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1、Mergers and Acquisitions A beginners guideValuation M&A involves using more than one valuation technique to arrive at a valuation that we think is fair. The most common techniques used are: Comparable Publicly traded companies (“Public Comps”) this analysis indicates how the stock markets are valuin
2、g companies that are similar to the target Precedent Comparable Transaction analysis (“Transaction Comps”) this analysis indicates the valuations at which prior M&A transactions have been done in the same industry as that of the target. DCF analysis is one of the most important valuation techniques
3、Sum-of-the-parts analysis If a target has more than one lines of business, the financial advisor will value each business separately. Therefore, each “part” might have its own Public Comps, Transaction comps and DCF (with different WACCs for each part). The total value is the sum of the parts Other
4、depending on the unique characteristics of the transaction, financial advisors will perform a number of other analyses to arrive at fair value like Leveraged Buyout (“LBO”) Analysis, Historical Exchange Ration analyses etc. PUBLIC COMPS Compare the current trading level of a Company to its peer grou
5、p of companies The peer group is a set of 5 to 10 companies that are most similar to the target in terms of business mix and strategy, geographic risks(same country), margins and size. (i.e. processed meats and raw meats are different). To find a good peer group start broad (all companies in the SIC
6、 code) and then narrow the list to the most comparable peers. Also refer to equity research reports, industry reports, the companys 10K where its discusses competitors and Bloomberg (Quote 2) to identify the most comparable peers. (look at filing 8K, prospectuses when they do a filing for new debt o
7、r equity in freeedgar.)Underst The goal of the analysis is to understand how the markets is valuing the peer group in terms of Price to Earnings, Price to Book value, Price to Cashflow to Equity, What the PEG ratio is, Enterprise Value to Revenues, EBITDA, Net Assets etc. Also understand if merger p
8、remium is already built into price industry group should know this. There are always some industry specific comps (Telecom Enterprise Value to POPs and SUBs, Electric Utilities - $/Mw etc.). Make sure you capture these in your analysis. Using these, we will try to value the target bearing in mind th
9、at public comps dont reflect the “control premium” that an acquirer will pay for buying control of the target. The control premium is generally around 30% for U.S. transactions. Also, some companies that are widely perceived to be acquisition targets may have some premium built into their stock pric
10、e. Most common multiples are:1. Equity Multiples: P/E (Price / LTM EPS, Price / 1-Year forward EPS, Note that the Earnings need to be after Preferred Dividends so that they are earnings that are available to Common shareholders), Price to Book (Price / Book value of equity per share).2. Enterprise V
11、alue Multiples: EV/Revenues, EV/ EBITDA, EV/EBIT (Note that the Revenues, EBITDA and EBIT multiples could be computed for LTM and 1-Year forward projected numbers)TRANSACTION COMPS The goal here is to understand the multiples at which transactions in the targets industry sector have been announced o
12、r completed. The importance difference with public comps is that in this case, a control premium is built into the offer price and therefore the multiples. Specifically, determine the pricing of past deals as compared to the targets financial performance and unaffected (pre-announcement) market valu
13、e Transactions selected should be as comparable to our proposed transaction as possible, so one should look for recent deals, where a company with highly similar business was acquired, in the same country as the target etc. The most common ones are same as in the case of public comps but, additional
14、ly, transaction comps also cover Premium paid (Offer price premium as % of 1-day, 1-week and 4-week trading prices). DCF (Merger model has this already built into it) Discount unleveraged projected free cash flows (or in some cases dividendable income) at Companys cost of capital to obtain an econom
15、ic present value of assets. Subtract market value of outstanding net debt and preferred capital from the present value of assets to get present value of equity. Free cash flow is after-tax operating earnings plus non-cash charges less increases in working capital less capital expenditures. (On lever
16、aged DCF analysis, free cash flow is reduced by after-tax interest expense) Sensitivities on discount rates, terminal value assumptions and operating scenarios are frequently used to estimate the uncertainty in the values obtainedLBO Goal is to understand how much value a financial buyer (with no op
17、erating synergies) could buy the target for To understand the economics of an LBO lets do an example: Company As equity market capitalization is $100MM and it has Debt of $75MM. This year it reported EBITDA of $50MM. A financial sponsor realizes that the even if it bought the stock at a 30% premium
18、to market for $130MM, it could generate attractive returns. So, the sponsor approaches management and structure a deal where the firm borrows an additional $100MM to buy back stock. The sponsor supplies the remaining $30MM required to buy the public float and ends up owning a 100% of the equity of t
19、he firm. The new firm has $75MM of old and $100MM of new debt outstanding which is sustained by the $50MM of annual EBITDA and an equity cushion of $30MM. To finance a LBO, the restructured company has to have a Debt to Total Capitalization (Debt+Equity) not exceeding 80% and a Debt to EBITDA ratio
20、that does not exceed 5.0x. Note that these could vary based on the nature of the industry. Assume current market scenarios for pricing the new debt The exit mechanism is an important element since it defines what the sponsor will do in, say, 5 years to exit the investment. In other words, is the spo
21、nsor planning an IPO or sale to strategic players? The sponsors returns will be driven by EBITDA growth rate, margins improvements, Capex, and exit multiples In a LBO, the entire equity is privately held, while in a Leveraged Recapitalization, there is usually a small percentage owned by publicly.Se
22、lected Public Comps statistics explained(1)Closing price: most recent closing stock price (from Bloomberg, ILX or Populator). Prices for all companies should be as of the same date. (2) Equity value: last closing stock price multiplied by number of shares outstanding. Shares outstanding from front p
23、age of latest 10K, 10Q, or other public document adjusted for options or other instruments in existence (if applicable). Note date of shares outstanding on the exhibit. The following is a list of definitions of shares outstanding: Basic: The actual outstanding shares which can be found on the cover
24、of the latest 10Q or 10K. Diluted: This is the Basic shares plus the dilutive impact of any “in-the-money” options or warrants that are outstanding as calculated by the Treasury stock adjustment method. Look for average strike price and if lower than closing price then assume would convert. Look at
25、public comps template. Option info is in 10K. Fully diluted: Basic + All options and warrants (as if all converted into equity) Average: This calculates the average shares that were outstanding during the year or quarter(3) Firm value (or Enterprise Value): Equity market value + LT debt + ST debt +
26、preferred stock + Minority Interest (-) cash. (Enterprise value may value from firm to firm or industry to industry sum of total value of firm. Comes from cash flows of business.) Use net income to common for common share price Up to EBIT still enterprise #s. As soon as you pay interest the net inco
27、me belongs to equity holders.LT debt: from latest 10K/Q under N/C liabilities LT debt plus redeemable pfd. (Other types of pfd. stock are not considered LT debt.)ST debt: from latest 10K/Q under current liabilities “ST borrowings,” “bank notes,” “loans,” plus “ “accrued interest” and “current maturi
28、ties of LT debt” (if any)Preferred stock: from latest 10K/Q under stockholders equity. Use market values, if possible, otherwise book values. (Market value can frequently be obtained from Bloomberg.)Cash: from latest 10K/Q “cash and cash equivalents” plus “marketable securities” (if any)Common Firm
29、Value multiples are: FV/Revenues, FV/EBITDA, FV/EBIT, FV/Cashflow, FV/Customers etc. We do NOT calculate FV/Net Income or FV/Book Value since the denominators in these “belong” to equity holders and so they are Equity multiples not Firm value multiples.(4)Equity value multiples: While the Firm value
30、 multiples reflect how the business is valued, equity multiples reflect how equities are valued relative to the net income or EPS (LTM and projected) and Book value (latest available).Divide the LTM NI by the weighted average number of shares outstanding from the most recent 10Q to calculate LTM EPS
31、. (Do not use LTM average shares!) Divide stock price by LTM EPSProjected P/E: Get median I/B/E/S estimates for the next two years. (Available on Bloomberg, Infocenter, Insight, or Populator by inputting = IDD (“ticker,” “FY1MEDIA” or “FY2MEDIA,” 0). These estimates are reported on fully diluted bas
32、is and updated every Thursday. Always use median I/B/E/S (not mean) to avoid skewed data values. Calendarize earnings estimates as needed Projected net income multiple: Multiply forward I/B/E/S by I/B/E/S projected weighted average shares outstanding (=IDD (“ticker,” “ibesshrs,” 0) to obtain project
33、ed net income. (Note that I/B/E/S shares are not fully diluted and are source from Exlel not “street” analysts. It is thus important to check to see that I/B/E/S projected shares outstanding are consistent with credible brokerage reports; if not, use most recent 10-Q shares outstanding to derive ful
34、ly diluted shares.) Divide projected net income into current equity value.(5)Long-term EPS growth rate: Get median I/B/E/S estimate from Infocenter, Insight, or Populator by typing = IDD (“ticker,” “MEDLTG,” 0). These estimates are updated every Thursday. It is advisable to crosscheck this with anal
35、yst reports. (Bloomberg)(6)Other equity multiples:( look at PEG ratios)Price/book value per share: Book value equal to sum of common equity accounts on most recent financial stated divided by most recent number of shares outstanding; this result then divided into most recent stock price.Price/cash f
36、low per share: Cash flow refers to operating cash flow, or NI plus D&A plus deferred taxes plus other non-cash charges, divided by average number of shares outstanding; this result is then divided into most recent stock price.(7)Last 12-Month (“LTM”) statistics: In order to see how a firm trades it
37、is customary to calculate LTM Revenues, EBITDA, EBIT, Cashflow and Net Income or EPS (before any extraordinary items). Say, you are spreading comps in September 2001 for a company that has a Jan-Dec financial year. You would calculate the LTM EBITDA as follows: FYE 12/31/00 EBITDA (from 10K) + 6-Mon
38、th EBITDA for 2001 (from the 10Q dated 6/30/01) (-) 6-Month EBITDA for 2000 (from the 10Q dated 6/30/01).(8)Projected firm value statistics: In addition to LTM multiples, its customary to look at the multiples of 1 and 2 year forward Revenues, EBITDA, EBIT etc. We usually cite recent equity analyst
39、reports as sources for publicly available projections. However, we could also make our own (private) projections and use them for calculation multiples. To adjust projected net income:EBT = (NI + (Pref. Dividends + Minority Interest) (1 - marginal tax rate)EBIT = EBT + net interest expenseEBITDA = E
40、BIT + Depreciation + AmortizationPublicly Traded Comparable Company Analysis (Sample)ClosingEquityFirmFirm value/LTMFirm value/FY1 (first proj. year)Price per share/EPSLT growthOptional multiplesCompanyPriceValueValueRevenueEBITDAEBITEBITDAEBITLTMFY1FY2rateP/BVPSP/CFPS($)($MM)($MM)(x)(x)(x)(x)(x)(%)
41、(x)(x)Comp 1Comp 2Comp 3Comp 4Comp 5MeanMedianCompany financialsImplied firm valueNet debtImplied equity valueImplied equity value per shareImplied premium/ (discount) Based on closing stock price as of (date) Based on (#) shares outstanding from the latest 10K/Q dated (K/Q date) Equity value plus t
42、otal debt less cash Trading comparablesExhibit: Selected operating statisticsProjected LT growth ratesLTM leverageCompanyBusiness descriptionSalesCF ,Five-year EPSLTM EBIT marginLTM EBITDAMarginAdjusted bookAdjustedmarketLTM EBIT/interest(%)(%)(%)(%)(%)(%)(%)(x)Comp 1Comp 2Comp 3Comp 4Comp 5MeanMedi
43、anCompany Estimated CAGR over the next five years based on the Value Line report as of (date) Cash flow as defined by Value Line Median estimated CAGR of EPS over the next five years based on the I/B/E/S report as of (date)Trading comparablesExhibit: Selected credit and operating statisticsGrowthMar
44、ginsReturnsCreditSalesEarningsEBITEarningsROEROCLeverageInterest coverage5S&P/MdyCompanyL3YAL3YAN5YAL3YALTML3YALTMLFYLFYBookMkt.4L3YALTMRating(%)(%)(%)(%)(%)(%)(%)(%)(%)(%)(%)(x)(x)Comp 1Comp 2Comp 3Comp 4Comp 5MeanMedianCompany1 All financial information is before extraordinary items. All LTM figur
45、es are for the period ending (latest 10K/Q date). Three-year averages for the fiscal years (date)(date)2 Next 5-years average annual EPS growth rate represents mean estimates from I/B/E/S report of (date)3 Total debt divided by total debt and book value as of (latest 10K/Q)4 Total debt divided by total debt and curren