forgot to check for press releases and are not using the most up-to-date data
You assume D&A is included in operating expenses but it isn’t
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Your Projected Data Is Incorrect
Your research report is outdated – make sure that the research report you are using has EPS estimates in line with I/B/E/S or First Call
You did not calendarize
Your research report had a mistake you did not catch
Your research report currency does not match the rest of your input currency
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Comparable Company Analysis
($ in millions)
PRICE52-WEEKEQUITYENTERPRISEMULTIPLE OF SALESMULTIPLE OF EBITDA EPSOPERATING
COMPANY02/04/05HIGHVALUEVALUE2004E2005E2004E2005E2004E2005EGROWTHRATIO
Sirva Inc9.4036.2%6931,1651.1x1.0x6.9x5.2x11.1x7.4x20.0%94.6%
EGL Inc31.1889.1%1,4611,4750.5x0.5x19.1x14.7x27.7x23.1x17.4%97.2%
Hub Group56.4696.6%5295290.4x0.4x10.2x8.9x25.3x22.6x25.0%96.6%
Mean1.3x1.1x14.0x10.2x23.3x19.1x17.9%93.5%
Median1.0x0.9x11.2x9.8x27.7x22.6x17.2%94.6%
USF Corp
P/E
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D. M&A Comps
Summer Assignment – M&A Comps
Assignment
For the following two acquisitions, create a deal list similar to that on the sample page
Include target business description, as well as the the following statistics:
EV / LTM sales
EV / LTM EBIT
EV / LTM EBITDA
Key Takeaways
At the end of this section you should be able to answer the following:
1. At what multiples have similar transactions been closed in the past?
2. What valuation (approximately) does this imply for Knight Ridder?
3. Is this valuation different than what was implied from the equity comp analysis, can you explain the difference?
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Agenda
What are M&A Comps and Why Do We Do Them?
Finding Comparable Transactions
USF Corporation: Sample M&A comps
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Comparable Acquisitions Analysis
Comparable acquisitions analysis values a company by reference to other sale transactions of similar businesses. Comparable acquisitions analysis is based on the same multiples as those used in comparable companies analysis
Enterprise Value / EBITDA
Enterprise Value / Sales (usually less relevant)
Enterprise Value / EBIT (usually less relevant)
The trick is to find the right comparable transactions and to ferret out the relevant information required
As in comparable company analyses, look for acquisitions of companies with comparable operational and financial characteristics
Recent transactions are a more accurate reflection of the values buyers are currently willing to pay than are acquisitions completed in the distant past. This is because market fundamentals are subject to dramatic change over periods of time. In addition, cyclical businesses will trade at widely different valuations at the peak and ebb of a cycle
Multiples should be based on the latest public financial information available to the Acquiror at the time of the acquisition
Helpful Hint #1: Unlike Equity Comps, which value companies off of forward looking estimates, M&A Comps are historical looking
Helpful Hint #2: Comparable acquisition multiples include consideration which is paid for "control" of the Target. Since this "control premium" is not reflected in the comparable company valuation, comparable acquisition multiples tend to be higher and more indicative of the value of a company in a sale context
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Finding Comparable Acquisitions
Other comparable acquisitions schedules
News runs
Equity analysts
Colleagues
Never rely on the multiples of a schedule with an unknown author or with an author who is not sure that the multiples are correct.
Look for recent acquisitions of companies with operational and financial characteristics similar to those of the business being valued.
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Calculation of Transaction Value
Total Transaction Value of an M&A deal is similar to Enterprise Value used in Comparable Companies Analysis.
Total Transaction
x
Helpful Hint: The major difference between a Transaction Value and an Enterprise Value lies in the share count. In any “Change of Control,” all outstanding and “in-the-money” options, regardless of whether they are exercisable or not , get converted at the weighted average strike price. This differs from the Enterprise Value calculation, where only those options that are exercisable get converted
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Calculation of Shares Outstanding
Basic Shares Outstanding are taken from the cover of the most recent 10-K or 10-Q.
Option/Warrant Shares are calculated using the treasury method, which assumes that all in-the-money options/warrants are exercised and the proceeds are used to repurchase shares at today’s market price
For example:
To calculate equity value, we must always use fully diluted shares outstanding.
Fully Diluted
Helpful Hint: There are two independent concepts regarding option/warrants that tend to confuse people:
1. Outstanding versus Exercisable
2. “In-the-money” versus “out-of-the-money”
In an acquisition context, all outstanding and “in-the-money” options/warrants get converted. In a market value (equity comp) context, only those options that are both exercisable and “in-the-money” convert
Options/warrants “out-of-the-money” never convert
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Calculation of Shares Outstanding (Cont’d)
In-The-Money Option/Warrant Shares:
Step 3: 500,000 - 357,143 = 142,857
Finally . . . To Calculate Fully Diluted Shares Outstanding.
Now You Can Solve For The Equity Value
Fully Diluted
Shares Outstanding
Determination of Purchase Price per Share
Cash consideration is straightforward
Common stock issued by an acquiror is valued using the acquiror’s stock price on the day prior to announcement of the transaction
Other securities are valued at market
Existing publicly traded securities should be valued at market on the day prior to announcement
New classes of securities should be valued at market value on the first day of trading
Calculating the purchase price per share is not always as simple as it may first appear
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Enterprise Value vs. Equity Value
General Overview
There are typically two stakeholders in any firm, the Debt Holders and the Equity Holders. The concept of Enterprise Value contemplates that the earnings of