Hybrid Methods Hybrid Methods – Mix of Asset Based & Income Based Method

Other Issues Relevant to Valuation Other Issues Relevant to Valuation

Process for Public Take Over: Process for Public Take Over: Evaluation: Evaluation: Predator company appoints experts. Predator company appoints experts. – Legal consultants, Banks, Accountants and Stock Brokers. Direct BID: Direct BID: – Decision regarding contact with target firm, approach before the BID or hostile takeover. Purchase of certain % age of shares of target. Purchase of certain % age of shares of target. Establish an offer and communicate target includes offer document, offer validity, Predator may revise offer if declined by target. Establish an offer and communicate target includes offer document, offer validity, Predator may revise offer if declined by target.

Limited consultancy services from expert are required. Internal evaluation is normally enough. Limited consultancy services from expert are required. Internal evaluation is normally enough. Detailed investigation is conducted before the transaction. Detailed investigation is conducted before the transaction. Offer price is negotiated by both parties. Offer price is negotiated by both parties. Finalization of deal By entering into a contract. Finalization of deal By entering into a contract. Payment of price finishes the deal. Payment of price finishes the deal. Acquisition of Private Company

A target company may employ such tools and tactics as to foil the takeover bid. This resistance is achieved in following ways: A target company may employ such tools and tactics as to foil the takeover bid. This resistance is achieved in following ways: Poison Pill: Poison Pill: – Target company grants right to existing shareholder to acquire new shares at attractive price. This effectively dilute the shareholdings and interest of predator. – In an other way the target company may give handsome dividends to existing shareholders (other than predator) to exchange their shares for cash at a price well above the offer price by predator. Anti-Takeover Tools

The target company may offer a debt security in lieu of shares. The target company may offer a debt security in lieu of shares. Pac Man: Pac Man: – The target company may make a reverse offer to predator company. It is not used widely. White Knight: White Knight: – Target company may seek a friendly predator (other than original predator) potentially capable of bidding high and acquiring. A target company can acquire another company may by large or under performing to decrease attractiveness to predator. A target company can acquire another company may by large or under performing to decrease attractiveness to predator.

Shark Repellents: Shark Repellents: – Target may modify its charter to stop the takeover. For example, it would need to have 90% votes to approve merger. Disposal of Assets: Disposal of Assets: – A target company may dispose off assets that are of prime interest to acquirer or to further extent liquidate all its assets leaving nothing for the acquirer. Severance Pay: Severance Pay: – Management may enter into agreement with senior personnel to pay them a certain hand some amount if there’s change in company’s control. Political Pressure and action can stop the take over. Political Pressure and action can stop the take over.

Case Study Case Study Valuation of Company Valuation of Company

Target Limited Balance Sheet As on December 31, 2005 $ Fixed Assets At Cost less Acc. Depreciation 2,300, ,300, Current Assets Raw materials Raw materials 400, , Finished goods Finished goods 650, , Accounts receivable Accounts receivable 1,349, ,349, Cash & bank Cash & bank 1, , ,400, ,400, Current Liabilities Accounts payable Accounts payable 1,280, ,280, Short term loan Short term loan 980, , ,260, ,260, Net Current Assets 140, , Total Assets 2,440, ,440, Capital Issued common stock Issued common stock 2,050, ,050, Retained earnings Retained earnings 390, , ,440, ,440,000.00

Case Study Valuation of Company History of Profit Net Income 260, , , , , , , , , , Dividend 135, , , , , , Retained Income 125, , , , , , , , , ,000.00

Other Information Replacement Value Fixed assets 2,600, Finished goods 700, Raw materials 475, Sales Value Fixed assets 2,200, Finished goods 550, Raw materials 380, Bad debts (above current level) 50, Avg. Industry beta 0.95 Avg. P/E ratio 9.00 Risk free rate 8% Market risk premium 5% Predator's WACC 17% Predator's P/E ratio 15.00

Solution 1 Balance sheet value $ Un-adjusted value 2,440, Bad debts (50,000.00) B/S value of Target 2,390, Replacement Cost Value B/S adjusted value (as above) 2,390, Increase in fixed assets value Increase in fixed assets value = , Increase in stock value Increase in stock value =475, ,000 75, Increase in finished goods value Increase in finished goods value =700, ,000 50, ,815, Break up value B/s adjusted value (as above) 2,390, Decrease in sales value Fixed assets (100,000.00) Finished goods (100,000.00) Raw materials (20,000.00) 2,170,000.00

4 DIVIDEND MODEL Po = D1 / (Ke -g) We need to calculate g & Ke g = r x b r = Profit / Capital Employed r = 260,000 / 2,440, or 10.65% b = Retention of Earnings = 125,000 / 260,000 = 125,000 / 260, or 48.07% g = r x b or 5.12% Ke, using CAPM Ke = Rf + b (Rm) Ke = (5) or 12.75%

Po = 135,000 x ( )/( ) 1,860, g can be calculated as under: = 110,000 (1+g) 4 = 135,000 = 110,000 (1+g) 4 = 135,000 g = (135,000/110,000) 1/ or 5.25% Po = 135,000 x ( )/( ) 1,894, P/E earnings basis of valuation Profit x P/E multiple of similar company =260,000 x 9 =260,000 x 9 2,340, ,340,000.00

Analysis of each Valuation Method Balance Sheet Value: Balance Sheet Value: Assets are based on historical cost adjusted for arbitrary accounting convention like depreciation. Assets are based on historical cost adjusted for arbitrary accounting convention like depreciation. Historical Costs are not representative of actual worth of assets. Historical Costs are not representative of actual worth of assets. Not logical to use this method. Not logical to use this method.

More appropriate for valuation of manufacturing concern than service industry. More appropriate for valuation of manufacturing concern than service industry. Assets subject to rapid technological change are difficult to value under this method. Assets subject to rapid technological change are difficult to value under this method. Replacement Cost Basis

The value return by this method means that the owner can realize the amount on piecemeal basis by disposing off assets individually. The value return by this method means that the owner can realize the amount on piecemeal basis by disposing off assets individually. Not based on going concern basis. Not based on going concern basis. Going concern value is normally well above the value returned by this method. Going concern value is normally well above the value returned by this method. Break Up Value

Dividend Valuation Method Dividend Valuation Method Assume Constant Growth: Assume Constant Growth: Company’s value is determined by discounting future estimated cash flow. Company’s value is determined by discounting future estimated cash flow.

Price Earning Method of Valuation Price Earning Method of Valuation It is very difficult to find a company of the similar size. It is very difficult to find a company of the similar size. P/E self is a problem and history can be used. P/E self is a problem and history can be used.