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When Thinking About Valuation…  Key valuation questions are:  What is the company worth?  What would another party pay?  Remember that valuation involves.

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Presentation on theme: "When Thinking About Valuation…  Key valuation questions are:  What is the company worth?  What would another party pay?  Remember that valuation involves."— Presentation transcript:


2 When Thinking About Valuation…  Key valuation questions are:  What is the company worth?  What would another party pay?  Remember that valuation involves not just the “science” of valuation math but also the “art” of using assumptions in the process  Valuation includes an understanding of what drives value for a company and how that value can be impacted by various factors

3 A Company’s Value May Differ For Different Parties  An asset’s (firm’s) value may be different for different buyers and under different scenarios  Value to seller vs value to buyer vs value to competitor  Going concern value vs liquidation value  Synergies from investment  Tax implications  Value of control vs minority interest – influence cash flows vs passive dividend stream  Strategic value – unlock opportunities beyond the asset itself Source: Goldman Sachs

4 Why do We Perform Valuation?  Initial public offerings / secondary public offerings  Debt offerings  Equity Research  Mergers & acquisitions  Buy-side & sell-side advice  Divestitures & restructurings  Recapitalizations  Leveraged buyouts

5 We Can Calculate Two Levels of Valuation  Enterprise value  Also known as firm value or aggregate value  Equals common equity + debt + preferred stock + non- controlling interest  Equity value  Also know as market capitalization  Value of shareholders’ interests

6 Valuation May Be Based On Accounting Data  Sales  EBIT  Earnings before interest and taxes  Measures performance before effects of financing and taxes  Operating income typically approximates EBIT  Net income  Earnings per share

7 Valuation May Also Be Based On Financial Data  EBITDA  Earnings before interest, taxes, depreciation and amortization  Proxy for operating cash flow  Does not equal actual cash flow  Free cash flow  EBIT * (1 – Tax Rate) + depreciation and amortization – change in net working capital – capital expenditures

8 How Do We Calculate the Value of a Company?  Public company comparables  Acquisition comparables  Discounted cash flows (Intrinsic Value)  The above methods enable us to calculate an Imputed Valuation Range  We might also see valuations based on:  Merger consequences (debt capacity, credit rating impact, EPS impact, pro forma ownership)  Leveraged buyout analysis (what can a financial sponsor afford to pay after borrowing 4.0-5.0x EBITDA)

9 Public Company Comparables Allow For A Relative Value  Comparison of similar companies  Relative valuations based on key metrics  Metrics may include Sales, EBIT, EBITDA, etc.  Method is very easy to use and defend!  If Company A trades at 12.5x projected EPS and Company B is in same industry and projects EPS of $4.00, at what price should Company B’s stock be valued?  $4.00 x 12.5 = $50.00

10 We Can Acquire Comparable Data From Many Sources  Data sources:  Capital IQ  FactSet  Value Line  Bloomberg  Thomson I/B/E/S  Thomson First Call  Zacks  Standard & Poor’s Industry Surveys  Proxy statements, 10-K’s, 10-Q’s, IPO prospectuses

11 We Use Various Metrics To Calculate Value  Price / EPS (known as PE multiple)  Market Value / Net Income  Market Value / Book Value  PE / Growth Rate (known as PEG ratio)  Enterprise Value / Sales  Enterprise Value / EBITDA  Enterprise Value / EBIT

12 One Example Of Comparable Data Comes From Bloomberg Source: Bloomberg

13 Acquisition Comparables Allow Us To Value Based On Recent Transactions  Compares similar transactions using actual transactions  Use recent data to best reflect current environment  Main drivers of multiples are risk profile and growth prospects  If Company A was recently acquired for 7.0x projected EBITDA and Company B is in same industry and projects EBITDA of $50,000,000, what is the enterprise value of Company B?  $50,000,000 x 7.0 = $350,000,000

14 We Can Also Acquire Acquisition Comparables From Various Sources  Data sources:  Thomson Financial Securities Data  Capital IQ  Dealogic  Mergerstat / FactSet  Industry newsletters  M&A publications  Note: compile data based on industrial classification using GICS, ICB, NAICS or SIC code screens

15 Many Acquisitions Use One of The Following Multiples  LTM (trailing 12 months) Sales  LTM EBITDA  Premium To Prior Stock Price

16 A Third Method For Valuation Is Discounted Cash Flow  Calculates an intrinsic value for a company  Based on unlevered free cash flows  Independent of capital structure  Looks at cash flows available to all providers of capital  Highly sensitive to changes in the following:  Free cash flow projections  Estimated terminal (horizon) value  Discount rate applied to free cash flows  Value of company equals the sum of :  Present value of forecasted unlevered free cash flows  Present value of projected terminal value of company

17 Discounted Cash Flow Valuation Focuses On An Unlevered Scenario  Free cash flow projections  Typically forecasted for 5-10 years; not taken further into future due to impracticality of being accurate in later years  All cash flows are calculated as if the company was not levered (i.e. capital structure is 100% common equity)  Unlevered free cash flow = Tax-effected EBIT + depreciation and amortization +/- change in working capital

18 Discounted Cash Flow Valuation Includes A Horizon Value  Terminal value projection  Represents the value of the company beyond the actual projection period  Two methods to calculate:  Growth perpetuity – calculate value of perpetual, growing cash flow beginning in year succeeding projection period  Exit multiple – apply multiple to EPS, cash flow, etc. in year succeeding projection period  Terminal value typically stated as a range based on range of discount rates as well as range of growth rates or exit multiples

19 Projected Nominal Cash Flows Are Discounted To Arrive At A Present Value  Discount rate  Used to calculate present value of future cash flows and terminal value  Rate represents the blended required return for equity and debt investors  The return required by investors is based on the risk of the investments  Weighted average cost of capital (WACC) represents the blended required return  Typically stated as a range of values

20 Using The Three Methodologies We Can Impute A Valuation Range  Given results of public company comparables, acquisition comparables and DCF analysis, what is the company worth?  Other considerations:  Stock’s historical trading range  Exclude outlier results  Multiples are industry-dependent  Valuations are typically presented as a range of values based on our assumptions for growth rates and discount rates

21 Illustrative Valuation Summary Enterprise Value ($ in millions) Public Company Comparables Acquisition Comparables Discounted Cash Flow Analysis 230272 216 251308 289 Source: Goldman Sachs

22 Our Valuation Task  Be scientific  Use existing rules and analytics in areas of accounting, finance and financial statement analysis to build and use a solid model  Be artful and use good judgment  Assumptions are subjective in nature; be prepared to defend all assumption as appropriate for the analysis  Understand client’s industry and operating environment  Recognize that timing may effect valuation/assumptions

23 Our Valuation Task  Focus on key drivers for projections  Annual sales growth  Margin trends  Gross margin  Operating income margin  Develop an appropriate discount rate for use in the DCF model  How will terminal value be determined:  Growth rate to infinity  Exit multiple

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