LEADENHALL CORPORATE ADVISORY

VALUING DISRUPTION

AGENDA

1 What is ‘disruption’

2 Impact of disruption

3 Valuation approaches

4 Valuation issues

5 Questions

2

3

What is disruption?

WHAT IS DISRUPTION

Financial services / banking Disrupted = Kodak / Blockbuster / Nokia

Disruption /dɪsˈrʌpʃn

Noun

A product or service takes root initially in simple applications at

the bottom of a market and then relentlessly moves up market,

eventually displacing established competitors

Clayton Christensen, Harvard Business School

Synonyms: distraction, interference, trouble, inconvenience,

irritation

WHAT IS DISRUPTION (2)

Financial services / banking Disrupted = Kodak / Blockbuster / Nokia

Disrupted Disrupter

Start-up date

Current valuation

2009 US $50bn

Cost of buying a taxi licence in Sydney drops to lowest in six years Sydney morning Herald, December 14, 2014

WHAT IS DISRUPTION (3)

Disrupted Disrupter

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WHY SHOULD YOU CARE

Disruption is here to stay

Technology trends

Consumer behaviour

Globalisation

Can impact all businesses

Capital allocation

Opportunities to diversify

Defensive / reactive

Valuing disruption

WHY VALUE

10

M&A Compliance Equity & Fundraising

Price of over time

VALUE PRICE

IPO range (v1)

$60-$66 per

share

+127% return

(p.a)

$150b

Closing price on

IPO

$94 per share

+2000% return

(p.a)

$233b

Pre-IPO fund

raising

$32b

2012

1-Sep-14

IPO range (v2)

$66-$68 per

share

+440% return

(p.a)

$170b

12-Sep-14

19-Sep-14

Post-IPO trading

$119 per share

+190% return

(p.a)

$300b

10-Nov-14

11

COMMON VALUATION APPROACHES

= Costs incurred

or

Replacement cost

Asset based

approaches

Relative valuation = Earnings/revenue

x

Multiple

Discounted cash flow = Net present value

of future cash flows

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DETERMINING CASH FLOWS

Disrupter

-20

-10

0

10

20

30

40

1 2 3 4 5 6 7 8 9 10 11 12 13 14

$

Time (years)

1) R&D 2) proof of concept3) commercialisation

Disrupted

-

5

10

15

20

25

30

35

40

45

1 2 3 4 5 6 7 8 9 10 11 12 13 14$

Time (years)

Significant investment required to retain lower market share

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DETERMINING CASH FLOWS (2)

Target market – taxis,

broader car services

Geography

Revenue share

Barriers to entry

Take-up and network

effect

Competitive response

(incumbents and new)

Driver share of revenue

Regulatory costs

Tax

Capital costs

Potential users/customers Geography

Pricing

Competitive response Political/regulatory

Barriers to entry

Cost structure Staff incentives

Regulatory Capex W/C

= FREE CASH FLOW

Addressable market

Market share

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DETERMINING CASH FLOWS (3)

Different perspectives / views on cash flows can have

profound impacts on value

Investor 1: US$6 billion

Investor 2: US$54 billion

RISK AND RETURN

16

Risks

Business model

Execution

Key person(s)

Funding

Failure

Low High

Start-up 50% 70%

Round 1 financing 40% 60%

Round 2 financing 35% 50%

Bridge-IPO 15% 30%

Returns

Need to ensure risks aren’t included in cash

flows and discount rate!

Venture capital required returns

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SUMMARY

• Disruption is here to stay

• Understanding the potential impact on your business is critical

• Valuing early-stage and/or disruptive companies is subjective and complex

QUESTIONS

SYDNEY Level 11, 65 York St Sydney NSW 2000 T +61 2 8823 6224

ADELAIDE Level 1, 31 Franklin St Adelaide SA 5000 T +61 8 8385 2207

MELBOURNE Level 9, 440 Collins Street Melbourne, 3000 T +61 3 9607 1330

DAVE PEARSON

Qualifications and professional

memberships

Bachelor of Commerce, Wilfrid Laurier

University

Institute of Chartered Accountants (Ontario)

Masters of Applied Finance, FINSIA

Chartered Business Valuer

Chartered Financial Analyst

Experience

Dave joined Leadenhall in September 2014 after

10 years as an adviser at Deloitte and KPMG in

Australia, Canada and Hong Kong.

Dave specialises in providing valuation and other

commercial advice for M&A, strategic decision

making and compliance purposes across a range

of industry sectors including financial services,

property and infrastructure.

Dave’s experience includes preparation of a

number of independent expert reports and

pricing/valuation papers and other commercial

advice to assist senior management, boards and

shareholders evaluate M&A transactions and

capital raising alternatives.

DAVE PEARSON E: dave.pearson@leadenhall.com.au T: (02) 9199 1103