Transcript Value - Analyst Reports
“I Will Return!!” (not GEN MacArthur)
A Charter Class member returns to speak on PE Valuation Bruce B. Bingham, FASA, FRICS 23 September 2013
Getting Started – Definitions • • • • • • • • • • • •
Value
– A useless word by itself.
Fair Market Value (“FMV”)
willing seller where neither is acting under compulsion and when both have reasonable knowledge of the relevant facts.
– Amount at which property would change hands between a willing buyer and a
Fair Value
– Statutory standard of value used in courts usually involving dissenting shareholders’ litigation.
Going Concern Value
– Assumes the business continues as a viable operating enterprise, including intangibles such as trained workforce, licenses and operating procedures.
Investor Value
– Value to a particular buyer/investor considering his or her specific personal circumstances, knowledge of the transaction and potential synergy.
Total Capital Value
– Value of Fair Market Value of 100% of the equity plus the market value of long term debt. Usually used in calculating performance ratios.
Liquidation Value
– Value from piecemeal sale of assets. (Opposite of Going Concern Value). Can be orderly or forced. Typically low end of value spectrum.
Book Value
– An accounting term for the value of total net assets minus total liabilities on the balance sheet. Intangibles usually excluded.
Minority Value
– Value reflecting an ownership position of less than 50%. Frequently expressed as a discount.
Control Value
– Additional value inherent in a legally controlling interest, reflecting the power of control. Frequently expressed as a premium.
Marketable Value
exchanged.
– Value of an equity assuming a pre-established market in which that equity can be
Non-marketable Value
: – Decreased value due to the limitation in the marketability of an equity. Opposite of Freely Traded Value. Usually expressed as a discount.
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Getting Started – Key Questions • What definition of value?
• What is being valued?
• Premise of Value?
• Valuation Date v. Report Date • Type of Report?
• Distribution?
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Approaches – Cost Approach •
Premise
– Value equals FMV of Assets Minus FMV of Liabilities •
Mechanics
– Value Each Tangible and Intangible Asset – Subtract Market Value of Liabilities
Advantages
- Useful for asset intensive businesses profit - Preferred by lenders - Facilitates purchase price allocation - Excluding intangibles, can represent "liquidation" value
Drawbacks
- No consideration of "going-concern" or - Intangibles defensible, but difficult - Cumbersome valuation process - Lack of information 3
Approaches – Market Approach • •
Premise
– The value of the target can be estimated by looking at prices paid for minority or controlling interests in the public marketplace – Ex-Ante approach
Mechanics
– Identify "comparable" companies – Calculate multiples and adjust for target company – Apply multiples to adjusted subject company financial statements – Produces minority, marketable value – Apply premiums or discounts as appropriate
Advantages
Value based on actual prices paid for comparable companies Use of hard numbers Multiple multiples
Drawbacks
- Does not take into account synergies - Focuses on historical results - Multiple multiples can lead to a divergence of indicated values - Requires estimation and application of premiums and discounts 4
Market Approach - Nuances • Guideline Company or Representative Transactions • Multiples Relevant to Industry Being Valued.
• TIC or Equity Multiples? • Comparable Company Medians or Averages?
• Haircuts to multiples.
• Adjustment from Minority, Freely Traded Basis.
• For Transaction Comps, Lookbacks before 15 September 2008 • Forward Multiples? An IB tact that mixes approaches 5
Income Approach – Premise and Mechanics Overview •
Premise
– The Value of the target can be estimated by forecasting the future financial performance of the business and identifying the cash flow that the business generates – Forward-looking approach •
Mechanics Overview
– Forecast the target company's financial performance (income statement, statement of changes, and balance sheet) – Identity the cash flow-negative or positive-in each forecasted fiscal year – Estimate the value of the target at the end of the forecast period (terminal value) – Estimate the target's risk-adjusted cost of capital – Discount the forecasted cash flows and the terminal value amounts by the cost of capital – Subtract actual borrowings at valuation date (long-term and short-term) to estimate the value of the business to its owners 6
Income Approach – Advantages & Drawbacks •
Advantages
– The DCF method forces you to translate future benefits from a business into hard dollars.
– The DCF method forces you to understand the target's business – The DCF method allows one to identify the expected cash flow that may be used to service debt – You can reflect the impact of the business cycle in the DCF analysis •
Drawbacks
– It is difficult to forecast with any degree of accuracy. You can compensate by developing different operating scenarios and measure their impact on value.
– Certain key assumptions can wildly alter DCF values – It is difficult to value the target at the end of the forecast period – DCF value, including synergies, may result in the buyer overpaying for the target 7
Income Approach - Nuances • Hockey stick projections • “Reasonably Objective Basis” • Perpetual Growth Rate • Projection Period • WACC – Beta – Company Specific Risk Premium – Baa as a Proxy for Cost of Debt – Tax Adjusted Cost of Debt 8
Conclusion of Value • Risk in Market Approach v. Risk in Income Approach • BBB’s Cherry-Picking Postulate: If information exists with which to apply an approach to value, then you better use it (or explain why not). • Use experience and professional judgment in reconciling your indications of value from the various approaches.
• No formulas or averages. Explain basis for weighting.
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