Corporate Valuation

“Price is what you pay. Value is what you get.” – Warren Buffett

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

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

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

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

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

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

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)

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

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

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

One Example Of Comparable Data Comes From Bloomberg

Source: Bloomberg

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

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

Many Acquisitions Use One of The Following Multiples

LTM (trailing 12 months) Sales

LTM EBITDA

Premium To Prior Stock Price

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

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

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

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

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

Illustrative Valuation SummaryEnterprise Value ($ in millions)

Public Company Comparab

les

Acquisition

Comparables

Discounted Cash Flow Analysis

230 272

216

251 308

Methodology Benchmark Parameters

289

Source: Goldman Sachs

18-24x 2014 P/E

6-10x LTM EBITDA

8.0-10.0% Discount Rate

6-10x EBITDA Exit

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

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