17

Click here to load reader

Valuation Methodologies

Embed Size (px)

Citation preview

Page 1: Valuation Methodologies

Last Modified: August 9, 2011 12:37:09 AM. Presentation2

DRAFT

[ 0 ]

2 Key Valuation Questions

1) What is the Company worth?

Public and private market valuations

Intrinsic value

2) What can/will someone pay?

Who is the seller?

Public or private

Insider ownership or sizable public float

Who is/are the potential buyer(s)?

Strategic or financial

What is the context of the transaction?

Privately negotiated sale or auction

Hostile or friendly

What are the market conditions?

Acquisition currency (Acquirer’s share price)

Historical premiums paid

Page 2: Valuation Methodologies

Last Modified: August 9, 2011 12:37:09 AM. Presentation2

DRAFT

[ 1 ]

Difficulty in Finding “Pure Comps”

Subjective nature and process

How do you assess differences in the operations and financial aspects?

How do you assess intangible differences such as brand equity, reputation or management expertise?

Comparables may be:

Divisions of larger companies

Private

Company may be “first of its kind”

What is the appropriate number of comps?

Selection may be more art than science

Use judgment and experience of senior team members

Page 3: Valuation Methodologies

Last Modified: August 9, 2011 12:37:09 AM. Presentation2

DRAFT

[ 2 ]

Synergies: Often Critical to the Deal

Synergy = increase in cash flow from the combination of operations in an M&A deal

3 main sources of synergies

Cost savings

Revenue enhancements

CapEx synergies

Announced “cost savings” often critical to deal

Relative scale: cost savings as % of Target sales/expenses

Multiple paid based on Target EBITDA + cost savings

Sources for synergy information:

Company presentation on the transaction

Press release

Equity research

Page 4: Valuation Methodologies

Last Modified: August 9, 2011 12:37:09 AM. Presentation2

DRAFT

[ 3 ]

Premiums Paid Analysis

Premium (%) = Offer Price / Target Price – 1

Use various time frames to control for leaks

Premium to:

1 day prior

1 week prior

1 month prior

Other points: 52 week high & low, various monthly averages

Get beyond the numbers!

Why was the premium low or high?

May use “unaffected share price”

Prior to announcement of possible sale or evaluating strategic alternatives

Page 5: Valuation Methodologies

Last Modified: August 9, 2011 12:37:09 AM. Presentation2

DRAFT

[ 4 ]

Narrowing Down the List

Goal = transactions where target & the deal have similar business & financial characteristics

Factors to consider:

Operations, lines of business

Size

Financial aspects (growth, margins)

Timing

Consideration paid

Circumstances surrounding the deal

Market conditions

What is the right number of deals?

Bottom line: know the story behind each deal!

Page 6: Valuation Methodologies

Last Modified: August 9, 2011 12:37:09 AM. Presentation2

DRAFT

[ 5 ]

Sources for Previous Acquisitions

Previous analyses of other practitioners

Internal resources & fairness opinions in filings

Screen for comparable M&A transactions

Popular databases:

Thomson Reuters Securities Data (formerly SDC)

Dealogic

Mergerstat

Compile list based on industrial classification

NAISC or SIC code screen

Other possible sources (to add color):

News, industry newsletters, journals

M&A journals and almanacs

Research reports

Page 7: Valuation Methodologies

Last Modified: August 9, 2011 12:37:09 AM. Presentation2

DRAFT

[ 6 ]

What is Acquisition Comparables Analysis?

Comparison with similar transactions

Actual vs. hypothetical valuation

“Grounds you in reality”

Price reflects:

Control premium

Potential synergies

Key factors for similar deals:

Timing & surrounding events (industry trends)

Nature (contested, hostile or friendly)

Consideration paid (cash, stock, or both)

Bottom line: similar analysis as public comps, but a different perspective

Page 8: Valuation Methodologies

Last Modified: August 9, 2011 12:37:09 AM. Presentation2

DRAFT

[ 7 ]

Essential Public Information Checklist

1) 10-K and/or annual report from latest fiscal year

2) 10-Q or interim from latest quarter or period

3) News announcements

Sources: press release, Bloomberg, Reuters, AP, Dow Jones, etc.

Earnings announcement before filing with SEC

• Companies now required to reconcile non-GAAP results to GAAP

• Details/disclosure various by company

4) Research estimates

Typically, consensus estimates of EPS, revenues, EBITDA, etc.

Common aggregators: Thomson First Call, Thomson I/B/E/S, Zacks, Capital IQ

5) Research reports

Recent, in-depth reports from reputable Wall Street firms

Other sources: S&P Industry Surveys / Tearsheets & Value Line

6) Share price (and latest dividend, if applicable)

Page 9: Valuation Methodologies

Last Modified: August 9, 2011 12:37:09 AM. Presentation2

DRAFT

[ 8 ]

Finding the Comps Universe

Previous analyses of other professionals

Public filings:

10-K / IPO Prospectus: “Competition section”

Proxy Statement: “Peer group index”

Fairness opinions (filed in Merger Proxy/S4)

Research reports

Consult with a senior team member before approaching someone in research

Other sources: Capital IQ, FactSet, S&P Industry Surveys & Tearsheets, Value Line, Bloomberg

Industrial classification screen

NAICS code (replaced U.S. SIC system)

Page 10: Valuation Methodologies

Last Modified: August 9, 2011 12:37:09 AM. Presentation2

DRAFT

[ 9 ]

Public Comparables Roadmap

1) Determine the Peer Group (comps universe)

2) Gather the Appropriate Information

3) Calculate Market Value and Enterprise Value

4) Calculate the Financial Performance Statistics

5) Calculate the Multiples

6) Analyze the Results and Derive a Range

Page 11: Valuation Methodologies

Last Modified: August 9, 2011 12:37:09 AM. Presentation2

DRAFT

[ 10 ]

Illustrative Summary Trading Multiples

MARKET MULTIPLES ANALYSIS OF SELECTED TECHNOLOGY COMPANIES

1. Calculated as Market Value of Equity plus total debt, minority interest and preferred stock, less cash & equivalents & unconsolidated affiliates.

(Figures in millions, except per share data)

LTM Total

Company Stock Price

Market Value

of Equity

Enterprise

Value(1)Sales

LTM

EBITDA

LTM

EBIT

LTM

2011E

EPS

2012E

EPS

EPS

Growth

EBITDA

Margin

Debt /

EBITDA

Apple Inc. $353.21 $327,457.8 $299,062.8 3.0x 9.3x 9.8x 27.4x 32.2x 22.5% 32.0% 0.0x

Dell Inc. $13.95 $26,308.8 $19,442.8 0.3x 3.8x 4.6x 1.4x 1.9x 6.0% 8.4% 1.5x

Google Inc. $546.02 $176,303.2 $143,322.2 4.3x 11.2x 12.8x 35.5x 41.9x 18.9% 38.4% 0.5x

Intel Corporation $20.11 $105,597.6 $96,211.6 2.0x 4.5x 5.9x 2.4x 2.5x 11.1% 44.4% 0.1x

International Business Machines $166.22 $198,512.9 $216,577.9 2.1x 8.4x 10.3x 13.3x 14.8x 11.8% 24.7% 1.2x

Oracle Corp. $26.02 $131,804.7 $119,347.7 3.4x 8.2x 9.4x 2.2x 2.4x 15.1% 40.8% 1.1x

Vmware, Inc. $83.96 $35,455.9 $32,202.8 9.7x 42.0x 57.0x 2.1x 2.5x 25.3% 23.1% 0.6x

Yahoo! Inc. $11.09 $14,002.4 $11,625.0 2.1x 6.3x 9.3x 0.8x 0.9x 12.2% 25.7% 0.1x

High 9.7x 42.0x 57.0x 35.5x 41.9x 25.3% 44.4% 1.5x

Average 3.4x 11.7x 14.9x 10.6x 12.4x 15.4% 29.7% 0.6x

Median 2.5x 8.3x 9.6x 2.3x 2.5x 13.7% 28.8% 0.5x

Low 0.3x 3.8x 4.6x 0.8x 0.9x 6.0% 8.4% 0.0x

Microsoft Corporation $24.48 $205,100.0 $166,867.0 2.4x 5.6x 6.1x 2.6x 2.9x 9.7% 42.9% 0.4x

Enterprise Value as a

Multiple of: Price as a Multiple of:

Page 12: Valuation Methodologies

Last Modified: August 9, 2011 12:37:09 AM. Presentation2

DRAFT

[ 11 ]

What is Public Comparables Analysis?

Comparison with similar companies

Value of capital holders’ interests

Analysis at a specific point in time and based on public information

Create relative valuations based on key multiples

On 5/3/2011, Apple traded 13.4x one year forward EPS of $25.99. What is Apple’s share price?

Used to imply valuation

Microsoft’s one year forward EPS is $2.58. What price per share would you imply for MSFT?

Equity or Enterprise “Value”

Financial Statistic “Value Driver”

Multiple “Value Relationship” =

Page 13: Valuation Methodologies

Last Modified: August 9, 2011 12:37:09 AM. Presentation2

DRAFT

[ 12 ]

Enterprise Value vs. Equity Value

Enterprise Value Equity Value

- Debt + Debt

- Preferred Stock + Preferred Stock

- Minority Interest(1) + Minority Interest(1)

+ Cash - Cash

= Equity Value = Enterprise Value

1. Under SFAS 160, in the U.S., minority interest now referred to as “noncontrolling interest.”

Page 14: Valuation Methodologies

Last Modified: August 9, 2011 12:37:09 AM. Presentation2

DRAFT

[ 13 ]

2 Main Valuation Concepts

Equity Value:

Value of shareholders’ interest

Other common terms:

Market Value, Offer Value, Market Capitalization

Enterprise Value:

Includes all forms of capital

Equity, debt, preferred stock minority interest(1)

Other common terms:

Firm Value, Total Enterprise Value, Transaction Value, Aggregate Value, Adjusted Market Value

1. Under SFAS 160, in the U.S., minority interest now referred to as “noncontrolling interest.”

Page 15: Valuation Methodologies

Last Modified: August 9, 2011 12:37:09 AM. Presentation2

DRAFT

[ 14 ]

What is the Purpose of Valuation?

Initial public offerings / equity offerings

Debt offerings

M&A

Buy- & sell-side advise

Divestitures and restructurings

Recapitalizations and LBOs

Defense analysis

Vulnerable to hostile takeover?

Fairness opinions

Is the price paid / received “fair”?

Research

Page 16: Valuation Methodologies

Last Modified: August 9, 2011 12:37:09 AM. Presentation2

DRAFT

[ 15 ]

Valuation is Highly Subjective

Valuation is both ART and SCIENCE

Art:

Judgment and interpretation of data

Selling the story and crafting the deal

Science: Reasonable analytical justification

Perspective: Buyer or seller?

“Intrinsic” may not equal “realizable” value

Make reasonable decisions based on

Limited information

Time constraints

Page 17: Valuation Methodologies

Last Modified: August 9, 2011 12:37:09 AM. Presentation2

DRAFT

[ 16 ]

How Can You Value a Company?

Valuation

Discounted Cash Flows

Public Comparables Leveraged Buyout

Other Techniques

Acquisition Comparables Merger Analysis