31st Oct Complete

Corporate restructuring

31st October 2009

Valuation Techniques

Market based methodologies Intrinsic valuation measures

Relative company valuation Discounted Cash Flow (DCF)

Dividend Yield / Dividend Growth

Adjusted Book Value

Adjusted Book Value• Valuation approach based on the market value of

assets and liabilities held by a company

• Typical use is for property companies and investment companies… and when company being valued is likely to be liquidated

• Often used as a cross-check for other valuation methods:– Indicates minimum acceptable value to the seller– Comparing Price: Book ratios– Asset backing to a valuation (measure of security)– Basis for computing goodwill (DCF/Earnings – NAV)

Dividend Valuation

• Valuation approach based on capitalising the dividend streams received by an investor and expected growth thereof

• Mostly used for ‘pure’ investments where the primary value driver is the dividend stream

• …. therefore methodology is typically used when valuing Minority Shareholdings

• Value seen as net present value of future dividend streams

Relative company valuation

Relative company valuation

Some exercise

• Trailing and forward multiples

• Outliers

DCF Approach

• Valuation approach based on discounting projected cashflows to today’s values

• By far, the most common methodology and used where the conditions for using capitalised earnings cannot be met i.e– erratic cash flow patterns

– abnormal (irregular) growth patterns

– large variations in capex or working capital

– expected significant variations in gearing structure

– asset valued has a finite life

DCF Approach

• DCF approach is based on FCF – cash flow available to debt and equity investors

EBITDA

- Taxation (unlevered)

+/- Changes in working capital

- Capital Expenditure

= Free Cash Flow

Valuation Road Map

What are we valuing?

Mainly asset based company?

Minority Shareholding?

Y

N

Adjusted book value

Consistent dividendstream?

Y DividendValuation

Mature business with consistent past results, constant growth and no major changes expected?

Relative valuation

N N

Y

Y

Discounted Cash Flow

N

M&A

Distinction between Mergers and Acquisitions 

Although they are often uttered in the same breath and used as though they were synonymous, the terms merger and acquisition mean slightly different things. 

When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded. 

In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks are surrendered and new company stock is issued in its place. For example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler, was created. 

In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it's technically an acquisition. Being bought out often carries negative connotations, therefore, by describing the deal as a merger, deal makers and top managers try to make the takeover more palatable. 

MergersType of mergers: Mergers appear in three forms, based on the competitive

relationships between the merging parties.

In a horizontal merger, one firm acquires another firm that produces and sells an identical or similar product in the same geographic area and thereby eliminates competition between the two firms.

In a VERTICAL MERGER, one firm acquires either a customer or a supplier.In a Conglomerate mergers encompass all other acquisitions, including:

- pure conglomerate transactions where the merging parties have no evident relationship (e.g., when a shoe producer buys an appliance manufacturer), - geographic extension mergers, where the buyer makes the same product as the target firm but does so in a different geographic market (e.g., when a baker in Chicago buys a bakery in Miami), and - product-extension mergers, where a firm that produces one product buys a firm that makes a different product that requires the application of similar manufacturing or marketing techniques (e.g., when a producer of household detergents buys a producer of liquid bleach).

Congeneric mergers occur where two merging firms are in the same general industry, but they have no mutual buyer/customer or supplier relationship, such as a merger between a bank and a leasing company.

Synergy• It is the magic force that allows for enhanced cost efficiencies of the new business. Synergy

takes the form of revenue enhancement and cost savings. By merging, the companies hope to benefit from the following: 

• Staff reductions - As every employee knows, mergers tend to mean job losses. Consider all the money saved from reducing the number of staff members from accounting, marketing and other departments. Job cuts will also include the former CEO, who typically leaves with a compensation package. 

• Economies of scale - Yes, size matters. Whether it's purchasing stationery or a new corporate IT system, a bigger company placing the orders can save more on costs. Mergers also translate into improved purchasing power to buy equipment or office supplies - when placing larger orders, companies have a greater ability to negotiate prices with their suppliers. 

• Acquiring new technology - To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a smaller company with unique technologies, a large company can maintain or develop a competitive edge. 

• Improved market reach and industry visibility - Companies buy companies to reach new markets and grow revenues and earnings. A merge may expand two companies' marketing and distribution, giving them new sales opportunities. A merger can also improve a company's standing in the investment community: bigger firms often have an easier time raising capital than smaller ones.

Doing the deal• Start with an offer or begins with the acquiring company carefully and discreetly buying up

shares in the target company, or building a position.

• Working with financial advisors and investment bankers, the acquiring company will arrive at an overall price that it's willing to pay for its target in cash, shares or both. 

• Open offer

• The Target's Response Once the tender offer has been made, the target company can do one of several things: 

Accept the Terms of the Offer - If the target firm's top managers and shareholders are happy with the terms of the transaction, they will go ahead with the deal. Attempt to Negotiate - price, job securityExecute a Poison Pill or Some Other Hostile Takeover Defense Find a White Knight

• Regulatory issues

• Closing the deal – sha & spa, exchange of money or stock

Doing the dealWhen a company is on offer?

Regulatory Issues• MRTP: Monopolies and Restrictive Trade Practices Act

- Historically, competition in India has been regulated by the MRTP Act, which is in force since 1970. The primary purpose of the MRTP Act is to curb unfair, restrictive and monopolistic practices  - However, to promote competition and to promulgate a modern competition law, Government constituted a committee in 1999, based on the recommendations of which, the Competition Act, 2002 was enacted and notified in January 2003 and the Competition (Amendment) Act, 2007 was enacted in September 2007. - The Competition Commission of India was established in October 2003 under the Competition Act, 2002. I

Three Stages of a Merger

Reasons for failure

• Excessive premium• Size Issues• Lack of research• Diversification• Lack of Previous Acquisition Experience• Poor Cultural Fits• Poor organization fit• Striving for Bigness

Reasons for failure

• Poorly Managed Integration

• Failure to Set the Pace for Integration

• Ego Clash

• Over Leverage

• Expecting Results too quickly