Valuation for Mergers & Acquisitions- Including Case Studies

Transcription

1 Valuation for Mergers & Acquisitions- Including Case Studies Ahemdabad Branch of WIRC of ICAI - CA Parag Ved August 3, 2013 Valuation Concept Value Price Valuation not an exact Science, More of Art and Subjective assessment Value varies with situations Date specific 1

2 Purchase / Sale of Business Merger/ Demerger Private Equity Buyback of Shares Test of Impairment/ IFRS Why Valuation? IPO/ FPO Family Separation Litigation PPA Regulatory Approval Portfolio Value of Investments Obtaining information Steps in Valuation Management Discussion and Industry Overview Data analysis and review Selection of method Applying Method Conducting sensitivities on assumptions Assigning Weights Recommendation Reporting 2

3 Sources of Information Historical data such as audited results of the company Future projections Stock market quotations Discussions with the management of the company Representation by the management Data on comparable companies Market surveys, news paper reports SWOT Analysis Analysis of Company Profitability Analysis- Past and vis-à-vis industry Ratio Analysis P&L Ratios Expense & Profitability ratios Balance Sheet Ratios Quick Ratio/ Current Ratio Turnover Ratios Liquidity Ratios Debt Equity- of Company & Industry 3

4 Principal Methods of Valuation Earning based approach Discounted Cash Flow Earnings Multiple Method Market Approach Market Price Market Comparables Asset Based Approach Net Assets Method Replacement Value/Realisable Value Common Adjustments Following adjustments may be called for: Investments Surplus Assets Auditors Qualification Preference Shares ESOPs / Warrants Contingent Liabilities/Assets Tax concessions Findings of Due Diligence Reviews 4

5 FDI In India - Revised Pricing Guidelines As per RBI circular dated May 4, ) Transfer of shares by Resident to Non-resident (i.e. to foreign national, NRI, FII and incorporated non-resident entity other than erstwhile OCB) In case of listed companies-the price shall not be less than the price at which a preferential allotment of shares can be made under the SEBI Guidelines In case of unlisted companies-the price shall not be less than the fair value to be determined by a SEBI registered Category I -Merchant Banker or a Chartered Accountant as per the discounted free cash flow method. 2) Transfer of shares by Non-resident (i.e. by incorporated non-resident entity, erstwhile OCB, foreign national, NRI and FII) to Resident The price shall not be more than the minimum price at which the transfer of shares can be made from a resident to a non-resident as given above. Discounted Cash Flow (DCF) Considers Cash Flow and Not Profits Cash is King Free Cash Flow ( FCF ) FCF to Firm FCF to Equity 5

6 DCF Parameters Cash Flows Projections Horizon period Growth rate Discounting Cost of Equity Cost of Debt Weighted Average Cost of Capital ( WACC ) Cash Flows Business Plan Business Cycle Working Capital Capital Expenditure Depreciation Amortization Tax 6

7 DCF - Projections Factors to be considered for reviewing projections: Industry/Company Analysis Dependence on single customer/ supplier Installed capacity Existing policy/ legal framework Capital expenditure increasing capacities Working capital requirements Alternate scenarios / sensitivities DCF Discounting Weighted Average Cost of Capital (WACC) D = Debt E = Equity Kd = Post tax cost of debt Ke = Cost of equity 7

8 DCF - Terminal value Terminal Value is the residual value of business at the end of projection period used in discounted cash flow method. Terminal Value Liquidation Approach Multiple Approach Stable Growth Approach 15 DCF An Example 8

9 Earnings Multiple Method Commonly used Multiples Price to Earnings Multiple: Enterprise Value to EBITDA Multiple: Sales Multiple: Market Cap/PAT Enterprise Value/EBITDA Enterprise Value/Sales Enterprise Value/EBITDA Multiple Method Determination of Maintainable EBIDTA Capitalisation Rate/Multiple Not affected by the pattern of Funding adopted by Company/ Comparable Companies 9

10 Enterprise Value/EBITDA Multiple Method Based on past performance and /or projections Non-recurring & extraordinary items excluded EBIDTA of various years are averaged (simple or weighted). Current EBIDTA is accorded the highest weight Projected EBIDTA discounted for inflation Finally appropriate multiple is applied to arrive at the value Multiples Multiples to be applied represent the growth prospects/ expectations of the Company Factors to be considered while deciding the multiple: Past and Expected Growth of the Earnings Performance vis-à-vis Peers Size & Market Share Historical Multiples enjoyed on the Stock Exchange by the Company and its peers 10

11 EV/EBIDTA An Example EV/EBIDTA An Example 11

12 Market Price Approach Evaluates the value on the basis of prices quoted on the stock exchange Thinly traded / Dormant Scrip Low Floating Stock Significant and Unusual fluctuations in the Market Price It is prudent to take weighted average of quoted price for past 6 months Regulatory bodies often consider market value as important basis Preferential allotment, Buyback, Takeover Code Market Price Method An Example 12

13 Market Comparables Generally applied in case of unlisted entities Estimates value by relating an element with underlying element of similar listed companies. Based on market multiples of Comparable Companies Book Value Multiples Industry Specific Multiples Multiples from Recent M&A Transactions. NAV Formula The Value as per Net Asset Method is arrived as follows: Total Assets (excluding Miscellaneous Expenditure and debit balance in Profit & Loss Account) Less: Total Liabilities NET ASSET VALUE Share Capital Add: Reserves Less: Miscellaneous Expenditure Less: Debit Balance in Profit & Loss Account NET ASSET VALUE OR 13

14 NAV An Example Selection of Methods Situation Approach Knowledge based companies Manufacturing Companies Brand Driven companies A Matured company Investment/Property companies Company going for liquidation Earnings/Market Earnings/ Market/ Asset Earnings/Market Earnings/Market Asset Asset Generally Market Approach is used in Combination with other methods or as a cross check 14

15 Reaching a Recommendation Methods throw a range of values Consider the relevance of each methodology depending upon the purpose and premise of valuation Mathematical weightage Professional judgment Subjective Value Fair Value 15

16 Other Value Drivers Final Value Final Price is a result of negotiations Appointment Letter Documentation Purpose & Scope of Valuation Valuation Date Commonly used Methodologies Timelines Fees Limitations Representation Letter No material omissions on part of the management Confirmation of all inputs/ information used in the valuation Responsibility for providing information lies with Management 16

17 Valuation Report Introduction/ Background Purpose of Valuation Key Financials Sources of Information Methodologies of Valuation Important consideration & assumptions Valuation Workings Fair Value Recommendation Exclusions and Limitations Case Study on Valuation for Merger 17

18 Before Merger Shareholders of X Shareholders of Y X Ltd Y Ltd 35 After Merger Option 1 Option 2 Option 3 Shareholders of X & Y Shareholders of X & Y Shareholders of X & Y X Ltd Y Ltd New Co. Z Note- Based on the swap ratio, the shareholders of the transferor company are issued shares of transferee company 36 18

19 Exchange Ratio The Exchange Ratio is simply the number of Transferee Co. s shares that are to be issued to the shareholders of Transferor Co. as consideration for the merger Depends upon the valuation of businesses of the Transferor and Transferee Companies Exchange Ratio 19

20 Case Laws Exchange Ratio not disturbed by Courts unless objected and found grossly unfair Miheer H. Mafatlal Vs. Mafatlal Industries (1996) 87 Com Cases 792 Dinesh v. Lakhani Vs. Parke-Davis (India) Ltd. (2003) 47 SCL 80 (Bom) Valuation will take into account number of factors such as prospective yield, marketability, the general outlook for the type of business of the company, etc. Mathematical certainty is not demanded, nor indeed is it possible Viscount Simon Bd in Gold Coast Selection Trust Ltd. vs. Humphrey reported in 30 TC 209 (House of Lords) Case Laws It is fair to use combination of three well known methods - asset value, yield value & market value Hindustan Lever Employees Union Vs. HLL (1995) 83 Com. Case 30 SC Valuation job must be entrusted to people who know the Company rather than giving to outsiders who will start from scratch Consolidated Coffee V/s Arun Kumar Agrawal(1999) 21 SCL 11 (Kar) Cont 20

21 Some Issues Relying on Technical Valuer s Report Joint Reports Fairness Opinion by Merchant Bankers Engagement Letter Management Representations Reporting Valuation is not an objective exercise. Any preconceptions and biases that an analyst brings to the process will find their way into the value. 21

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