08-Chapter 8c Primer on Relative Valuation Methods

8/20/2019 08-Chapter 8c Primer on Relative Valuation Methods

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Applying Relative, Asset Oriented,and Real Option Valuation Methods to

Mergers and Acquisitions

Chapter 8

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Learning Objectives

! "ri#ary learning objective$ %o provide students &ith 'no&ledge o(

alternatives to discounted cash (lo& valuation #ethods, including ) Market Approach – Similar to real estate valuations

! Co#parable co#panies

! Co#parable transactions

! *a#e industry or co#parable industry

) Asset oriented approach! %angible boo' value

! Liquidation value

! +rea'up value

) Cost approach

) Weighted average method *ee -ebsite, Chapter 8, Alternate Valuation Ratios, Table 7 , &hich discusses several

alternate .quity Valuation and .nterprise Valuation Ratios/

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Applying Mar'et+ased RelativeValuation2 Methods1

MV% 3 MVC 4 5C2 6 5%

-here

MVC 3 Mar'et value o( the co#parable co#pany C

5C 3 Measure o( value (or co#parable co#pany C

5% 3 Measure o( value (or co#pany %

MVC45C2 3 Mar'et value #ultiple (or the co#parable

co#pany

1Co#parable co#panies #ay include those &ith pro(itability, ris', and gro&th characteristics si#ilar to the target (ir#/

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Relative valuation is pervasive

! Most valuations on -all *treet are relativevaluations/ ) Al#ost 85% of equity research reports are

based upon a #ultiple and co#parables/ ) More than 5!% of all acquisition valuations are

based upon #ultiples

) Rules o( thu#b based on #ultiples are not only

co##on but are o(ten the basis (or finalvaluation "udgments/

Another study indicates #!$# in favor of relative comps/

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Relative valuation is pervasive

! -hile there are #ore discounted cash (lo&valuations in consulting and corporate (inance, theyare o(ten relative valuations masquerading asdiscounted cash (lo& valuations/

) %he objective in #any discounted cash (lo&valuations is to bac' into a nu#ber that has beenobtained by using a #ultiple/

) %he ter#inal value in a signi(icant nu#ber o(discounted cash (lo& valuations is esti#atedusing a #ultiple/

=


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Valuation Ratios versus 9C@

! 9o both

! +oth entail use o( value esti#ates, pro(essional judg#ent, quality o( in(or#ation and purpose o(

valuation/! Acquisition o( specific kno&n asset or company

and good data, Co#ps #ay be better/

! Acquisition o( general non'specific or unkno&n

asset or company (C) may *e *etter / *ee %it#an, Valuation-The Art and Science of Corporate Investment ecisions, B11, pgs/ 1/

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Mar'et+ased Methods$ Co#parable Co#pany .6a#ple

.6hibit 81/ +aluing ,epsol ;"@


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Valuation .66onMobil Che#ical

! .66onMobil, 0rd largest (ollo&ing +A*@ F 9u"ont

! 9ivision earned E0/78 +illion

! Gypothetical ) assu#e spin o(( o( division/

) -hat is the baseline valuationH :e6t slide 1B2 ) Modi(y baseline to adjust (or relative sie/ *lide 112

) Consider gro&th (actors *lide 12

1B


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.quity Valuation /70 10/77

+ayer 0>/?7 1/>11 0/>

9o& Che#ical 7=/7B 7/7B1 1B/==

9u"ont 71/BB />= 1>/7

.ast#an Che#ical >1/? >/=> 8/

@MC >/> >/= 1B/0

Roh# F Gass 7>/B /?=8 1?/81

Average #2348

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Mar'et Cap and ". Ratios

-1/ ,atio Market Cap 6illions7

+A*@ 10/77 E 08/>

+ayer 0/> >/?0

9o& Che#ical 1B/== 7>/>

9u"ont 1>/7 7B/?1

.ast#an Che#ical I 8/ 7/1B

@MC I 1B/0 /B

Roh# F Gass I 1?/81 1B/B1

Average 6ig 27 #532 9:;322

Average *#all 02I 1/B? >/77

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Variation o( ". Ratio

Share -rice Current/-S

Current1/70 10/77 E =/= /?

+ayer 0>/?7 1/>11 0/> /? 10/=

9o& 7=/7B 7/7B1 1B/== >/=1 8/0B

9u"ont 71/BB />= 1>/7 0/B7 10/78

.ast#an >1/? >/=> 8/ >/0 8/=1

@MC >/> >/= 1B/0 >/?? 1B/>1

Roh# F

Gass

7>/B /?=8 1?/81 0/1 17/77

Average #2348 ##34!

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Valuation o( .66onMobil

! +aseline valuation ) .arnings E0/78+ D "4. Ratio 17/8 3 E78/7 +

! Modi(ication to re(lect relative sie

) .arnings E0/78+ D "4. Ratio 1>/7 3 E>7/?0 +

! @urther #odi(ication

) *ubstantial dispersion 1B/== ) 0/>2 in "4.

Ratios even a#ong top 7 (ir#s indicate ris' andgro&th potential #ust be considered/

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Mar'et+ased Methods$Recent %ransactionsJ Method1

! Calculation si#ilar to co#parable co#paniesJ#ethod, e6cept #ultiples used to esti#ate targetJsvalue based on purchase prices o( recentlyacquired co#parable co#panies/

! Most accurate #ethod &henever the transaction istruly co#parable and recent/ 6oston 6eer =->

! Major li#itation is that truly co#parable recent

transactions are rare/

1 Also called precedent #ethod/

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+oston +eer Co#pany

! @ounded 187 ?th generation bre&er G+*2

! 9ra&n by .uropean, #ore bitter bre&s/

! :ot loo'ing to co#pete &ith +ud&eiser etc/

! +y 17, largest cra(t bre&er, gre& >=K/

! = year round and seasonal beers/

! +oston Lager ?0K o( sales/

! .uropean standards and ra& #aterials/

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+oston +eer Co#pany! #asters, date passed, beer goes

) Contract bre&ing ) "ros and consH

) 5ntensive #ar'eting F sales ) 7B N o( each E

) "roduct innovations seasonal F private labeling

! Outloo'

) Current gro&th ) stagnant but cra(t beers gre&

) :iche #ar'eting and develop#entH

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+oston +eer Co#pany

! Co#petitors *-O% ) Majors ) A+ +ev Coors, Miller

) nd %ier ) *trohs, Geile#an, Penessee etc/

! %ough (or the# to (ight the +ig 0! Loss o( #ar'et share

! .6cess capacity ) Go& did this help ++CH

) 5#ports ) Per#an, Golland, Canada, Me6ico/

*ubsequent changes due to MFA ie/ Molson4Coors ) Cra(t bre&eries ) (ar and a&ay, the s#allest

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+oston +eer Co#pany

! Cra(t +re&ing ) s#allest rapid gro&th 7BK ) Very co#petitive, proprietary recipes

) Catered to upscale #ar'et there(ore e6pensive

) @our types! +re&pubs 1K2 product consu#ed on site

! Micro K2 ) li#ited distribution Q 1>,BBB bbls

! Regional 0BK2 li#ited distribution, capital intensive,

li#ited #ar'eting, brand recognition! Custo# 0?K2 ) %ypically contract, less capital

intensive there(ore #ore #ar'eting E

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+oston +eer Co#pany!

Recent 5"Os$ ) Redhoo' ) t&o plants, planning a third, allied &ith +ud in :Gusing distribution net&or'/ 71K gro&th :o& Cra(t +re&ers Alliance/ E?/87 share price 1B4>411

) "eteJs ) Contract bre&er, allied &ith *trohs, planned to build

bre&ery/ :o& "eteJs -ic'ed +re&ing/ "rivate/ A((iliated &ithPa#brinus, i#porters Moosehead, Corona

) @urther characteristics ) *ee previous slides

) uestions and 5ssues (ro# the Mar'et$

! "ositive reception ) ho& &ell4ho& longH Gula hoopH! Age old question o( sustainable gro&th/

! 9ependence on nd tier bre&eriesH

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+oston +eer 5"O Calculation

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+oston +eer 5"O

! :ove#ber 1, 1> , ++C issues / #illionshares at EB each/

! "rice by end o( day rose >BK to E0B/=>/

! %odayJs "rice E8B/7/ .arlier this year,E1BB/0/


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Mar'et+ased Methods$*a#e or Co#parable 5ndustry Method

! Multiply targetJs earnings or revenues by#ar'et value to earnings or revenue ratios(or the average (ir# in target?s industry or a

compara*le industry/! "ri#ary advantage is the ease o( use andavailability o( data/

! 9isadvantages include presumption industry multiples are actually compara*leand analystsJ projections are unbiased/

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".P Ratio 3 ". Ratio4.arnings Pro&th!


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Applying the ".P Ratio

An analyst is as'ed to deter#ine &hether +asic .nergy *ervice +A*2 or Co#posite "roduction*ervices C"*2 is #ore attractive as an acquisition target/ +oth (ir#s provide engineering,

construction, and specialty services to the oil, gas, re(inery, and petroche#ical industries/+.* and C"* have projected annual earnings per share gro&th rates o( 1> percent and percent, respectively/ +.*J and C"*J current earnings per share are E/B> and E0/1>,respectively/ %he current share prices as o( Sune >, BB8 (or 6/S is 9:#328 and for C- is 94D/%he industry average pricetoearnings ratio and gro&th rate are 1/7 and 11 percent,respectively/ +ased on this in(or#ation, &hich (ir# is a #ore attractive ta'eover target as o( thepoint in ti#e the (ir#s are being co#paredH

=ndustry average -/E ratio$# #432 -/ ,atio7 13## Ero&th rate of earnings7 0 ##43;:+.*$ 5#plied share price 3 11/=0 6 /1> 6 E/B> 3 9:23DD #!3#% undervaluedC"D$ 5#plied share price 3 11/=0 6 /B 6 E0/1> 3 9:#3D 443% undervalued

Ans&er$ %he di((erence bet&een the i#plied and actual share prices (or +.* and C"D is E0/18i/e/, E07/?? E01/782 and E>/? E01/? E?/BB2, respectively/ C"D is #ore undervalued than+.* at that #o#ent in ti#e/

1*olving MV% 3 A 6 V5%PR 6 V5% using an individual (ir#Js ".P ratio provides the (ir#Js current or share price in period %, since this

(or#ula is an identity/ An industry average ".P ratio #ay be used to provide an esti#ate o( the (ir#Js intrinsic value/ %his i#plicitlyassu#es that both (ir#s e6hibit the sa#e relationship bet&een pricetoearnings ratios and earnings gro&th rates/

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Asset+ased Methods$%angible +oo' Value

! %angible boo' value %+V2 3 total assets totalliabilities good&ill2

! %argetJs esti#ated value 3 %argetJs %+V 6 Tindustryaverage or co#parable (ir# #ar'et value2 4

industry or co#parable (ir# %+V2U/! O(ten used (or valuing ) )inancial services firms &here tangible boo'

value is pri#arily cash or liquid assets ) (istri*ution firms &here current assets

constitute a large percentage o( total assets! Re#e#ber i#pact o( PAA" 3 historical cost

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Valuing Co#panies


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*olution to 5ngra# "roble#

! 5ngra#Js net tangible boo' value per share V5%2 3 E0/7 E/=24/1= 3 915.70¹

! +ased on ris' as #easured by the (ir#J beta and the >year projected earningsgro&th rate, Synne is *elieved to ehi*it significantly different risk and gro&thcharacteristics and is ecluded from the calculation of the industry averagemarket value to tangi*le *ook value ratio/ %here(ore, the appropriate industryaverage ratio is as (ollo&s$

MV5:94V55:9 3 /> Ti/e/, /11/B1/0240U

! 5ngra#Js i#plied value per share 3 MV% 3 MV5:94V55:92 6 V5% 3 /> 6 E1>/=B 3 $14.92

! +ased on the i#plied value per share, 5ngra# &as overvalued on 8414B8 &hen its

share price &as $19.30 :ote, &e are deriving tangible boo' value by assu#ing it equals equity less intangible assets good&ill2/ %he

better approach &ould be to revie& or project :+V (ro# (inancial state#ent/

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Asset+ased Methods$ Liquidation Method

! Value assets as i( sold in an orderly (ashion e/g/, 1

#onths2 and deduct value o( liabilities and e6pensesassociated &ith asset disposition/ Jsed in Chapter ;1##6ankruptcy Cases3

! -hile varies &ith industry,

) Receivables o(ten sold (or 8BBK o( boo' value

) 5nventories #ight realie 8BBK o( boo' valuedepending on degree o( obsolescence and condition

) /quipment values vary &idely depending on age andcondition and purpose e3g3 special purpose7

) 6ook value of land may understate market value ) "repaid assets such as insurance can be liquidated &itha portion o( the pre#iu# recovered/

Asset +ased Methods$


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Asset+ased Methods$Liquidation Method

! :ortel :et&or's ) Canadian Co#pany ) Suly 1, B11 pursuant to +an'ruptcy

) *old ?,BBB patents (or E7/> +illion at auction to

,ockstar 6idco/ ) Consortiu# Apple, .MC, Microso(t, R5M F *ony

) Poogle ) de(ensive, stal'ing horse bid todiscourage suits over Android F Chro#e/

) 5ntel ) early bidder but tea#ed &ith Poogle

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Asset+ased Method$ +rea'

deals/

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McPra& Gill *pin O(( H

! August B11 ) "ublisher F *F" o&ner ! "ressure (ro# activist hedge (und Sana "artners and

Ontario %eachersJ "ension "lan/

! Meetings bet&een MG Pold#an2 F Sana

! MG )#ini conglo#erate o( non related in(or#ationbusinesses/ .ducation ) capital intensive and ploddinggro&thH

! Laard F S"Morgan Chase ) brea'up value E>> per

share versus E71 current price/

*ee &ebsite, !c"ra# $ill Faces %rea&up 'ressures, %usiness (ee& , August , B11/

0

R l t C t M th d


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Replace#ent Cost Method

! All target operating assets are assigned a value

based on &hat it &ould cost to replace the#/! .ach asset is treated as i( no additional value is

created by operating the assets as part o( agoing concern/

! .ach assetJs value is su##ed to deter#ine theaggregate value o( the business/

! %his approach is li#ited i( the (ir# is highlyprofita*le suggesting a high going concern

value7 or if many of the firm?s assets areintangi*le/

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-eighted Average Valuation Method

An analyst has esti#ated the value o( aco#pany using #ultiple valuation#ethodologies/ %he discountedcash (lo& value is EB #illion,co#parable transactionsJ value isE07 #illion, the "4.based value isE7 #illion and the liquidation

value is E1>B #illion/ %he analysthas greater con(idence in certain#ethodologies than others/.sti#ate the &eighted averagevalue o( the (ir# using all valuation#ethodologies and the &eights orrelative i#portance the analyst givesto each #ethodology/

.sti#atedValue EM2

Relative-eight

-eighted Avg/ EM2

B /0B ??/B

07 /7B 0/?

7 /B 77/8

1>B /1B 1>/B

1/BB 1/7

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Alternative Real Option


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Alternative Real OptionValuation Methods

0?

! 9evelop a decision tree (or &hich the :"V o( eachbranch represents the value o( alternative real options/%he optionJs value is equal to di((erence bet&een its :"Vand the :"V &ithout the real option/ Art or scienceL

! %reat the real options as (inancial options and value usingthe 6lack'Scholes method/

) Option to e6pand or delay are valued as call options andadded to the :"V o( the invest#ent &ithout the option/

) Option to abandon is valued as a put option and addedto the :"V o( the invest#ent &ithout the option/

Analying Microso(tJs Real Options in


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+ase Case$Microso(t o((ers to

buy all outstandingshares o( ;ahoo

Option to postponecontingent on

;ahooJs rejection o(o((er

Option to abandon

contingent on (ailureto integrate ;ahoo FM*:

Option to e6pandcontingent onsuccess(ulintegration o( ;ahooF M*:

"urchase ;ahooonline searchbusiness only/ +uyre#ainingbusinesses later/

O((er sa#e4lo&erprice (or all o(;ahoo i( boardco#positionchanges

*pino(( co#bined;ahoo F M*: toMicroso(tshareholders

9ivest co#bined;ahoo F M*:/

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08-Chapter 8c Primer on Relative Valuation Methods

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