Corporate Valuation “Price is what you pay. Value is what you get.” – Warren Buffett
Dec 16, 2015
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