M&A and Investment Banking
Transcript of M&A and Investment Banking
Relative Valuation In relative valuation, the value of an asset is compared to the values assessed by the market for
similar or comparable assets.
Relative valuation process:
1. Identify comparable assets and obtain market values for these assets.
2. Convert these market values into standardized values, since the absolute prices cannot be compared.
This process of standardizing creates price multiples.
3. Compare the standardized value or multiple for the asset being analyzed to the standardized values for
comparable asset, controlling for any differences between the firms that might affect the multiple, to
judge whether the asset is under or over valued
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Advantages and Disadvantages of Valuation Multiples
Advantages Disadvantages
▲ Useful – multiples can be robust tools that provide useful
information about relative value
▲ Simple – ease of calculation and wide availability of data make
multiples an appealing method for assessing value
▲ Relevant – Multiples are based on key statistics that investors use
▼ Simplistic – combine many value drivers into a point estimate.
Difficult to disaggregate the effect of different value drivers
▼ Static – Multiples measure value at a single point in time and do not
fully capture the dynamic nature of business and competition
▼ Difficult to compare – Multiples differ for many reasons, not all
relating to true differences in value. This can result in misleading
‘apples-to-oranges’ comparisons among multiples
Multiples are Standardized Estimates of Price
4 Source: Aswath Damodaran (http://pages.stern.nyu.edu/~adamodar)
Market Value of Equity
Market Value for the Firm
Firm Value = Market
Value of Equity + Market
Value of Debt
Market Value of Operating
Assets of Firm
Enterprise Value (EV) =
Market Value of Equity +
Market Value of Debt -
Cash
Revenues
Accounting revenues
Drivers
No. of Customers
No. of Subscribers
No. of Units
Earnings
To Equity investors
Net income
Earnings per share
To Firm
Operating income
(EBIT)
Cash Flow
To Equity
Net Income +
Depreciation
Free CF to Equity
To Firm
EBIT + DA
(EBITDA)
Free CF to Firm
Book Value
Equity
= BV of Equity
Firm
= BV of Debt + BV
of Equity
Invested Capital
= BV of Equity +
BV of Debt – Cash
Multiple =
Numerator = What You are Paying for the Asset
Denominator = What You are Getting in Return
Comparable Companies Analysis (Comps) Steps
5
Select the Universe of Comparable Companies
Locate the Necessary Financial Information
Spread Key Statistics, Ratios, and Trading Multiples
Benchmark the Comparable Companies
Determine Valuation
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2
3
4
5
Select the Universe of Comparable Companies
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Business Profile Financial Profile
Sector Size
Products and Services Profitability
Customers and End Markets Growth Profile
Distribution Channels Return on Investment
Geography Credit Profile
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Locate the Necessary Financial Information
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Source: Rosenbaum, J. and Pearl, J., 2009. Investment banking : valuation, leveraged buyouts, and mergers & acquisitions. Wiley: Chapter 1
Notes: (1) As a non-GAAP (generally accepted accounting principles) financial measure, EBITDA is not reported on a public filer’s income statement. It
may, however, be disclosed as supplemental information in the company’s public filings.
Information Item Source
Income Statement Data
Sales
Gross Profit
EBITDA(1)
EBIT
Net Income/EPS
Most recent 10-K, 10-Q, 8-K, Press Release
Research Estimates First Call or IBES, individual equity research reports
Balance Sheet Data
Cash Balance
Debt Balances
Shareholders’ Equity
Most recent 10-K, 10-Q, 8-K, Press Release
Cash Flow Statement Data
Depreciation and Amortisation
Capital Expenditures
Most recent 10-K, 10-Q, 8-K, Press Release
Share Data
Basic Shares Outstanding 10-K, 10-Q, or Proxy Statement, whichever is most recent
Options and Warrants Data 10-K or 10-Q, whichever is more recent
Market Data
Share Price Data Financial information service
Credit Ratings Rating agencies’ websites, Bloomberg
Spread Key Statistics, Ratios, and Trading Multiples
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3
Source: Rosenbaum, J. and Pearl, J., 2009. Investment banking : valuation, leveraged buyouts, and mergers & acquisitions. Wiley: Chapter 1
Key Trading Multiples
Multiple= a measure of market valuation in the numerator (e.g., enterprise value, equity
value) / a universal measure of financial performance in the denominator (e.g., EBITDA, net
income)
Enterprise Value Multiples: The denominator employs a financial statistic that flows to
both debt and equity holders (e.g.: sales, EBITDA, and EBIT)
Equity Value (or Share Price) Multiples: The denominator must be a financial statistic
that flows only to equity holders, such as net income (or diluted EPS)
Enterprise Value vs. Equity Multiples
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Enterprise Value Multiples Equity Multiples
Allow the user to focus on statistics where accounting policy
differences can be minimised (EBITDA, OpFCF)
Avoid the influence of capital structure on equity value
multiples
More comprehensive (apply to the entire enterprise)
Wider range of multiples possible
Easier to apply to cash flow
Enables the user to exclude non-core assets
More relevant to equity valuation
More reliable (estimating enterprise value involves more
subjectivity, especially in the valuation of non-core assets)
More familiar to investors
Equity Value Multiples
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Multiple Definition Advantages Disadvantages
P/E ratio
Share price / Earnings per share (EPS) EPS
is net income/weighted average no of
shares in issue
EPS may be adjusted to eliminate
exceptional items (core EPS) and/or
outstanding dilutive elements (fully diluted
EPS)
Most commonly used equity multiple
Data availability is high
EPS can be subject to differences in
accounting policies and manipulation
Unless adjusted, can be subject to one-off
exceptional items
Cannot be used if earnings are negative
Price / cash
earnings
Share price / earnings per share plus
depreciation amortization and changes in
non-cash provisions.
Cash earnings are a rough measure of
cash flow
Unaffected by differences in accounting
for depreciation
Incomplete treatment of cash flow
Usually used as a supplement to other
measures if accounting differences are
material
Price / book
ratio Share price / book value per share.
Can be useful where assets are a core
driver of earnings such as capital-
intensive industries
Most widely used in valuing financial
companies, such as banks, which rely on
a large asset base to generate profits
Book values for tangible assets are stated
at historical cost, which is not a reliable
indicator of economic value
Book value for tangible assets can be
significantly impacted by differences in
accounting policies
PEG ratio Prospective PE ratio / prospective average
earnings growth.
Most suitable when valuing high growth
companies
Requires credible forecasts of growth
Can understate the higher risk associated
with many high-growth stocks
Dividend
yield Dividend per share / share price.
Useful for comparing cash returns with
types of investments
Can be used to establish a floor price for
a stock
Dependent on distribution policy of the
company
Yield to investor is subject to differences
in taxation between jurisdictions
Assumes the dividend is sustainable
Price / Sales Share price / sales per share.
Easy to calculate
Can be applied to loss making firms
Less susceptible to accounting differences
than other measures
Mismatch between nominator and
denominator in formula (EV/Sales is a
more appropriate measure)
Not used except in very broad, quick
approximations
Enterprise Value Multiples
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Multiple Definition Advantages Disadvantages
EV/Sales Enterprise value / net sales
Least susceptible to accounting differences
Remains applicable even when earnings are negative
or highly cyclical
A crude measure as sales are rarely a direct value
driver
EV/EBITDAR Enterprise value / Earnings before Interest, Tax,
Depreciation & Amortization and Rental Costs
Proxy for operating free cash flows
Attempts to normalize capital intensity between
companies that choose to rent rather than own their
core assets
Most often used in the transport, hotel and retail
industries
Rental costs may not be reported and need to be
estimated
Ignores variations in capital expenditure and
depreciation
Ignores value creation through tax management
EV/EBITDA
Enterprise value / Earnings before Interest, Tax,
Depreciation & Amortization. Also excludes
movements in non-cash provisions and exceptional
items
EBITDA is a proxy for free cash flows
Probably the most popular of the EV based multiples
Unaffected by depreciation policy
Ignores variations in capital expenditure and
depreciation
Ignores potential value creation through tax
management
EV/EBIT and
EV/EBITA
Enterprise value / Earnings before interest and
taxes (and Amortisation)
Better allows for differences in capital intensiveness
compared to EBITDA by incorporating maintenance
capital expenditure
Susceptible to differences in depreciation policy
Ignores potential value creation through tax
management
EV/NOPLAT Enterprise value / Net Operating Profit After Adjusted
Tax
NOPLAT incorporates a number of adjustments to
better reflect operating profitability
NOPLAT adjustments can be complicated and are not
applied consistently by different analysts
EV/opFCF
Enterprise value / Operating Free Cash FlowOpFCF is
core EBITDA less estimated normative capital
expenditure requirement and estimated normative
variation in working capital requirement
Better allows for differences in capital intensiveness
compared to EBITDA
Less susceptible to accounting differences than EBIT
Use of estimates allows for smoothing of irregular real
capital expenditures
Introduces additional subjectivity in estimates of
capital expenditure
EV/ Enterprise
FCF
Enterprise value / Free cash flowEnterprise FCF is core
EBITDA less actual capital expenditure requirement and
actual increase in working capital requirement
Less subjective than opFCF
Better allows for differences in capital intensiveness
compared to EBITDA
Less susceptible to accounting differences than EBIT
Can be volatile and difficult to interpret as capital
expenditure is often irregular and “lumpy”
EV/Invested
Capital Enterprise value / Invested capital
Can be useful where assets are a core driver of
earnings, such as for capital-intensive industries
Book values for tangible assets are stated at historical
cost, which is not a reliable indicator of economic
value
Book value for tangible assets can be significantly
impacted by differences in accounting policies
EV/Capacity
Measure
Depends on industry (e.g. EV/subscribers,
EV/production capacity, EV/audience)
Not susceptible to accounting differences
Remains applicable even when earnings are negative
or highly cyclical
A crude measure as capacity measures are rarely a
direct value driver
Choosing the Pricing Date
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Alternative Pricing Bases for Multiples
Multiple Comparisons and Lifecycles
Source: UBS Global Equity Research, 2001. Valuation Multiples: A Primer
Pricing Basis Calculation Profit or Cash Flow Used Use in Valuation
Historical Average price or enterprise value for
a period
Historical profit for the same period Established a historical
trading range
Current Current price or enterprise value Any historical or forecast profit Investigation of current value – best to
use current year forecast profit
Forward Forward price or enterprise value Forecast profit for a period related to
the forward price date
Investigation of current value – superior
to current-priced multiple for forecasts
beyond one year
Partial-
forward
Current market cap plus forecast net debt
(applies to enterprise value only)
Forecast profit for a period related to
the forward price date
Investigation of current value but the
partial-forward price is inconsistent and
difficult to interpret
Growth rate
Now Time Forward
Multiples likely to be most
comparable where
companies are at similar
points in their lifecycles
Conventional Usage of the Main Trading Multiples
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Sector Multiple Used Rationale
Cyclical Manufacturing PE, Relative PE Often with normalized earnings
Growth Firms PEG ratio Big differences in growth rates
Young Growth Firms with
Losses
Revenue Multiples What choice do you have?
Infrastructure EV/EBITDA Early losses, big DA
REIT P/CFE (where CFE = Net
income + Depreciation)
Big depreciation charges
on real estate
Financial Services Price/ Book equity Marked to market?
Retailing Revenue Multiples Margins equalize sooner
or later
Sector-Specific Valuation Multiples
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Valuation Multiple Sector
Enterprise Value
Access Lines/Fiber Miles/Route Miles Telecommunications
Broadcast Cash Flow (“BCF”) Media
Telecommunications
Earnings Before Interest Taxes, Depreciation, Amortisation, and
Rent Expense (“EBITDAR”)
Casinos
Restaurants
Retail
Earnings Before Interest Taxes, Depreciation, Depletion, Amortisation, and Exploration Expense
(“EBITDAX”)
Natural Resources
Oil and Gas
Population (“POP”) Telecommunications
Production/Capacity (in Units) Metals and Mining
Natural Resources
Oil and Gas
Paper and Forest Products
Reserves Metals and Mining
Natural Resources
Oil and Gas
Subscriber Media
Telecommunications
Square Footage Real Estate
Retail
Valuation Multiple Sector
Equity Value (Price)
Book Value (per Share) Financial Institutions
Homebuilders
Cash Available for Distribution (per Share) Real Estate
Discretionary Cash Flow (per Share) Natural Resources
Funds from Operations (“FFO”) (per Share) Real Estate
Net Asset Value (NAV) (per Share) Financial Institutions
Real Estate
Benchmark the Comparable Companies
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Benchmarking centers on analyzing and comparing each of the comparable
companies with one another and the target. The ultimate objective is to determine
the target’s relative ranking so as to frame valuation accordingly.
It is a two-stage process:
1. Benchmark the Financial Statistics and Ratios (measures of size, profitability, growth,
returns and credit strength)
Goal: identifying the closest or “best” comparables and noting potential outliers
2. Benchmark the Trading Multiples
Emphasis on the best comparables
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Example of Financial Statistics and Ratios
16 Source: Rosenbaum, J. and Pearl, J., 2009. Investment banking : valuation, leveraged buyouts, and mergers & acquisitions. Wiley: Chapter 1
Example of Financial Statistics and Ratios (Cont’d)
17 Source: Rosenbaum, J. and Pearl, J., 2009. Investment banking : valuation, leveraged buyouts, and mergers & acquisitions. Wiley: Chapter 1
Example of Trading Multiples Output Page
18 Source: Rosenbaum, J. and Pearl, J., 2009. Investment banking : valuation, leveraged buyouts, and mergers & acquisitions. Wiley: Chapter 1
Determine Valuation
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The trading multiples for the comparable companies serve as the basis for deriving an
appropriate valuation range for the target by using the means and medians of the most
relevant multiple for the sector (e.g.:EV/EBITDA or P/E) to extrapolate a defensible range of
multiples. The high and low multiples of the comparables universe provide further guidance.
The multiples of the best comparables, however, are typically relied upon as guideposts for
selecting the tightest, most appropriate range
Example of Enterprise Value-to-EBITDA Multiple Range
5
Source: Rosenbaum, J. and Pearl, J., 2009. Investment banking : valuation, leveraged buyouts, and mergers & acquisitions. Wiley: Chapter 1
High Median Mean
Closest
Comparable A
Closest
Comparable B
Closest
Comparable C
Low
6.0x 5.0x 6.5x 7.0x 8.0x
Selected Multiple Range
Net Income
Fully Diluted
Shares
LTM $70 12.00x – 15.00x $840 – $1,050 100 $8.40 – $10.50
2008E $75 11.00x – 14.00x $825 – $1,050 100 $8.25 – $10.50
2009E $80 10.00x – 13.00x $800 – $1,040 100 $8.00 – $10.40
Multiple Range Implied Equity Value Implied Share Price
Net Income Plus: Net Debt
LTM $70 12.00x – 15.00x $840 – $1,050 500 $1,340 – $1,550
2008E $75 11.00x – 14.00x $825 – $1,050 500 $1,325 – $1,550
2009E $80 10.00x – 13.00x $800 – $1,040 500 $1,300 – $1,540
Multiple Range Implied Equity Value Implied Enterprise Value
EBITDA
Less: Net
Debt
Fully
Diluted
Shares
LTM $200 6.50x – 7.50x $1,300 – $1,500 (500) $800 – $1,000 100 $8.00 – $10.00
2008E $215 6.00x – 7.00x $1,290 – $1,505 (500) $790 – $1,005 100 $7.90 – $10.05
2009E $230 5.50x – 6.50x $1,265 – $1,495 (500) $765 – $995 100 $7.65 – $9.95
Implied Share PriceMultiple Range Implied Enterprise Value Implied Equity Value
Implied Valuation
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The selected multiple range is applied to the target’s appropriate financial statistics to derive an implied
valuation range
Example of Valuation Implied by P/E – Share Price
Example of Valuation Implied by P/E – Enterprise Value
Example of Valuation Implied by EV/EBITDA
Source: Rosenbaum, J. and Pearl, J., 2009. Investment banking : valuation, leveraged buyouts, and mergers & acquisitions. Wiley: Chapter 1
Comparable Precedent Transactions Analysis
(Compaq)
21
Precedent transactions analysis, like comparable companies analysis, employs a multiples-based
approach to derive an implied valuation range for a given company, division, business, or
collection of assets (“target”)
Compaq is premised on multiples paid for comparable companies in prior M&A transactions
Steps:
1. Select the Universe of Comparable Acquisitions
2. Locate the Necessary Deal-Related and Financial Information
3. Spread Key Statistics, Ratios, and Transaction Multiples
4. Benchmark the Comparable Acquisitions
5. Determine Valuation
Compaq: Pros & Cons
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Pros Cons
Market-based – analysis is based on actual
acquisition multiples and premiums paid for
similar companies
Market-based – multiples may be skewed
depending on capital markets and/or
economic environment at the time of the transaction
Current – recent transactions tend to reflect
prevailing M&A, capital markets and general
economic conditions
Time Lag – precedent transactions, by definition,
have occurred in the past and, therefore, may not
be truly reflective of prevailing market conditions
(e.g., the LBO boom in the mid-2000s vs. the
ensuing credit crunch)
Relativity – multiples approach provides traight
forward reference points across sectors and time
periods
Existence of Comparable Acquisitions – in some
cases it may be difficult to find a robust universe
of precedent transactions
Simplicity – key multiples for a few selected
transactions can anchor valuation
Availability of Information – information may be
insufficient to determine transaction multiples for
many comparable acquisitions
Objectivity – precedent-based and, therefore, avoids
making assumptions about a company’s future
performance
Acquirer’s Basis for Valuation – multiple paid by the
buyer may be based on expectations governing
the target’s future financial performance (which is
typically not publicly disclosed) rather than on
reported LTM financial information
Example of Precedent Transactions Input Page
Template
23 Source: Rosenbaum, J. and Pearl, J., 2009. Investment banking : valuation, leveraged buyouts, and mergers & acquisitions. Wiley: Chapter 1
Example of Transaction Multiples Output Page
24 Source: Rosenbaum, J. and Pearl, J., 2009. Investment banking : valuation, leveraged buyouts, and mergers & acquisitions. Wiley: Chapter 1
Ducati Case Study: Comparable Companies Operating Benchmarking –
Historical Performance
18.1%
26.0% 20.2%
13.0% 16.4% 14.4%
8.0% 13.0%
10.0% 6.9%
(3.3%)
20.1%
(12.6%)
9.0%
24.7% 1.0% 6.5%
(1.4%)
8.5% 4.0%
8.9% 14.7% 14.9%
7.5% 4.9%
11.1%
4.7% 9.5%
(5.2%) (4.6%)
(8.6%)
10.0%
(9.7%)(2.7%)
(10.7%) (6.2%)(6.2%) (7.1%)
(27.2%)(20.7%)
Revenues CAGR
2008A–2010A
EBITDA margin
2010A
EBITDA CAGR
2008A–2010A
EBIT margin
2010A
Luxury
Comparables Direct Comparables Ducati(1)
Top branded
stocks(2)
Cash flow
conversion
2010A 41.8%
81.6% 79.1% 87.3%
54.9% 74.8%
63.7% 64.6%
45.9% 31.6%
(3)
25
Other Comparables
Source: Company data, FactSet as of 9 February 2011. Notes: (1) Data as of December 2010 annual report. (2) Median of top branded products
including: Burberry, Hermès, LVMH, PPR, Tod’s. (3) Calculated as (EBITDA – Capex) / EBITDA
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EBITDA margin
2012E
EBITDA CAGR
2011E–2013E
EBIT margin
2012E
19.0%
26.0% 26.6%
14.0% 13.3% 17.3%
7.4% 9.8% 9.4% 8.2%
10.9% 13.5% 14.5% 13.3% 15.5%
20.3%
8.7% 3.1% 3.0%
11.7%
10.9%
21.4% 22.2%
7.9% 7.0%
14.9%
4.4% 5.7% 4.9% 4.2%
Top branded
stocks(2)
(3)
49.4%
83.1% 85.7%
42.7% 49.7%
84.7%
55.9% 48.3%
23.6%
44.3%
Cash flow
conversion
2012E (4)
Revenues CAGR
2011E–2013E
8.0% 10.4%
6.5% 8.6% 10.1% 12.7%
6.9% 2.2% 1.9%
6.8%
Luxury
Comparables Direct Comparables Ducati(1) Other Comparables
Ducati Case Study: Comparable Companies Operating Benchmarking -
Expectations
Source: Company data, FactSet as of 9 February 2012 Notes: (1) Preliminary estimates. (2) Median of top branded products including: Burberry,
Hermès, LVMH, PPR, Tod’s. (3) Growth refers to 2012 since 2013 estimates not available. (4) Calculated as (EBITDA – Capex) / EBITDA
10.0x 11.4x 11.3x
7.6x 6.8x 7.5x
16.3x
11.9x14.6x
12.5x 12.9x 12.7x
9.4x
15.1x
9.3x 10.8x15.6x
11.9x
21.6x
Top branded
stocks(1)
EV / EBITDA
2013E
EV / (EBITDA –
Capex) 2012E
EV / (EBITDA –
Capex) 2013E
7.9x 7.9x9.8x
4.5x
6.1x 4.5x8.1x
3.2x
6.4x
ex fin. services
Avg. 2013: 7.2x Avg. 2013: 5.7x
Avg. 2012: 12.4x Avg. 2012: 13.8x
Avg. 2013: 9.5x Avg. 2013: 11.4x
EV / EBITDA
2012E 9.5x
8.7x10.8x
5.2x
7.5x 7.9x5.5x
8.4x
3.3x
7.1x
Avg. 2012: 7.8x Avg. 2012: 6.4x
n.a.
27
Luxury
Comparables Direct Comparables Other Comparables
n.a.
Ducati Case Study: Trading Multiples of Key Peers
Source: Company data, FactSet as of 9 February 2012. Notes: (1) Median of top branded products including: Burberry, Hermès, LVMH, PPR, Tod’s
–
5.0x
10.0x
15.0x
20.0x
25.0x
30.0x
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Ducati EV / EBITDA HD EV / EBITDA 1999-2008 Ducati average EV / EBITDA 1999-2008 HD average EV / EBITDA
12.9x
7.8x
28
Ducati Case Study: Historical Multiples Evolution NTM EV / EBITDA
Reference Motorcyle Sector Transactions
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Luxury Flash Spot Automotive Transactions
Ducati Case Study: Comparable Acquisitions Analysis
Target Enterprise EV Multiples Inputs (local currency)
Date Bidder Value LTM revenue LTM EBITDA Comments
1 19-Feb-08 Ducati Motor Holding SpA € 401m 1.4x 10.5x
Performance Motorcycles SpA
2 22-Dec-06 KTM Power Sports AG € 454m 0.9x 7.9x
Cross Industries AG
3 21-Oct-99 Piaggio € 693m 0.7x 10.0x
Morgan Grenfell Private Equity
Average 1.0x 9.5x
Median 0.9x 10.0x
4 09-Aug-09 Volkswagen € 12 , 400m 1.9x 8.5x Volkswagen acquiring 49.9% stake of Porsche
Porsche
5 26-Jul-07 Mubadala Development Co. € 2 , 280m 1.9x 8.6x Mubadala Development acquiring a 5% stake in Ferrari
Ferrari
6 12-May-07 Investor Group € 783m 1.0x 7.0x Investor Group acquiring 91 % of Aston Martin for € 783 m
Aston Martin
7 12-Jun-00 Volkswagen € 106m 2.2x NA Volkswagen acquiring 100% of Lamborghini
Lamborghini
Average 1.8x 8.0x
Median 1.9x 8.5x
Overall average 1.4x 8.7x
Overall median 1.4x 8.6x
Public offer for ordinary shares at a price of € 1 . 70 each
Cross Industries acquired 1.38m shares (20% stake) of KTM
Power Sports AG from Polaris for € 58 . 5 m
Morgan Grenfell acquired Piaggio. Morgan is to hold 80%,
TPG 10% and Umberto Agnelli 10%
Note: Exchange rates used for deal value is the rate as on the date of transaction
Valuation driver €860m: value paid by
Audi(1) for the
acquisition of Ducati
in April 2012
10.2x 22.0x 9.0x 18.3x
30
2012E 8.8x – 9.8x 19.2x – 21.4x 7.8x – 8.7x 15.6x – 17.4x
2013E 8.8x – 9.7x 19.1x – 21.1x 7.8x – 8.6x 15.5x – 17.1x
2012E 7.2x – 8.5x 15.7x – 18.6x 6.4x – 7.5x 12.7x – 15.1x
2013E 6.3x – 9.7x 13.7x – 21.0x 5.6x – 8.5x 11.1x – 17.1x
8.7x – 10.5x 18.9x – 22.8x 7.7x – 9.3x 15.4x – 18.6x
LBO 7.5x – 8.5x 16.3x – 18.5x 6.6x – 7.5x 13.3x – 15.0x
- Low: overall average of
comparable transactions (8.7x LTM
EBITDA)
- High: VTO on Ducati by
Investindustrial (10.5x LTM
EBITDA)
EV / EBITDA
multiple
Implied EV/ 2012
(EBITDA - Capex)
Implied EV/
2012 EBITDA Comments
-Low: average value of direct
comparables trading multiple (7.8x
2012E EBITDA and 7.2x 2013E
EBITDA)
-High: trading multiple of Harley
Davidson ex. Financial Services
(8.7x 2012E EBITDA and 7.9x
2013E EBITDA)
Tra
din
g V
alu
ati
on
Implied EV/
2011 EBITDA
Implied EV/ 2011
(EBITDA - Capex)
Targeting c. 2.0x CoC returns over
5 years
EV / (EBITDA -
Capex)
Multiple
-Low: median trading multiple of
direct comparables (12.7x 2012E
EBITDA - Capex and 9.5x 2013E
EBITDA - Capex)
-High: trading multiple of KTM
(15.1x EBITDA - Capex) for 2012E;
trading multiple of Kawasaki (14.6x
EBITDA - Capex) for 2013E
Comparable Precedent
Transactions
Enterprise Value Methodology
Co
ntr
ol
Valu
ati
on
630
731
528
606
738
742 826
814
717
811
882
715
Ducati historical
NTM EV/EBITDA
average multiple of
7.8x
(~€740m)
Ducati Case Study: Indicative Valuation Overview
Note: (1) According to press release
Purchase Consideration
31
Purchase Consideration refers to the mix of cash, stock, and/or other securities that the acquirer offers to
the target’s shareholders.
All-Cash Transaction: the acquirer makes an offer to purchase all or a portion of the target’s shares
outstanding for cash.
Equity value: cash offer price per share multiplied by the number of fully diluted shares outstanding.
Receipt of such consideration triggers a taxable event as opposed to the exchange or receipt of shares
of stock, which, if structured properly, is not taxable until the shares are eventually sold.
Stock-for-Stock Transaction:
Equity value: calculation based on a fixed exchange ratio or a floating exchange ratio (“fixed price”). The
exchange ratio is calculated as offer price per share divided by the acquirer’s share price.
Cash and Stock Transaction: the acquirer offers a combination of cash and stock as purchase consideration.
The cash portion of the offer represents a fixed value per share for target shareholders. The stock
portion of the offer can be set according to either a fixed or floating exchange ratio.
Offer Price per Share and Equity Value is calculates as follows:
Source: Rosenbaum, J. and Pearl, J., 2009. Investment banking : valuation, leveraged buyouts, and mergers & acquisitions. Wiley: Chapter 1
Offer Price
per Share
Equity Value
Cash Offer
per Share
Cash Offer
per Share
Exchange Ratio
Exchange Ratio
Acquirer’s
Share Price
Acquirer’s
Share Price
Target’s Fully Diluted
Shares Outstanding
= + x
= + x x
Stock-for-Stock Transaction:
Value to Target and Shares Received
32
In a fixed exchange ratio structure, the offer
price per share (value to target) moves in line
with the underlying share price of the acquirer.
The amount of the acquirer’s shares received,
however, is constant.
Floating Exchange Ratio Fixed Exchange Ratio
In a floating exchange ratio structure, as
opposed to a fixed exchange ratio, the dollar
offer price per share (value to target) is set and
the number of shares exchanged fluctuates in
accordance with the movement of the acquirer’s
share price
Source: Rosenbaum, J. and Pearl, J., 2009. Investment banking : valuation, leveraged buyouts, and mergers & acquisitions. Wiley: Chapter 1
Val
ue t
o T
arge
t
Acquirer’s Share Price
Value to Target
Shares Received
Val
ue t
o T
arge
t
Acquirer’s Share Price
Value to Target
Shares Received
Discounted Cash Flow Analysis (DCF)
33
In intrinsic valuation, an asset is valued based upon its intrinsic characteristics
For cash flow generating assets, the intrinsic value will be a function of the magnitude of
the expected cash flows on the asset over its lifetime and the uncertainty about receiving
those cash flows
The value of a risky asset can be estimated by discounting the expected cash flows
on the asset over its life at a risk-adjusted discount rate:
Where the asset has a n-year life, E(CFt) is the expected cash flow in period t and r is a
discount rate that reflects the risk of the cash flows
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑛 𝐴𝑠𝑠𝑒𝑡 = 𝐸 𝐶𝐹1
(1 + 𝑟)+
𝐸 𝐶𝐹2
1 + 𝑟 2+ ⋯ +
𝐸 𝐶𝐹𝑛
1 + 𝑟 𝑛
DCF Choices: Equity Valuation vs. Firm Valuation
34 Source: Aswath Damodaran (http://pages.stern.nyu.edu/~adamodar)
Assets Liabilities
Existing Investments
Generate cashflows today
Includes long lived (fixed) and short-
lived (working capital) assets
Assets in Place
Growth Assets
Debt
Equity Expected Value that will be created by
future investments
Fixed Claim on cash flows
Little or No role in management
Fixed Maturity
Tax Deductible
Residual Claim on cash flows
Significant Role in management
Perpetual Lives
Firm Valuation: Value the entire business
Equity Valuation: Value just the equity
claim in the business
DCF Choices: Equity Valuation vs. Firm Valuation (Cont’d)
35
Firm Valuation
Equity Valuation
Source: Aswath Damodaran (http://pages.stern.nyu.edu/~adamodar)
Assets Liabilities
Cash flows considered are
cashflows from assets, after debt
payments and after making
reinvestments needed for
future growth
Assets in Place
Growth Assets
Debt
Equity Discount rate reflects only the
cost of raising equity financing
Present value is value of just the equity claims on the firm
Assets Liabilities
Cash flows considered are
cashflows from assets, prior to
any debt payments but after firm
has reinvested to create growth
assets
Assets in Place
Growth Assets
Debt
Equity
Discount rate reflects the cost
of raising both debt and equity
financing, in proportion to
their use
Present value is value of the entire firm, and reflects the value
of all claims on the firm
Discounted Cash Flow Valuation: The Steps
36
Estimate the discount rate or rates to use in the valuation
Discount rate can be either a cost of equity (if doing equity valuation) or a cost of capital (if
valuing the firm)
Discount rate can be in nominal terms or real terms, depending upon whether the cash flows are
nominal or real
Discount rate can vary across time
Estimate the current earnings and cash flows on the asset, to either equity investors
(CF to Equity) or to all claimholders (CF to Firm)
Estimate the future earnings and cash flows on the firm being valued, generally by
estimating an expected growth rate in earnings
Estimate when the firm will reach “stable growth” and what characteristics (risk &
cash flow) it will have when it does
Choose the right DCF model for this asset and value it
Generic DCF Valuation Model
37 Source: Aswath Damodaran (http://pages.stern.nyu.edu/~adamodar)
Value
Firm: Value of Firm
Equity: Value of Equity
Length of Period of High Growth
Terminal Value
CF1 CF2 CF3 CF4 CF5 CFn
Forever
……..
Cash Flows
Firm: Pre-debt cash flow
Equity: After debt
cash flows
Expected Growth
Firm: Growth in
Operating Earnings
Equity: Growth in Net
Income/EPS Firm is in stable growth:
Grows at constant rate forever
Discount Rate
Firm: Cost of Capital
Equity: Cost of Equity
The Different Valuation Models
38
Input
Dividend
Discount Model
FCFE (Potential
dividend)
discount model
FCFF (firm)
valuation model
Cash Flow Dividend
Potential dividends
= FCFE = Cash
flows after taxes,
reinvestment needs
and debt cash
flows
FCFF = Cash
flows before debt
payments but after
reinvestment needs
and taxes.
Expected
Growth
In equity income
and dividends
In equity income
and FCFE
In operating
income and FCFF
Discount Rate Cost of equity Cost of equity Cost of capital
Steady State
When dividends
grow at constant
rate forever
When FCFE grow
at constant rate
forever
When FCFF grow
at constant rate
forever
Source: Aswath Damodaran (http://pages.stern.nyu.edu/~adamodar)
Dividend Discount Model (DDM)
39 Source: Aswath Damodaran (http://pages.stern.nyu.edu/~adamodar)
Value of Equity
Riskfree Rate
No default risk
No reinvestment risk
In same currency and in same
terms (real or nominal) as
cash flows
Beta
Measures market risk
Risk Premium
Premium for average
risk investment
Type of
Business
Operating
Leverage
Financial
Leverage Base Equity
Premium
Country Risk
Premium
+
x
Discount at Cost of Equity
Terminal Value = Dividend n+1/(ke-gn)
Dividend1 Dividend2 Dividend3 Dividend4 Dividend5 Dividendn Forever
……..
Dividends
Net Income
* Payout Ratio
= Dividends
Expected Growth
Retention Ratio *
Return on Equity
Firm is in stable growth:
Grows at constant rate forever
Cost of Equity
Free Cash Flow to Equity (FCFE)
40 Source: Aswath Damodaran (http://pages.stern.nyu.edu/~adamodar)
Value of Equity
Riskfree Rate
No default risk
No reinvestment risk
In same currency and in same
terms (real or nominal) as
cash flows
Beta
Measures market risk
Risk Premium
Premium for average
risk investment
Type of
Business
Operating
Leverage
Financial
Leverage Base Equity
Premium
Country Risk
Premium
+
x
Discount at Cost of Equity
Terminal Value = FCFE n+1/(ke-gn)
FCFE1 FCFE2 FCFE3 FCFE4 FCFE5 FCFEn Forever
……..
Cashflow to Equity
Net Income
- (Cap Ex – Depr) (1-DR)
- Change in WC (1-DR)
= FCFE
Expected Growth
Retention Ratio *
Return on Equity Firm is in stable growth:
Grows at constant rate forever
Cost of Equity
Financing
Weights
Debt ratio = DR
Free Cash Flow to Firm (FCFF)
41 Source: Aswath Damodaran (http://pages.stern.nyu.edu/~adamodar)
Value of Operating
Assets
+ Cash and Non-op
Assets
= Value of Firm
- Value of Debt
= Value of Equity
Riskfree Rate
No default risk
No reinvestment risk
In same currency and in same
terms (real or nominal) as
cash flows
Beta
Measures market risk
Risk Premium
Premium for average
risk investment
Type of
Business
Operating
Leverage
Financial
Leverage Base Equity
Premium
Country Risk
Premium
+
x
Discount at WACC = Cost of Equity (Equity/(Debt + Equity)) + Cost of Debt (Debt/(Debt + Equity))
Terminal Value = FCFF n+1/(WACC-gn)
FCFF1 FCFF2 FCFF3 FCFF4 FCFF5 FCFFn Forever
……..
Cashflow to Firm
EBIT (1-t)
- (Cap Ex - Depr)
- Change in WC
= FCFF
Expected Growth
Reinvestment Rate
* Return on Capital Firm is in stable growth:
Grows at constant rate forever
Cost of Equity Cost of Debt
(Riskfree Rate + Default Spread) (1-t) Weights
Based on Market Value
TeamSystem Case Study: Comparable Companies
Operating Benchmarking
Growth
2.5%
8.3%
2.0% 2.7% 4.1%
8.2% 8.0%
19.1%
7.1%8.1%
17.0% 15.9%
4.5%
19.2% 20.3%
13.5%
15.9%
3.4%
8.0%
15.9% 17.6%
European ERP SaaS Large Cap Vendors High Growth Eur.
SW
Cash Conversion(1)
67.9%57.7%
65.5%43.0% 46.8%
44.0%55.7% 58.9%
67.4%54.6%
65.6% 69.3%71.3%
39.2%49.1% 46.0% 41.5%52.6% 57.4%
69.1%
43.8%
EBITDA Margin
26.2%20.1% 24.2% 24.2% 15.2% 19.4%
41.7% 43.7%35.9%
36.8%54.3%
26.9%35.6%
16.3%
30.3%
8.6%
15.0%22.1%
39.3% 35.6%
15.7%
TeamSystem
11.3%
2009–2011 revenue CAGR
2010 EBITDA Margin
2010 UFCF/EBITDA
39.0%
69.0%
42 Source: FactSet as of 04 June 2010 and Broker Research. Note: (1) UFCF defined as (1- marginal tax rate) × EBIT + D&A – Capex.
EV/EBITDA 2010
9.2x 7.6x 6.9x4.1x 4.6x
5.4x6.9x 8.1x 9.4x
9.0x 12.9x 11.0x
13.7x
43.2x21.0x
49.5x
13.8x
6.3x8.6x
12.9x 32.1x
EV/UFCF 2010(1)
13.6x 13.1x 10.5x 9.4x 9.8x12.3x
12.3x 13.7x 14.0x16.5x 19.6x
15.9x
19.2x
110.0x
42.7x
107.7x
33.1x
11.6x14.1x 19.2x
75.6x
EV/EBITDA minus capex 2010
10.0x 10.5x7.9x 6.9x 7.3x
9.2x7.4x 8.3x 10.1x
10.1x 14.3x11.6x
14.1x
56.0x
26.0x
n.m.
20.6x
8.8x 9.3x14.1x
26.0x
European ERP SaaS Large cap vendors High growth Eur. SW
43
TeamSystem Case Study: Trading Multiples of Key
Peers
Source: FactSet as of 04 June 2010 and Broker Research. Note: (1) UFCF defined as (1- marginal tax rate) × EBIT + D&A – Capex.
TeamSystem Case Study: Precedent Transaction
Analysis
Acquiror Target Revenue EBITDA EBIT Target description
13/05/2010 Honeywell Matrikon €105 1.4x 16.0x 19.5x Provides software to manage production and operations for industrial plants
12/05/2010 SAP Sybase €4,502 4.8x 12.6x 15.5x Provides enterprise and mobile software to manage, analyze and mobilize information
05/05/2010 ABB Ventyx €777 4.0x NA NA Provider of software solutions for managing energy networks
04/05/2010 PE Consortium IDC €2,336 4.0x 11.3x 12.8x Leading provider of financial markets data, analytics, & related solutions
03/05/2010 Apax Sophos €630 3.2x 16.0x NA Provider of security and data protection solutions
16/04/2010 Oracle Phase Forward €414 2.6x 11.9x 16.6x Life sciences data management solutions for clinical trials
31/03/2010 Investor Group SkillSoft PLC €832 3.6x 9.2x 9.6x SaaS provider of on-demand, e-learning and performance support solutions
02/03/2010 Elliott Associates Novell €783 1.2x 6.6x 7.7x Provider of enterprise infrastructure, software and services
11/02/2010 Advanced Comp. Software COA Soltn's €115 1.7x 8.1x NA Supplier of accounting and budgeting software to the healthcare industry
08/12/2009 Francisco Partners QuadraMed €81 0.8x 8.1x 11.1x Provider of healthcare information technologies and services
01/12/2009 Vista Equity Partners Intuit- Real Estate Solutions €85 1.7x NA 21.3x Provider of software and services to companies in the real estate management and investment industry
05/11/2009 JDA Software Group i2 Technologies €271 1.7x 6.6x 7.1x Dallas-based developer of supply chain management software
07/10/2009 Compuware Gomez €201 5.6x 48.2x 70.3x Provider of on-demand platform for web and mobile applications
06/10/2009 Sykes ICT Group €146 0.5x 7.8x 69.6x Provider of customer management and BPO solutions
29/09/2009 Investor Group MSC Software €171 1.1x 9.3x 12.7x Provider of simulation and software services
15/09/2009 Adobe Omniture €1,179 5.1x 25.0x 42.8x Online business optimization software provider
02/09/2009 Axel Springer AG StepStone ASA €119 1.1x 6.9x 10.2x Provider of e-recruiting solutions and human capital management software
28/07/2009 IBM Corporation SPSS Inc. €590 2.8x 9.7x 12.7x Provider of predictive analytics software and solutions
13/07/2009 Software AG IDS Scheer €401 1.0x 16.5x 20.1x Provider of business process management software solutions
02/06/2009 Intuit Paycycle €119 5.2x NA NA Provider of online payroll services
27/05/2009 Vista Equity Partners SumTotal Systems €80 1.0x 15.0x 39.2x Provider of learning, performance, and talent management solutions
22/01/2009 Autonomy Interwoven €494 2.5x 13.1x 14.8x Provider of enterprise content management software
18/09/2008 Wulters Kluwer Addison Software €192 NA NA NA Provides software applications for tax advisors
14/01/2008 Unit4 Coda €214 3.7x 12.1x 13.1x Provider of finance-based management information solutions
17/12/2007 Epicor NSB €227 3.1x 12.9x 19.3x Provider of application management software and services to the retail industry
01/06/2007 Hellman & Friedman Iris €768 NA NA NA Provider of accounting software
23/03/2007 Hellman & Friedman Kronos €1,322 2.9x 13.0x 14.1x Provider of workforce and talent management software and services
Average 2.7x 13.5x 21.9x
Median 2.6x 12.0x 14.8x
Enterprise value / LTM
Announcement
date
Enterprise
value
(1)
(data in €m)
Significant software
transactions announced
since March 2010 have
commanded median
LTM EBITDA and LTM
EBIT multiples of 12.3x
and 14.1x, respectively
(1)
44 Note: (1) Defined as fully diluted equity value less cash plus total debt.
TeamSystem Case Study: Preliminary IRR Analysis
45
4.00x Senior, 1.50x Mezzanine
Exit Scenario (€m)
IRR Cash-on-Cash
Exit Year - 4 Exit Year - 4
Entry EV € 529 € 554 € 580 € 605 € 630 Entry EV € 529 € 554 € 580 € 605 € 630
Entry multiple 10.5x 11.0x 11.5x 12.0x 12.5x Entry multiple 10.5x 11.0x 11.5x 12.0x 12.5x
€ 896 10.5x 27.8% 25.0% 22.4% 20.1% 18.0% € 940 10.5x 2.67x 2.44x 2.25x 2.08x 1.94x
€ 938 11.0x 29.7% 26.8% 24.2% 21.9% 19.7% € 985 11.0x 2.83x 2.59x 2.38x 2.21x 2.06x
€ 981 11.5x 31.5% 28.6% 25.9% 23.5% 21.4% € 1 , 030 11.5x 2.99x 2.73x 2.52x 2.33x 2.17x
€ 1 , 024 12.0x 33.2% 30.2% 27.6% 25.2% 23.0% € 1 , 075 12.0x 3.15x 2.88x 2.65x 2.46x 2.29x
€ 1 , 066 12.5x 34.9% 31.9% 29.2% 26.7% 24.5% € 1 , 120 12.5x 3.31x 3.02x 2.78x 2.58x 2.40x
12.5
Exit Year - 5 Exit Year - 5
Entry EV € 529 € 554 € 580 € 605 € 630 Entry EV € 529 € 554 € 580 € 605 € 630
Entry multiple 10.5x 11.0x 11.5x 12.0x 12.5x Entry multiple 10.5x 11.0x 11.5x 12.0x 12.5x
€ 940 10.5x 24.5% 22.3% 20.2% 18.4% 16.8% € 940 10.5x 2.99x 2.73x 2.52x 2.33x 2.17x
€ 985 11.0x 25.8% 23.6% 21.6% 19.7% 18.0% € 985 11.0x 3.16x 2.89x 2.66x 2.46x 2.29x
€ 1 , 030 11.5x 27.1% 24.9% 22.8% 21.0% 19.3% € 1 , 030 11.5x 3.33x 3.04x 2.80x 2.59x 2.41x
€ 1 , 075 12.0x 28.4% 26.1% 24.0% 22.2% 20.4% € 1 , 075 12.0x 3.49x 3.19x 2.94x 2.72x 2.54x
€ 1 , 120 12.5x 29.6% 27.3% 25.2% 23.3% 21.6% € 1 , 120 12.5x 3.66x 3.35x 3.08x 2.85x 2.66x
12.0
Ex
it m
ult
iple
E
xit
mu
ltip
le
EX
IT E
V
EX
IT E
V
EX
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V
EX
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V
Ex
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ult
iple
E
xit
mu
ltip
le
46
TeamSystem Case Study: Preliminary Target Return
Analysis
4.00x Senior, 1.50x Mezzanine
Exit Scenario (€m)
Target IRR Target Cash-on-Cash
Exit Year - 4 Exit Year - 4
Entry EV € 519 € 537 € 554 € 572 € 589 Entry EV € 519 € 537 € 554 € 572 € 589
Implied Entry multiple 10.3x 10.7x 11.0x 11.3x 11.7x Implied Entry multiple 10.3x 10.7x 11.0x 11.3x 11.7x
€ 810 9.5x 25.0% 23.0% 21.1% 19.3% 17.7% € 810 9.5x 2.4x 2.3x 2.1x 2.0x 1.9x
€ 853 10.0x 27.1% 25.0% 23.1% 21.3% 19.7% € 853 10.0x 2.6x 2.4x 2.3x 2.2x 2.1x
€ 896 10.5x 29.0% 26.9% 25.0% 23.2% 21.5% € 896 10.5x 2.8x 2.6x 2.4x 2.3x 2.2x
€ 938 11.0x 30.9% 28.8% 26.8% 25.0% 23.3% € 938 11.0x 2.9x 2.8x 2.6x 2.4x 2.3x
€ 981 11.5x 32.7% 30.6% 28.6% 26.7% 25.0% € 981 11.5x 3.1x 2.9x 2.7x 2.6x 2.4x
12.5
Exit Year - 5 Exit Year - 5
Entry EV € 547 € 565 € 583 € 601 € 619 Entry EV € 547 € 565 € 583 € 601 € 619
Implied Entry multiple 10.9x 11.2x 11.6x 11.9x 12.3x Implied Entry multiple 10.9x 11.2x 11.6x 11.9x 12.3x
€ 851 9.5x 20.0% 18.5% 17.2% 15.9% 14.7% € 851 9.5x 2.5x 2.3x 2.2x 2.1x 2.0x
€ 896 10.0x 21.5% 20.0% 18.6% 17.3% 16.1% € 896 10.0x 2.6x 2.5x 2.3x 2.2x 2.1x
€ 940 10.5x 22.9% 21.4% 20.0% 18.7% 17.5% € 940 10.5x 2.8x 2.6x 2.5x 2.4x 2.2x
€ 985 11.0x 24.2% 22.7% 21.3% 20.0% 18.8% € 985 11.0x 3.0x 2.8x 2.6x 2.5x 2.4x
€ 1 , 030 11.5x 25.5% 24.0% 22.6% 21.2% 20.0% € 1 , 030 11.5x 3.1x 2.9x 2.8x 2.6x 2.5x
EX
IT E
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Ex
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TeamSystem Case Study: Financial Benchmarking
CY 2010 UFCF Multiple vs. 2009–2011 Revenue CAGR CY 2010 UFCF Multiple vs. 2009–2011 UFCF CAGR
Sage Group PLC
Exact Holding N.V.
Mamut ASA
Autonomy Corp. PLCAveva Group PLC
Softw are AG
Microsoft Corp.
Oracle Corp.SAP AG (ADS)
Intuit Inc.
R² = 0.3586
8x
10x
12x
14x
16x
18x
20x
22x
0% 5% 10% 15% 20% 25% 30%
UFC
F m
ulti
ple
2010
2009–2011 UFCF CAGR
Sage Group PLC
Unit4
Exact Holding N.V.
Cegid Group S.A.
IFS AB
Mamut ASA
Autonomy Corp. PLCAveva corp
Software AG
Microsoft Corp.
Oracle Corp.
SAP AG (ADS)
Intuit Inc.R² = 0.2365
8x
10x
12x
14x
16x
18x
20x
22x
0% 5% 10% 15% 20% 25%
UFC
F m
ultip
le 2
010
2009–2011 revenue CAGR
47 Source: Consensus estimates as of 04 June 2010. Note: TeamSystem growth based on TeamSystem management guidance. Unit4, Cegid, and IFS
omitted due to one-time, abnormal net income growth. UFCF defined as (1- marginal tax rate) x EBIT + D&A – CapEx.
TeamSystem Case Study: Preliminary TeamSystem
Summary Valuation
Low: median of European ERP comps
High: 20% premium to Sage, as suggested by superior growth / margin profile relative to European ERP peer group
Company Business Plan elaborated on Company Management Plan up to
2014E. Extrapolations from 2015E to 2020E
Long-term EBITDA margin of c.42%
Theoretical tax rate at 31.4% over the projected period (IRES + IRAP)
Valuation assumptions
WACC in the 9.0%–10.0% range
Perpetuity growth rate in the 1.0%–2.0% range
Low: Skillsoft transaction
Most recent similar transaction
Low / negative growth for Skillsoft suggests TS should be priced
above this
High: Median EV/EBITDA of announced software transactions since March
Low: implied EV to get a 25% target IRR at year 4 (assuming exit at 10.0x
EV/EBITDA 2014E of €85m)
High: implied EV to get a 20% target IRR at year 5 (assuming exit at 11.0x
EV/EBITDA 2015E of €90m)
Comments
M&
A V
alu
ati
on
T
rad
ing M
ult
iple
s D
CF
Valu
ati
on
Implied
EV/EBITDA
’10E
Enterprise Value Methodology
(€m)
6.3x–11.0x
8.1x–11.4x
10.7x–11.9x
FY1 EV/EBITDA –
(CY 10E pro forma
EBITDA: €50m)
DCF Valuation
Precedent Transactions
LBO Valuation
8.4x–11.4x
FY1 EV/(EBITDA minus
capex) – (CY 10E pro forma
EBITDA minus capex:
€47m)
FY1 EV/UFCF– (CY 10E
pro forma UFCF €35m)
12.4x–13.7x
9.3x–12.4x
Same methodology as above
Same methodology as above
Implied
EV/(EBITDA-
capex) ’10E
6.7x–11.7x
8.6x–12.1x
11.3x–12.4x
8.8x–12.0x
13.2x–14.6x
9.9x–13.2x
Implied
EV/UFCF
’10E
9.0x–15.8x
537
464
625
406
418
315
601
620
692
571
570
552
250 450 650 850
€250 €500 €750
11.6x–16.3x
15.4x–16.9x
11.9x–16.3x
18.0x–19.9x
13.3x–17.7x
€565m, value paid by HgCapital for the acquisition
of TeamSystem in August 2010
48 Note: Assumes valuation date as of 31-Dec-2010
49
Valuation Methodologies – A Summary Methodology
Broker
Valuation
“Sanity” check for the valuation using the
primary methodologies mentioned above
Sometimes valuation is based on market trading and transactions which might differ from fundamental value
Brokers may vary widely in their valuations Data points may be outdated or incomplete– full
clarity around basis of valuation not provided
Takes account of asset intensity
Close proxy to free cash flows
Difficult to find truly comparable companies
Inability to fully value a company at early stage of development (high capex)
DCF
Reflects intrinsic value of the company’s long-
term cash flows and therefore inherently
embeds value of control
Understood and widely applied by investors
Powerful methodology when there is consensus
on the projections
Output is variable based on multiple assumptions
used for key valuation drivers, e.g. WACC and
TGR
Requires detailed knowledge about company’s
revenue streams and cost profile over long-term
Compaqs
Relevant in context of M&A transaction as it
captures control premium
Specific factors (transaction structuring, asset
competition, etc.) affect pricing
Control or synergy premia vary substantially
from deal to deal
Difficult to find companies with closely
comparable business models
Typically used methodology in telecoms
Proxy to free cash flows
Difficult to find truly comparable companies
Inability to fully value a company at early stage of development
Compcos
Bottom-line consideration and hence takes into account impact of tax
Most useful for comparing net income positive businesses in same country and sector
Limited comparability across international stocks due to different accounting and capital structures
Earnings can be de-coupled from cash flows
Captures inherent value of an enterprise or
asset
Calculates net present value of the expected
future cash flows generated by the asset
Uses WACC as a discount rate to reflect time
value of money and risk interest in cash flows
Involves comparing and / or applying multiples
or yields of comparable publicly traded
companies
EV/EBITDA, EV/EBITDA-Capex and P/E
multiples are typically calculated
Provides a market based valuation which could
be biased (i.e. could undervalue or overvalue
an asset)
Provides a “non control” valuation of a
company since it is based on traded shares
where control is not being transferred
Brokers typically use a combination of the
above methodologies to derive valuation
Valuation based on precedent transactions in
the same industry with similar business model
Typically establishes valuation benchmarks in a
change of control scenario
EV
/E
BIT
DA
-
Cap
ex
EV
/ E
BIT
DA
P
/ E
EV
/ E
BIT
DA
E
V / E
BIT
DA
-
Cap
ex
P / E
Cons Pros Description
50
Valuation Approach Relevance
Applied valuation methodologies will focus on DCF and IRR, depending on the nature of the potential buyers
Intrinsic valuation; discounts expected future cash flows
Allows fundamental view on input assumptions
Allows to implement sensitivities on pipeline execution
Comments Valuation
methodology
Precedent transactions can be used as reference during transactions
Allows to incorporate control premium in valuation
Can be used as a relative benchmark to understand if price offered is in
line with market valuation of similar assets
Relatively easy application for equity investors
Focus on roll-forward EV / EBITDA and EV / EBIT multiples
Relevant methodology for financial investors
Influenced by credit market conditions and access to credit of each single
bidder
Depending on the nature of the investor will encompass a different time
period and target IRR
Comparable
Acquisitions
Comparable
Companies
IRR Analysis
DCF
2
3
4
1
Relevance
Financial
Buyer
Industrial
Buyer IPO
Pri
mary
meth
od
olo
gy
Valu
ati
on
Su
pp
ort
Does M&A Pay? Findings about the Drivers of M&A
Profitability
52
Diversification destroys value. Focus conserves it. Berger and Ofek (1995) found an average loss in value from diversification of between 13-15%. The degree of relatedness between the businesses of the buyer and seller is positively associated with returns. Intuitively, this makes sense if synergies or savings arise from the economics of the two firms. In particular, conglomerate deals (unrelated lines of business) are associated with the poorest returns. Diversifying (unrelated) mergers tend to be associated with worse performance than related mergers. Maquieira et al. (1998) found negative, but insignificant returns to buyers in conglomerate deals; in contrast, they found positive and significant returns to buyers in non-conglomerate deals. In a study of bank mergers, DeLong (2001) found that mergers that focus both activity and geography enhance buyer’s share value by 2 to 3% more than other types of mergers.
Expected synergies are important drivers of the wealth creation through merger. Houston, James and Ryngaert (2001) studied the association of forecasted cost savings and revenue enhancements in bank mergers and found a significant relationship between the present value of these benefits, and the announcement day returns. The market appears to discount the value of these benefits, however, and applies a greater discount to revenue-enhancing synergies, and a smaller discount to cost-reduction synergies.
Value acquiring pays, glamour acquiring does not. Rau and Vermaelen (1998) found that post-acquisition underperformance by buyers was associated with “glamour” acquirers (companies with high book-to-market value ratios). Value-oriented buyers (low book-to-market ratios) outperform glamour buyers. Value acquirers earn significant abnormal returns of 8% in mergers, and 16% in tender offers, while glamour acquirors earn a significant -17% in mergers and insignificant +4% in tender offers.
M&A to build market power does not pay. Studies by Ravenscraft and Scherer (1987), Mueller (1985), and Eckbo (1992) reveal that efforts to enhance market position through M&A yield no better performance, and sometimes worse. Studies by Stillman(1983) and Eckbo (1983) find that share price movements of competitive rivals of the buyer do not conform to increases in market power by buyers. It suggests that the sources of gains from M&A do not derive from anticompetitive combination of firms.
Bruner, 2004. Applied Mergers and Acquisitions. Wiley Finance: chapters 3, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=286054
Does M&A Pay? Findings about the Drivers of M&A
Profitability (Cont’d)
53
Paying with stock is costly; paying with cash is neutral. Asquith, Bruner and Mullins (1987), Huang and Walkling (1987), Travlos (1987) and Yook (2000) found that stock-based deals are associated with significantly negative returns at deal announcements, whereas cash deals are zero or slightly positive. This finding is consistent with theories that managers time the issuance of shares of stock to occur at the high point in the cycle of the company’s fortunes, or in the stock market cycle. Thus, the announcement of the payment with shares (like an announcement of an offering of seasoned stock) could be taken as a signal that managers believe the firm’s shares are overpriced.
M&A regulation is costly to investors. Weir (1983) and Eckbo (1983) find evidence suggesting that US Federal Trade Commission antitrust actions benefit competitive rivals of the buyer and target. Schipper and Thompson (1983) consider four regulatory changes between 1968 and 1970, and found wealth-reducing effects associated with increased regulation.
M&A to use excess cash generally destroys value except when redeployed profitably. Cash-rich firms have a choice of returning the cash to investors through dividends, or reinvesting it through such activities as M&A. Studies report value destruction by the announcement of M&A transactions by firms with excess cash. However, Bruner (1988) reports that the pairing of slack-poor and slack-rich firms creates value. Before merger, buyers have more cash and lower debt ratios than non-acquirers. And the return to the buyers’ shareholders increases with the change in the buyer’s debt ratio due to the merger.
Tender offers create value for bidders. Mergers are typically friendly affairs, negotiated between the top management of buyer and target firms. Tender offers are structured as take-it-or-leave-it proposals, directly to the target firm shareholders. Quite often, tender offers are unfriendly. Research suggests that bypassing the target firm’s management, and appealing directly to target shareholders can pay. Several studies report larger announcement returns to bidders in tender offers, as compared with friendly negotiated transactions. These findings are consistent with the view that unwanted suitors are entrepreneurs who have uncovered special value-creating insights about the target firm. By making an unsolicited bid, the buyer seeks to retain value for itself, rather than give it up in a negotiation.
Bruner, 2004. Applied Mergers and Acquisitions. Wiley Finance: chapters 3, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=286054
Does M&A Pay? Findings about the Drivers of M&A
Profitability (Cont’d)
54
When managers have more at stake, more value is created. Studies suggest that returns to buyer firm
shareholders are associated with larger equity interests by managers and employees. In assessing the
pattern of performance associated with deal characteristics, Healey, Palepu and Ruback (1997) concluded
“while takeovers were usually break-even investments, the profitability of individual transactions varied
widely…the transactions characteristics that were under management control substantially influenced the
ultimate payoffs from takeovers.” A related finding is that LBOs create value for buyers. The sources of
these returns are not only from tax savings due to debt and depreciation shields, but also significantly from
efficiencies and greater operational improvements implemented after the LBO. In LBOs, managers tend to
have a significant portion of their net worth committed to the success of the transaction. Several studies
about LBOs reveal that cash flow increases, and capital spending declines materially in the years following
the transaction.
The initiation of M&A programs is associated with creation of value for buyers. Asquith, Bruner and Mullins
(1983), Gregory (1997), and Schipper and Thompson (1983) report that when firms announce they are
undertaking a series of acquisitions in pursuit of some strategic objectives, their share price rises
significantly. That these kinds of announcements should create value suggests that M&A generally creates
value, and that the announcement is taken as a serious signal of value creation.
Bruner, 2004. Applied Mergers and Acquisitions. Wiley Finance: chapters 3, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=286054
References
55
Bruner, 2004. Applied Mergers and Acquisitions. Wiley Finance: chapters 3(1),
9, 11,12
Damodaran, 2012. Investment Valuation: Tools and Techniques for
Determining the Value of Any Asset.Wiley Finance
Damodaran web site: http://pages.stern.nyu.edu/~adamodar
Fleuriet, 2008. Investment banking explained. McGraw-Hill: chapters 16
Rosenbaum, J. and Pearl, J., 2009. Investment banking : valuation, leveraged
buyouts, and mergers & acquisitions.Wiley: chapters 1,2,3
UBS Global Equity Research, 2001. Valuation Multiples: A Primer
Note: (1) Available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=286054