Valuation for Mergers and Acquisitions. Prepared By Ooi Kok Hwa MRR Consulting

Transcription

1 Valuation for Mergers and Acquisitions Prepared By Ooi Kok Hwa MRR Consulting

2 Agenda This seminar will explain: Various valuation approaches for M&A exercises; Determine the value of target companies as well as post-merger valuations;

3 Valuation Approaches Enterprise Value/EBITDA Comparable company analysis Comparable transaction analysis Discounted cash flow method

4 Enterprise value = MV Equity + MV Debt + MV Preferred Stock - Cash and Investments Enterprise value is often viewed as the cost of a takeover.

5 Total Asset Cash Other CA Current Assets Long-term Assets Total Liabilities + Equity Current Liabilities Long-term liabilities Equity Market Value Enterprise Value = MV of Equity + MV of Debt Cash or = MV of Op Asset (CA + LTA) MV of CL

6 EBITDA Earnings Before interest, Taxes, Depreciation, and Amortization, and before non-cash, nonreoccurring, non-operating and non-fair- market expenses. M&A: EBITDA is the new cash available for no other purpose than debt-service, taxes and reinvestment and investor return. It is a more reliable measure of cash profits.

7 Median Deal Multiples - Investment Banker Survey (Spring 2011) Industry $1M EBITDA $5M EBITDA $10M EBITDA $15M EBITDA $25M EBITDA $50M EBITDA $100M EBITDA Service Mfg Retail Wholesale Distribution Oil and Gas NA Restaurant NA Healthcare Technology Media / Ent Average

8 Definition of Value - The standard of value for M&A transaction is Enterprise Value. - M&A: Enterprise Value, BV: Equity Value. - Enterprise Value is the negotiated value between a willing buyer and a willing seller to acquire the business. buyer and a willing seller to acquire the business. - Enterprise Value is the present value of the amount to be paid, either in cash or a combination of cash and future payments. - For the Enterprise Value buyer gets the Operating Balance Sheet including intangible assets.

9 Comparable Analysis

10 Comparable transaction analysis

11 Comparable Analysis The relevant data for the three comparable companies and for B are as follows:- Valuation variables C D E Target B Current stock price (RM) Earnings/Share (RM) Sales/Share (RM) Book value/share (RM)

12 Comparable company analysis Calculate the relative valuation ratios for the three comparable companies and their means Relative Valuation Ratio C D E Mean P/E P/S P/BV

13 Comparable company analysis Apply the means to the valuation variables for B to get the estimated stock price for B based on the comparable companies Valuation Variables B Mean Multiple for comparables Current stock price Estimated Stock Price Earnings/share Sales/price Book value/share The mean estimated stock price = ( )/3 = RM

14 Comparable Analysis The relevant data for the three recently acquired companies are given below:- Valuation Variables F G H Stock price pre-takeover (RM) Acquisition stock price (RM) Earnings/Share (RM) Sales/Share (RM) Book value/share (RM)

15 Comparable company analysis The takeover premiums on three recent comparable takeovers are: F: ( )/24.90 = 12.45% G: ( )/43.20 = 20.37% H: ( )/29.00 = 18.97% Mean takeover premium = 17.26% Using the comparable company approach, considering the mean takeover premium = 17.26%, the estimated fair acquisition price for B = * ( ) = RM

16 Comparable transaction analysis Calculate the relative valuation ratios for the three comparable companies and their means Relative Valuation Ratio F G H Mean P/E P/S P/BV

17 Comparable transaction analysis Apply the means to the valuation variables for B to get the estimated stock price for B based on the comparable transactions. Valuation Variables B Mean Multiple for comparables Current stock price Estimated Acquisition Price Earnings/share Sales/price Book value/share The mean estimated acquisition stock price = ( )/3 = RM

18 Bootstrapping Earnings Bootstrapping is a technique whereby a high P/E firm acquires a low P/E firm in an exchange of stock. The total earnings of the combined firm are unchanged, but the total shares outstanding are less than the two separate entities. The result is higher reported earnings per share, even though there may be no economic gains. 18

19 Bootstrapping Earnings Assume two companies are planning a merger. A is the acquirer, T is the target, and A* is the post-merger combination of the two companies. The companies stock prices and earnings per share are as shown below. Note that the acquirer has a PE of 25 and the target has a PE of 20: 19 A T A* Stock price $ $50.00 EPS $4.00 $2.50 $4.20 PE Total share outstanding 100,000 50, ,000 Total earnings $400,000 $125,000 $525,000 Market value of equity $10,000,000 $2,500,000

20 Bootstrapping Earnings (cont cont ) Given its stock price, the acquirer can issue 25,000 ($2,500,000/$100) of its own shares and use the proceeds to buy the target company. The total outstanding of the merged company will be 125,000 shares The new EPS = $525,000/125,000 = $4.20 (+$0.20 higher than original) 20

21 Discounted Cash Flow The process for valuing a target company with discounted cash flow analysis requires the following steps:- Determine which free cash flow model to use for the analysis Develop pro forma financial estimates Calculate free cash flows using the pro forma data Discount free cash flows back to the present Determine the terminal value and discount it back to the present Add the discounted FCF values to the discounted terminal value 21

22 Example 1: Discounted Cash Flow A buy B. B has 10 million shares of common stock outstanding and no debt. The post-merger free cash flow B, in millions of Ringgit, would be 15, 17, 20 and 23 at the end of the following four years. After Year 4, the free cash flow is expected to grow at a constant rate of 6.5% a year. The discount rate = 11%.

23 Example 1: Discounted Cash Flow (con t) The value of B = total present value (PV) of free cash flows (FCF) during the first 4 years + PV of the terminal value at the end of the fourth year using the constant growth model Total PV of free cash flows during the first 4 years = 15/ / / / = RM57.09 million

24 Example 1: Discounted Cash Flow (cont ) Based on the constant growth model, the terminal value of B at the end of the fourth year = FCF at the end of fifth year/(r g) + (23 x 1.065)/( ) = RM million Present value of the terminal value = / = RM million Estimated value of B =RM57.09m+RM358.57m=RM415.66m Estimated stock price = m/10m = RM41.57