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1、Baidu.Com Valuation at IPOFIN 468: Corporate Financial PolicybyWuliao Gao: 11:00 SectionYanan Huo: 11:00 Section1.a. U.S. capital market is the largest capital market in the world. It also has the most advanced and complete capital market system. When foreign companies, like Baidu, are listed on maj
2、or U.S. stock market, it will be easier for foreign companies to attract more investors from all around the world to invest more money in their companies. Also, the investors in the U.S. are more rational than those in other developing countries.b. Some drawbacks. The company may encounter some new
3、problems that will only occur in the U.S., which is challenging to foreign firms. The company will face more competition from different competitors. While there is a benefit, there is a risk and competition.c. According to the Law of Securities in China, when Baidu went public, it was not qualified
4、to be listed on the Chinese stock market since Baidu was a small firm with a consecutive loss for the past few years. Compared with U.S., Hong Kongs capital market is relative small with less liquid capital and less investors. This is why Baidu did not list its company in China or Hong Kong. 2. Inte
5、rnational Competitor: GooglePro: both Baidu and Google are concentrated on searching services, including websites, music, images and so on. They have similar operating and business attributes and as a result, using Google as a comparable firm to value Baidu is a good choice. Con: Google was forced t
6、o leave China mainland about a year ago because of inappropriate searching results issues, most of Googles servers are now hosted outside of China mainland. There is no R&D team in China either. But Baidu has all those advantages against Google, or we can say they are not competing with each other e
7、qually. From this perspective, misvaluation may be created when valuing Baidu via Google.International Competitor: Abibaba/YahooPro: Yahoo has very similar business and operating attributes with Baidu, especially after fully acquiring and the acquisition of 40% stake and 35% voting rights in A. Als
8、o, they both are running businesses in China mainland, under the same regulations and same audiences. So, Yahoo/Alibaba is a good choice when valuing Baidu.Con: Alibaba had never completed a merger before, and the possible integration challenges were many. In addition, Alibaba had not been a technol
9、ogy-focused company and did not have a large R&D team. Misvaluation may be created by those mentioned above.Local Competitor: Sina and SohuPro: they have similar functions with Baidu, such as searching in MP3, images, China local news. The business and operating attributes are thus similar. Valuatio
10、n of Baidu needs comparable companies with similar aspects.Con: Sina and Sohu, although they are domestic players, but their concentration is now different from Baidu. Sina and Sohu have scaled back their operations to focus portal development and spent less on loss-generating paid search market. So
11、, they may do harm to the accuracy of the valuation data when valuing Baidu.3. We started with Operating Profits (Loss) as reported on the Income Statements(Exhibit 22). And then we subtracted taxes(15% tax rate) to get EBIAT. Depreciation and amortization, from Cash Flow statements(Exhibit 24), wer
12、e added back to get Operating Cash Flows. Finally, FCFF was calculated by adding Capex, Change in NWC and total additional adjustments to Operating Cash Flows. The FCFF from 2006 to 2010 were 120.65, 194.80, 277.95, 472.45 and 602.55. All numbers are in RMB millions. Please see Exhibit 1 for full de
13、tails.4. We discounted(at 13.5% discount rate) the cash flows calculated above back to 2006 and summed them up. 120.65/1.135 +194.80/1.1352+ 277.95/1.1353+ 472.45/1.1354+ 602.55/1.1355=1052.20. 1052.20 is the total present value for the cash flows in the forecast horizon. All numbers are in RMB mill
14、ions. Please See Exhibit 2 for further information.5.a. By using constant growing perpetuity model, we first estimated the cash flow in 2011, 602.55*(1+5%) =632.68. Then we got the terminal value in 2010 which was calculated as 632.68/ (13.5%-5%) =7443.26. Discounting 7443.26 back to 2006 was comput
15、ed as 7443.26/ (1+13.5%) 5=3951.70. Finally, we summed up the PV of forecasted cash flows and the terminal value, the firm value should be about 1052.20+3951.70=5003.9. All numbers are in RMB millions. For further details, please refer to Exhibit 2.b. From the Excel file with a tab called “Request 7
16、”, we calculated EV/EBITDA for each of the 5 comparable companies, and got an average EV/EBITDA value of about 16.36. The 2010 terminal value was calculated as 16.36*860=14069.60, then discounted this number back to 2006 we got 14069.60/ (1+13.5%) 5=7469.69. Summing up the PV of cash flows in foreca
17、st horizon and the terminal value, the firm value should be about 1052.20+7469.69=8521.89. All numbers are in RMB millions. Please see Exhibit 3 for further details.6.a. The average EV/EBITDA for the seven companies listed on Exhibit 25 is about 22.16. The total firm value is thus 22.16*95=2105.20.
18、All numbers are in RMB millions. Please refer to Exhibit 4.b. DCF model accurately calculates the firm value using the PV forecasted CFs from 2006-2010 and the perpetuity after 2010. The second comparable company method uses other companies data to get an average performance in the industry, and the
19、n calculates the Baidus value based on these average values. Also, it ignores the CFs and just takes average EV/EBITDA and 2005E EBITDA into consideration.Exhibit 1. Year200520062007200820092010Operating Profits(losses)129 228 327 557 723 Less Taxes19.35 34.20 49.05 83.55 108.45 EBIAT109.65 193.80 2
20、77.95 473.45 614.55 Plus D&A5565677179Operating Cash Flows164.65258.8344.95544.45693.55Plus Capex-61-84-94-115-131Accounts receivables23426182110129Prepaid expenses and others222222Accrued expenses and others-22-22-22-22-22-22Deferred revenues-7-9-11-14-18-21Customers deposits-65-112-163-212-256-300
21、NWC-69-99-133-164-184-212Plus change in NWC-30-34-31-20-28Share-based compensation4450525558Allowance for doubtful accounts346810Total Additional Adjustments4754586368FCFF120.65194.8277.95472.45602.55(All numbers are in RMB millions)NWC=A/R+ Prepaid/Accrued expenses and others-Deferred revenues-Cust
22、omers depositsChange in NWC= NWCt- NWCt-1Total additional adjustments=share-based compensation+ allowance for doubtful accountsExhibit 2.Year200620072008200920102011Forecasted FCF120.65 194.80 277.95 472.45 602.55 632.68 PV of Forecasted CFs (13.5%)106.30 151.22 190.10 284.69 319.90 Total PV of CFs1
23、052.20 Terminal Value7443.26 PV of Terminal Value3951.70 Firm Value5003.91 (All numbers are in RMB millions)Present Value of Forecasted Cash Flows= Cash Flow/ (1+13.5%) tPV of forecast horizon CFs=120.65/1.135 +194.80/1.1352+ 277.95/1.1353+ 472.45/1.1354+ 602.55/1.1355=1052.20Terminal Value Formula
24、End of Year 2010= (602.55*1.05)/ (13.5%-5%) =7443.26Present Value of Terminal Cash Flows= 7443.26/ (1+13.5%) 5=3951.70Firm value= Total PV of CFs in forecast horizon+ PV of Terminal ValueExhibit 3.Target NameEnterprise Value ($mil)Target EBITDAEV/EBITDAOverturn Serv. Inc.1,494.346113.18513.20Creo. C
25、o. Ltd.12.5147.481.67T-Online Intl. AG13,536.767607.85822.27Wanadoo SA13,583.882401.07533.87OneSource Info. Serv.82.1527.60410.80AVERAGE=16.36PV OF TV in 20107469.69Firm Value8521.89(All numbers are in RMB millions)Present Value of the Terminal Value in 2010= 16.36*860/ (1+13.5%) 5=7469.69Present Value of the Terminal Value and forecasted CFs= 1052.50+7469.69= 8521.89Exhibit 4.ComparablesEV/EBITDAGoogle30.8Alibaba/Yahoo!27.8Sina18.4Sohu21.4NetEase20.6Shanda12.1Tencent24Average22.16