How To Value A Company

Transcription

1 the valuation of high-tech companies

2 course outline introduction valuation of a company Introduction Concepts Methods example: valuation of a biotech company

3 introduction

4 the right choice CCF VC bank business angels entrepreneur + 3F sweat equity seed money start-up expansion t concept sales know-how time research engineering prototype marketing plan proof of concept product devt business plan production prototype marketing plan product introduction 1st personnel start marketing management team marketing working capital product support helpdesk maintenance product enhancements expansion regional market segment Naar: Aernoudt in Goldchstein 2007 market studies

5 financing growth Naar: Goldchstein 2007 IPO banks large companies venture capital funds business angels seed capital funds pre-seedfunds own money + 3F opstart initiële groei duurzame groei

6 the four innovative startup profiles VC backed starter prospector product starter transitional starter technology maturity of product core technology early yes early medium mature no novelty very high medium yes financing start capital high low medium minimal debt ratio low medium medium high risk capital high low varies low team # entrepreneurs sectoral experience 3+ average 2 to 3 low 1 to 2 high 1 to 2 high management expertise medium low high high external managers yes no varies no count source: Clarysse, 2004

7 VC logic quality of investment bad alive ok good super total amount invested multiple after 5 years 0 x1 x5 x10 x20 cash from trade sale revenue

8 VC logic VC is looking for an exit: IPO acquisition... a traditional VC will remain in a company for maximum 7 years except for evergreen funds, e.g. GIMV

9 key term and possible pitfall dilution a reduction in earnings per share of common stock that occurs through the issuance of additional shares or the conversion of convertible securities. (investopedia)

10 example situation after first investment round: entrepreneur: 50% of shares VC A: 50% of shares for 3 million so, the company is valued at 6 million 50% 50% Entrepreneur VC A

11 example in the next financing round, an extra investor is attracted: he will invest 3 million in return for 25% of the shares (new issues). assume that investor VC A and the entrepreneur will not participate in this second financing round. what will happen?

12 example: dilution new situation: the company is valued at 12 million if the dilution is shared equally by the entrepreneur and VC A, the new shareholder structure becomes: entrepreneur 37,5% VC A: 37,5% VC B: 25% 25,0% 37,5% Entrepreneur VC A VC B 37,5%

13 dilution what can a VC or an entrepreneur do in order to prevent dilution? put money on the table (follow-on financing) negotiate when investing: clauses, share classes

14 the basic VC formula

15 the basic VC formula the value of a company is calculated as the sum of the forecasted free cash flow of a company out to a valuation horizon, discounted back to the present at a discount rate and the forecasted value of a company at the horizon or the terminal value, discounted back at the same discount rate.

16 example fact summary required IRR investment term year 5 net income year 5 P/E 50% 3.5 million 5 years 2.5 million 15 what price should the VC pay for the stock?

17 example the VC must own enough of the company in five years to realise a 50% annual return on investments. so, at that time his shares must be worth: required future value = = = ( 1+ IRR) years ( investment) ( ) million ( 3.5million)

18 example in five years, the company will be worth: total value year 5 = PER net income year 5 = million = 37.5 million for the VC to receive the required 26.6 million in year 5, the required percent of ownership at that time must be 26.6/ 37.5 = 70,9%

19 the basic venture capital formula final ownership required = required future value ( investment) total end value = (1 + ) PER ( end IRR years investment net income)

20 but this looks very nice, but you often don t know what the value of the company will be in five years technology market adoption/penetration uncertainty

21 setting the scene

22 the right choice: biotech bank VC business angels DEALS concept sales know-how time expansion research engineering prototype marketing plan proof of concept product devt business plan production prototype marketing plan product introduction 1st personnel start marketing management team market studies marketing working capital product support helpdesk maintenance product enhancements regional market segment Naar: Aernoudt in Goldchstein 2007

23 it s a risky business high risk profile of the high tech, young firm scares banks and risk-averse investors young high-tech companies often live by the grace of venture capitalists and big companies this might seem a contradiction: poor high tech companies face a huge valley of death.

24 VC financials valuation

25 why? business valuation: to determine the fair market value of an owner s interest in a business reasons for business valuation external investors need to find out wether or not they should participate in a company entrepreneurs need to know what share they are willing to sell in exchange for the additional money internal capital allocation investment decisions M&A during licence negotiations

26 what is valuation process of estimating the market value of a financial asset or liability assets: marketable securities such as stocks, options, business enterprises or patents, trademarks liabilities: bonds

27 determining the price of the investment a price is always determined by the laws of supply and demand a company always asks for as much financial means as possible VC wants to invest an amount as small as possible pitfalls for the VC: paying a (too) high price for an investment not reaching (preset) value adding milestones risk of not reaching the multiples value inflation countering the pitfalls: experience and know-how at the initial investment, the VC needs to have a clear idea of the companies future valuation path (experience)

28 to put it simple: if you were a VC, in which company would you invest? example both companies have an expected value of 100 million after 5 years. initial investment 50M 100M 100M initial investment 5M t Y1 Y5 Y1 Y5 t

29 valuation: disclaimer there is no gold standard when it comes to valuation: it is and will remain a subjective task. consequently, a company can have as many values as there are people doing the valuation. (Frei & Leleux, 2004)

30 valuation concepts

31 sum-of-the-parts valuation valuing companies that have diverse lines of business. the worth of each business line is measured seperately, using an appropriate valuation parameter, and then, the individual values are added together applied to multi-industry companies various divisions in the same sector (see Ablynx valuation)

32 post- and pre-money pre-money value: value of the company before external financing alternatives are added to the balance sheet. Post-money value: value of the company after external financing alternatives are added to the balance sheet. example: if VC wishes to invest 100m for 20% of the shares, the company is worth: post-money valuation: 500m pre-money valuation: 400m in biotech, the pre-money valuation is based on intangible assets. this model is mostly used backwards

33 price/earnings-ratio price/earnings-ratio: P/E of a technology company: high P/E of a utility company: low each industry has different growth prospects. the P/E is sometimes referred to as the "multiple : it shows how much investors are willing to pay per dollar of earnings. example: if a company were currently trading at a multiple (P/E) of 20, the interpretation is that an investor is willing to pay $20 for $1 of current earnings. the quality of the P/E is only as good as the quality of the underlying earnings number. source:

34 price/earnings-ratio price/earnings-ratio: valuation ratio of a company's current share price compared to its per-share earnings. P / E Ratio = market value per share earnings per share example: company stock is currently trading at 40 a share earnings over the last 12 months = 2 per share 40 P / E ratio of the stock = = 20 2 what does this mean: high P/E: investors are expecting higher earnings growth in the future compared to companies with a lower P/E. compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company's own historical p/e. pe from the last four quarters: trailing P/E pe from the estimates of earnings expected in the next four quarters: forward P/E source:

35 valuation methods

36 valuation methods discounted cash flow valuation (DCF) relative valuation/comparables real option valuation...

37 the basic VC formula DCF analysis the value of a company is calculated as the sum of the forecasted free cash flow of a company out to a valuation horizon, discounted back to the present at a discount rate and the forecasted value of a company at the horizon or the terminal value, discounted back at the same discount rate.

38 calculating the value of the cash flow: DCF analysis NPV: uses interest rate based on expected marginal cost of capital to future cash flows IRR: finds the average return on investment and computes the discount rate that equates present value of future cash flows to the cost of the investment discount factor used is adjusted according to the financial risk of investing in the company example: typical discount rate for a biotech company big pharma: 10% public biotech companies: 20% private biotech companies: 30% - risk +

39 DCF analysis net present value method: based on future cash-flows NPV = C 0 C r + C2 (1 + r)² Ct (1+ r) t + CTV r(1+ r) u C t = net cash flow in period t R = discount rate (defined by CAPM/WACC) U = period in which the remaining future cash flows are valued as terminal value (TV)

40 DCF analysis in order to use DCF method, some estimations have to be made: life of the company/asset cash flows during life of the company/asset discount rate to apply to the cash flows to get the present value these estimations prove to be difficult in the case of young, innovative companies

41 relative valuation/comparables compare the value of an asset to the value assessed by the market for similar/comparable assets. comparable firms = firms with similar fundamentals distinction: comparable public company assessment comparable private company assessment

42 relative valuation/comparables difficulty: find truly comparable projects/firms. once a comparable firm is chosen, several valuation ratios can be measured P/E ratio: compare the company s current share price and earnings per share PEG ratio: ratio of market price to expected growth in earnings per share PEGY: p/e to growth plus yield price-to-sales ratio price-to-book value EBITDA enterprise value-to-ebitda

43 relative valuation/comparables unlike publicly traded firms, a private company has no observable stock price to serve as a measure of market value. therefore, to value private companies, many valuation experts tend to find a set of comparable publicly traded companies and take valuation ratios like price-to-sales or price-to-earnings, and apply these to observable accounting characteristics of the private companies. they next apply a marketability discount for the lack of liquidity, because there does not exist a ready market for these investments. (S.R. Das et al., 2003)

44 relative valuation/comparables identify comparable companies that already attracted money try to define their pre-money value know the VC logic and the multiplicators they use know the current stage of development of the company you use as a benchmark count backwards this gives you an indication of the value of the company, but adjustments can and must be made on intangible factors

45 real options method capture the value of managerial flexibility to adapt decisions in response to unexpected market developments. basic idea: companies create shareholder value by identifying, managing and exercising real options. the real options method applies financial options theory to quantify the value of management flexibility and leverage uncertainty in a changing world. luehrman: "in financial terms, a business strategy is much more like a series of options than a series of static cash flows". as a result, in valuations that involve significant future flexibility and/or uncertainty is involved and/or future cash-flows alone are close to break-even, such as long-term strategic scenario's, flexibility has become a major source of value and option (real options) value must be taken into consideration then. source:

46 real options method formula used is black-scholes or other similar. generally, the following variables determine the value of having (an) option(s) - option value: time to expiration (duration) degree of uncertainty cost of acquiring the option(s) potential cashflows lost compared to full upfront commitment risk-free interest rate expected present value of future cashflows by introducing these factors into business decision-making, the real options method has enabled corporate decisionmakers to leverage uncertainty and limit downside risk. source:

47 real options method a good approach complicated, extensive mathematical model very specific expertise is required a lot of market information is needed rather expensive

48 augmented NPV method

49 augmented NPV method early stage R&D projects company has often several programs in parallel in order to reduce the risk need of decision points: focus on the most promising paths, outlicencing or termination of programs with low priority cfr. business model v. 3.0 develop a project target profile define deliverables basis for product development plan and sales forecast. identify competitors assess the market risk source: Bode-Greuel & Greuel, 2004

50 augmented NPV method augmented npv reflects uncertainty and decision options of biotech R&D NPV: static, managerial actions have virtually no impact on value in the presence of risk, managerial options have value because they minimise the impact of negative outcomes and allow to maximise the value of the project in the presence of new information source: Bode-Greuel & Greuel, 2004

51 augmented NPV method decision trees: represent development risk and decision options illustrate investment should focus on activities essential for completion of development and for the achievements of a competitive product profile typically: decision points at completion of essential preclinical and clinical trials at decision points there are two possible options: go stop create different scenarios source: Bode-Greuel & Greuel, 2004

52 augmented NPV method registration launch phase III (80%) L.T. Tox.(85%) approval 90% continue do not launch phase II (50%) CMC (90%) success 80%*85% rejection 10% continue = 68% stop phase I success 50%*90% failure 32% continue = 45% stop success failure kans 65% stop 55% beslissing failure 35%

53 augmented NPV method assume we start from compounds that have a great chance of bein allowed to be tested in humans. (cfr ) phase II (60%) CMC (80%) phase III go 65% registration go 90% scenario 1 Phase I go 60%*80% stop 10% scenario 2 preclinical go 80% = 54% stop 35% scenario 3 go 90% stop 46% scenario 4 stop 20% scenario 5 stop 10% scenario 6 Note: this tree is simplified

54 excercise: monte carlo Cumulative ascending probability plot * probability ** Project value ( m) * = probability that NPV > 100m ** = probability that NPV 100m

55 added value

56 added-value method rudy dekeyser (VIB): classical methods are useless in a (modern) biotech environment. valuation is based on the added value the company was able to produce during its cashburning period. problem: this added value is largely intangible

57 added-value method M A B C IPO knowhow value creation cash time

58 how to determine the added value? product development: in which state is the product? added value e.g.: possible blockbuster in Phase I Clinical trials implies a m milestone. deals with big firms: 1. cash flow 2. validation of technology Note: a blockbuster is a medicine with an annual revenue of more than $1 billion, once it has reached maturity

59 the case of Ablynx valuation of the company

60 at the start up Gaston Matthyssens (Vesalius Biocapital): peer comparison try to define the pre money valuation of peer companies i.e. companies active in therapeutic antibody industry Frank Bulens (GIMV) valuation of a biotech start up is always very difficult price of a company is the result of demand and supply the vc logic is used from the beginning: go for those multiples avoid value inflation

61 at IPO sum of the parts: calculate the NPV ranges for the most advanced projects and collaborations valuation of the company within 245m- 317m peer group comparison compare ablynx with a selection of companies in the antibody field that are public or have been bought by larger players. problem: some loss-making biotech companies are valued more than others: no financial reasons real reasons: technology industry validating deals... this leads to big differences in valuation

62 Conclusion: Ablynx at the start up: peer comparison is the most tangible VC logic has a strong impact on the valuation of the company at start up: the VC aims for his multiples augmented NPV methods become more reliable when the company is more mature (at IPO) the valuation method evolves together with the company!!