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Key Valuation and Acquisition Comparables Analysis
1. Last Modified: August 9, 2011 12:37:09 AM. Presentation2
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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
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2. Last Modified: August 9, 2011 12:37:09 AM. Presentation2
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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
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3. Last Modified: August 9, 2011 12:37:09 AM. Presentation2
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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
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4. Last Modified: August 9, 2011 12:37:09 AM. Presentation2
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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
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5. Last Modified: August 9, 2011 12:37:09 AM. Presentation2
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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!
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6. Last Modified: August 9, 2011 12:37:09 AM. Presentation2
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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
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7. Last Modified: August 9, 2011 12:37:09 AM. Presentation2
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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
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8. Last Modified: August 9, 2011 12:37:09 AM. Presentation2
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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)
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9. Last Modified: August 9, 2011 12:37:09 AM. Presentation2
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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)
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10. Last Modified: August 9, 2011 12:37:09 AM. Presentation2
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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
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11. Last Modified: August 9, 2011 12:37:09 AM. Presentation2
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Illustrative Summary Trading Multiples
MARKET MULTIPLES ANALYSIS OF SELECTED TECHNOLOGY COMPANIES
(Figures in millions, except per share data) Enterprise Value as a
Multiple of: Price as a Multiple of: LTM Total
Market Value Enterprise Sales EBITDA EBIT 2011E 2012E EPS EBITDA Debt /
Company Stock Price of Equity Value(1) LTM LTM LTM EPS EPS Growth Margin 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
1. Calculated as Market Value of Equity plus total debt, minority interest and preferred stock, less cash & equivalents & unconsolidated affiliates. [ 10 ]
12. Last Modified: August 9, 2011 12:37:09 AM. Presentation2
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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. Equity or Enterprise
What price per share would you imply for MSFT? “Value”
Financial Statistic
= Multiple
“Value Relationship”
“Value Driver”
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13. Last Modified: August 9, 2011 12:37:09 AM. Presentation2
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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.” [ 12 ]
14. Last Modified: August 9, 2011 12:37:09 AM. Presentation2
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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.” [ 13 ]
15. Last Modified: August 9, 2011 12:37:09 AM. Presentation2
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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
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16. Last Modified: August 9, 2011 12:37:09 AM. Presentation2
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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
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17. Last Modified: August 9, 2011 12:37:09 AM. Presentation2
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How Can You Value a Company?
Other Techniques Discounted Cash Flows
Leveraged Buyout Valuation Public Comparables
Merger Analysis Acquisition Comparables
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