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1、“How Do You Value a Company?”,December 2,2003Graduate Finance AssociationStern School of Business,Agenda,OverviewPublic/Trading ComparablesAcquisition ComparablesDiscounted Cash Flow(Firm,Equity)Other Techniques(LBO,Private company,Liquidation value,Option value),The most common types:,Value based o
2、n public multiples(relative value)Implied value in public securities markets(IPO analysis)Focused on forward looking EBITDA,EPS or Cash Flow,Overview,Acquisition Comps,Trading Comps,DCF,Value based on multiples paid for comparable companies/assets in M&A transactionsImplied value in public and priva
3、te marketFocused on multiples of historical EBITDA,EPS or Cash Flow,PV of cash flows“Inherent”or intrinsic valueBest captures the business in transitionSensitivity analysis/Synergies analysis,Public Comps,DCF,M&A Comps,Others,Some Valuation Concepts:,Equity Value-Value of shareholders interest-Other
4、 common terms:-market value,offer value,market capitalizationEnterprise Value(EV)-Includes all forms of capital:-equity,debt,preferred stock,minority interest-Other common terms:-aggregate value,firm value,total capitalization,adjusted market value,transaction valueEV=Equity market value+Net Debt+Pr
5、ef.+Minority InterestWhat are my assets worth?How did I finance them?,Overview,Public Comps,DCF,M&A Comps,Others,Some Valuation Concepts(contd):,EBIT=Earnings Before Interest and Taxes-Income from operations before the effects of the financing and taxes-income independent of capital structureWhy use
6、 EBIT?-Operating Income EBIT-measures of profitability independent of capital structure-interest expense is a tax shield,Overview,Public Comps,DCF,M&A Comps,Others,Some Valuation Concepts(contd):,Overview,Public Comps,DCF,M&A Comps,Others,EBITDA=Earnings Before Interest,Taxes,Depreciation and Amorti
7、zation-“Quick and dirty”approximation of operating cash flow-D&A are non-cash expenses-If D&A are very high,then EBITDA growth must be supported by high capital expenditure(focus on EBIT),Some Valuation Concepts(contd):,Overview,Public Comps,DCF,M&A Comps,Others,Multiples-Provide a measure of relati
8、ve valuation to an underlying financial item-On December 8,2002,ABC Corp.traded at 45x FY03 EPS(forward EPS multiple)-On December 8,2002 XYZ Inc.was sold for 10 x LTM EBITDA(trailing/historical multiple)-Allow for relative comparisons-Between similar companies and/or similar transactions(ABC Corp.wa
9、s sold for 16x 2003 EBITDA is that a good price?)-With historical performance(Historically,MBA Ltd.has traded between 50-60 x next FYs EPS.Today it trades at 35x any conclusions?),Let us begin.,OverviewPublic/Trading ComparablesAcquisition ComparablesDiscounted Cash Flow(Firm,Equity)Other Techniques
10、(LBO,Private company,Liquidation value,Option value),Overview,Public Comps,DCF,M&A Comps,Others,What is Public Market Valuation?,Overview,Public Comps,DCF,M&A Comps,Others,-Comparisons with similar,publicly traded companies-Common uses:1.Imply value for:-public company-division as an independent,pub
11、licly traded company-private company-valuation does not reflect control premiums or synergy2.Defense analysis:-are we a possible takeover candidate?,How is public comparables analysis done?,Overview,Public Comps,DCF,M&A Comps,Others,The steps:1.Determine the peer group(your comps universe)2.Gather t
12、he appropriate financial information3.Enter the financial information into your spreadsheetnormalize for non-recurring items4.Calculate relevant historical or forward multiples(P/E;EV/EBITDA)5.Forecast your companys future financial performance(EBITDA,EPS,Cash Flow,etc.)6.Apply appropriate multiples
13、 to your companys financial stats and derive implied valuation range,Overview,Public Comps,DCF,M&A Comps,Others,What is a“comparable”firm?,“Comparable”or“similar”in terms of:-Operations-products/services;distribution;costs structure;geography;interest exposure;customers,etc.-Financial Aspects-size(s
14、ales,mkt cap);capital structure;margins/profitability;management experience,etc.*You are probably better off to not exclude the comps that are different but use them to explain different relative valuation,Overview,Public Comps,DCF,M&A Comps,Others,Difficulty in finding“pure comps”,-Subjective natur
15、e and process-how do you asses differences in the operations and financial aspects?-do you assess intangible differences such as brand equity,reputation or management expertise?-What is the appropriate number of comps?-Selection may be more art than science-use judgment,Overview,Public Comps,DCF,M&A
16、 Comps,Others,What if there are no publicly traded comps?,-Comparables may be:-private-divisions of lager companies-Company may be the“first of its kind”-Use educated guesswork and creativity-Place more emphasis on other valuation methodologies,Overview,Public Comps,DCF,M&A Comps,Others,Why normaliz
17、e?Where is the information?,-Why?-items not expected to be part of the normal course of business in the future should be adjusted for-examples:restructuring charges,gains/losses on sale of assets,legal settlements,asset impairments-the goal is to evaluate the ongoing business,earnings and cash flows
18、-Where is it?-separate line on IS(other income/expense,COGS,SG&A)-add back in the CF-MD&A section,Overview,Public Comps,DCF,M&A Comps,Others,What are the relevant multiples?,-Multiples will vary by industry:-Retail:EPS,PEG-Industrials:EBITDA,EPS-Internet:Revenues,Subscribers,Page views-Banks/Financi
19、al institutions:EPS,Book Value-REITS:Funds from operations,Net asset value-Use forward multiples if possible-Projected EBITDA,EPS-Use research,How do public comps look like in Excel?,Overview,Public Comps,DCF,M&A Comps,Others,Our oral care market share is at stake!,Next,OverviewPublic/Trading Compar
20、ablesAcquisition ComparablesDiscounted Cash Flow(Firm,Equity)Other Techniques(LBO,Private company,Liquidation value,Option value),Overview,Public Comps,DCF,M&A Comps,Others,What is Acquisition Comparables Valuation?,Overview,Public Comps,DCF,M&A Comps,Others,-Comparisons with similar transactions-ac
21、tual vs.hypothetical valuation-“grounds you in reality”-Price reflects control premiums and synergies-Key factors to consider:-Timing and surrounding events(industry trends)-Nature(friendly,contested,hostile)-Consideration paid(cash,stock,combination of both)-Bottom line:Very similar analysis as pub
22、lic comps(use of multiples),but a different perspective,How is acquisition comparables analysis done?,Overview,Public Comps,DCF,M&A Comps,Others,The steps:1.Determine the appropriate deal list2.Gather the appropriate financial information3.Enter the financial information into your spreadsheetcalcula
23、te Transaction Value(TV)and Offer Value(OV)normalize for non-recurring items4.Calculate relevant multiples(TV/Sales,TV/EBITDA,OV/Net Income,OV/Book Value;Offer Price per Share/EPS)5.Analyze the results6.Derive implied valuation range,Transaction Value=Total Firm Value(incl.debt);Offer Value=Total Eq
24、uity Value;Offer Price=Offer Value per Share,Narrowing down the transactions list,Overview,Public Comps,DCF,M&A Comps,Others,-Goal:-to find transactions where the companies involved have similar business and financial characteristics to the company you are advising-Factors to consider:-operations,li
25、ne of business-size-financial aspects(growth,margins,etc)-consideration paid-timing(last 3 5 years)-the then market conditions-What is the right number of deals?-Know the basic story behind each deal;note revisions,Premiums paid analysis,Overview,Public Comps,DCF,M&A Comps,Others,-Premium(%)=(Offer
26、Price/Target Price)1-It is common to use various time frames to control for leaks:-Premium to:-1 day prior-1 week prior-1 month prior-other points:52 week high and low;last month average-The idea is to use“unaffected share price”i.e.prior to announcement of possible sale or before the“evaluating str
27、ategic alternatives”press release,Calculating the Offer Value,Overview,Public Comps,DCF,M&A Comps,Others,-Offer Value is similar to Equity Value-also called“Total Equity Purchase Price”Offer Value=(Total Shares Outstanding*x Purchase Price per Share)Option Proceeds*Total Shares Outstanding=Basis Sha
28、res+In-the-money-options+Shares from in-the-money convertible securities)-Check footnotes for options and convertible securities-Outstanding,not exercisable options change of control event,A word about convertible securities,Overview,Public Comps,DCF,M&A Comps,Others,Test:What would a rational inves
29、tor do?-Conversion Price Purchase Price Per Share-the convertible security is underwater-assume securities do not convert into common shares-Conversion Price Purchase Price per Share-the security is“in-the-money”-assume securities do convert into common sharesExample:No of Shares Underlying the Conv
30、ert.Sec.=Face Value of the Security/Conversion Price Face Value=$1,000;Conversion Ratio:40(Conversion Price$25);Purchase(Offer)Price per Share$30,Calculating the Transaction Value,Overview,Public Comps,DCF,M&A Comps,Others,-Transaction Value is similar to“Enterprise Value”for acquisition comparables
31、 analysis-also called“Total Consideration”Transaction Value=Offer Value+Total Debt*+Pref.Stock+Minority Interest Cash&Equiv.*Total Debt excludes convertible securities that are assumed to convert into common shares(do not double count)-Use most recent balance sheet,What are the relevant multiples?,O
32、verview,Public Comps,DCF,M&A Comps,Others,-Multiples will vary by industry-Transaction Value/EBITDA almost always used-Similar to public comparables analysis-Unlike trading multiples,acquisitions multiples will generally be higher as they include control premiums and synergies-Last twelve months(LTM
33、)multiples are most common-Also,use forward multiples if possible-Could be difficult with private targets-Obtain research with Sales,EBITDA and EPS estimates just prior to the transaction announcement date,Next,OverviewPublic/Trading ComparablesAcquisition ComparablesDiscounted Cash Flow(Firm,Equity
34、)Other Techniques(LBO,Private company,Liquidation value,Option value),Overview,Public Comps,DCF,M&A Comps,Others,DCF-What is it?,-DCF is often the primary valuation methodology in M&A-Comparable public company and comparable acquisition analysis are often used as confirming methodologies-DCF is the
35、PV of 2 main types of free cash flows:1.Free cash flows to all capital providers(debt and equity)2.Free cash flows to equity capital providers-special case:dividend discount model-DCF measures the“inherent”value of the asset and best captures business in transition-Fundamental in nature,DCF allows f
36、or questioning all of the assumptions and for performing sensitivity analysis-One can easily estimate equity value from firm value by subtracting the market value of debt today,Overview,Public Comps,DCF,M&A Comps,Others,How is DCF analysis done?,Overview,Public Comps,DCF,M&A Comps,Others,The steps:1
37、.Project operating results and free cash flows2.Estimate the terminal value of the business by 1 of 2 methods:-perpetuity formula-exit multiple3.Calculate appropriate discount rate 4.Discount the annual cash flows and the terminal value to present 5.Determine range of values6.Interpret the results a
38、nd perform sensitivity analysis,Free Cash Flow to the Firm(FCFF)the cash flow available to all capital providers,Overview,Public Comps,DCF-firm,M&A Comps,Others,The terminal value,Overview,Public Comps,DCF,M&A Comps,Others,-Estimating the terminal value(the value of all future cash flows after the e
39、xplicit forecast period of 10 years)1.Perpetuity growth method(Gordon growth formula):Terminal value=FCF(n+1)/(r-g)assumption-forecast 10 explicit years of FCF-grow Year 10 FCF and obtain estimate of FCF in Year 11-“r”,the discount rate is either Er or WACC(depending on whether we are discounting FC
40、FE or FCFF)-“g”is the perpetuity growth rate(the growth forever)and in many models is often equal to GDP growth rate-discount the Terminal Value to present using the appropriate discount rate,The terminal value(contd),Overview,Public Comps,DCF,M&A Comps,Others,-Estimating the terminal value(the valu
41、e of all future cash flows after the explicit forecast period of 10 years)2.Exit multiple method:Terminal value=Statistic x Multiple assumption-forecast 10 explicit years of FCF,EBITDA,Net Income-grow Year 10 FCF and obtain estimate of FCF in Year 11-apply an“exit”multiple-multiply and estimate Term
42、inal Value-discount the Terminal Value to the present using the appropriate discount rate,Free Cash Flow to the Equity(FCFE)the cash flow available to the common equity holders,Overview,Public Comps,DCF-equity,M&A Comps,Others,The discount rates,Overview,Public Comps,DCF,M&A Comps,Others,-Discount F
43、ree Cash Flows to the Equity at the cost of equity:Er=Rf+levered x(Rm Rf)Risk-free rateReflecting the risk of debt Market Risk premiumLevered=Unlev.x(1+(1-Tax rate)x D/E)-Discount Free Cash Flows to the Firm at the cost of capital:WACC=After tax cost of Debt x D/C+Er x E/CThe tax deductibility of in
44、terest expense provides a“tax shield”,Our oral care market share is at stake!,Moving on.,OverviewPublic/Trading ComparablesAcquisition ComparablesDiscounted Cash Flow(Firm,Equity)Other Techniques(LBO,Private company,Liquidation value,Option value),Overview,Public Comps,DCF,M&A Comps,Others,LBOs,Over
45、view,Public Comps,DCF,M&A Comps,Others,-What is it?-definition-DCF Free Cash Flow to the Firm-Calculate the Terminal Value-Add the PVs of Cash Flows and the PV of the Terminal Value and estimate the firms Enterprise Value-Subtract the debt from the Enterprise Value-The issue to get the equity value
46、in 3,5 or 7 years-Calculate equity returns-Compare with cost of equity(usually 20-30%)-Debt service analysis extremely crucial-State of the high yield market important,Private companies,Overview,Public Comps,DCF,M&A Comps,Others,-Why are we valuing the firm?-to make a minority investment,or-to buy t
47、he whole firm(in a“private sale”,a publicly traded company or at an IPO)and control the cash flows-Valuation challenges-difficulty in estimating beta,cost of equity and cost of debt-short history of cash flows-Other issues-business vs.personal expenses;accounting standards-selling a private firm to
48、stay private:apply both liquidity discount and control premium-selling to a publicly traded company:no liquidity discount,just control premium,Liquidation Value,Overview,Public Comps,DCF,M&A Comps,Others,-Forced Liquidation(Auction)-Definition:A professional opinion of the estimated most probable pr
49、ice expressed in terms of currency which could typically be realized at a properly advertised and conducted public auction sale,held under forced sale conditions and under present day economic trends,as of the effective date of the appraisal report.-Issues:Taken into consideration are physical locat
50、ion,difficulty of removal,physical condition,adaptability,specialization,marketability,overall appearance and psychological appeal.Further,the ability of the asset group to draw sufficient prospective buyers to insure competitive offers is considered.-Orderly Liquidation Value-Definition:A professio
