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Chapter 8 Company Valuation and Capital Expansion; Mergers &…
Chapter 8 Company Valuation and Capital Expansion; Mergers & Acquisitions, Private Equity, Public Offering
Company Valuation
Why Valuation is Important?
Company valuation is not only important for mergers and acquisitions and public offerings but also because the process of valuing the company and its business units helps identify sources of value creation and destruction within the company.
If you know how to value a company, you learn how to increase its value...
Differences in Valuations
Generally speaking, a company’s value is different for the seller and buyer and also different for different buyers.
usually the buyer wants to offer half of the value the seller wants to sell and the seller wants the double of the value the buyer wants to buy.
Company values are measured usually not with brand and or asset values but with the current and future profits.
Basic Valuation Methods
Balance sheet methods; book value帐面价值, liquidation value
Income statement methods; multiplier (per sales, per ebitda etc.)
Discounting methods; discounted cash flow (DCF)
Note: For multiplier and free cash flow discounting, the values calculated are the enterprise values of companies. To find the equity values, net debt should be deducted from the enterprise values.
Book Value帐面价值
A company’s book value, or net worth, is the value of the shareholders’ equity stated in the balance sheet.
This quantity is also the difference between total assets and liabilities, that is, the surplus of the company’s total goods and rights over its total debts with third parties.
The book value of the below company is $5 million.
Adjusted Book Value
Numbers on the balance sheet may not reflect the realities...
If this company has $2 million of bad debts and 3 million of its inventory is obsolete废弃的 and the real value of its fixed assets is 20 million, accepting that the liabilities are at market prices, the equity value becomes $9 million.
Liquidation Value清算价值
This is the company’s value if it is liquidated, that is, its assets are sold and its debts are paid off.
This value is calculated by deducting the business’s liquidation expenses (redundancy payments裁员费 to employees etc) from the adjusted book value.
If the below company has $2 million as liquidation expenses than the liquidation valuation becomes $9-2= $7 million.
Sales Multipliers生產乘數
This valuation method, which is used in some industries, consists of calculating a company’s value by multiplying its sales by a number.
For example, a pharmacy is often valued by multiplying its annual sales (in dollars) by 2 or another number, depending on the market situation.
It is also a common practice to value a soft drink bottling plant by multiplying its annual sales in liters by 500 or another number, depending on the market situation.
Ebitda Multipliers企业价值倍数
Ebitda multiplier method is widely used to calculate company values.
Some examples are below;
Ebitda Multiplier Company Value Calculation
The Idea Behind the Ebitda Multiplier Method
Ebitda multiplier valuation mostly takes into consideration the ebitda of the last operational year.
In most cases ebitda multiplier is preferred by the buyer and not preferred by the seller since it mainly values the past of the company.
Discounted Cash Flow (DCF)现金流量贴现
Equity value of the company = Enterprise value of the company – Net Debt*
The present value of the future cash flows to be created by the company
The existing and if needed, the extra debt that is needed for the working capital. If there is cash in the company it is subtracted from net debt.
The present value of targeted free cash flows
for the determined period of time (e.g. 5 years)+The present value of free cash flows that will be realized after the determined period of time and that are expected to last forever (terminal value)
Crosscheck Between Ebitda Multiplier and DCF
It may be a good idea to compare the DCF valuation with Ebitda multiplier valuation;
Capital Expansion Methods; Mergers & Acquisitions, Private Equity, Public Offering
M&A types & motıves
Types:
Horizontal: Merger of firms, which are competitors in the same industry
Vertical: Firms have a seller-buyer relationship before the merger
Conglomerate: Merger of Firms that operate in different lines of business
Motives:
Enlarging size+Increasing competitive advantage
Creating synergy协同作用+Tax advantages
Using extra cash+Decreasing investment cost and increasing speed
Diversification+Integration+Improve R&D
Other characteristics of m&A Transactions
M&A professionals: Investment bankers +Lawyers +Auditors
The purchase and sale of a company can be structured in one of two basic formats: Sale of assets + Sale of stocks
Payments for M&A’s may be in three different formats: Cash + Stocks + Cash & stocks
Payments by stocks may be realized by using the stock of the acquirer as well as other stocks accepted by the seller.
Company sale Time Chart
Agreement between the seller of the stocks (or the current partner looking for a new partner) and the consultant (investment bank)
Teaser preparation (by the consultant) and mailing to potential buyers
First contacts between the consultant and potential buyers and identification of relevant buyers together with the seller
Information memorandum preparation (by the consultant)
Confidentiality agreement between potential buyers and the consultant
Information memorandum presentation to potential buyers (by the consultant)
Questions of potential buyers are replied and/or Q&A meetings are held.
Letter of intent received from potential buyers
Due diligence permission given to those potential buyers who have submitted reasonable letters of intent.
Based on the result of the due diligence, the potential buyer makes an offer
Negotiation and bargaining
If agreed, closing is made by signing of partnership agreements, agreement of stock sales and other documents.
M&A vs Private EquIty Investments
Very active M&A market.
Most activity in the <US$50 million segment.
70% of the transactions for 50% or majority of companies.
Turkish companies have a number of needs which lead to sales:
Financing need
Managerial shortcomings
Family/ownership issues or preferences
Buyers are mostly strategic
Only 15 PE investments per annum
There is a lack of adequate PE coverage in the SME segment
Purpose and Structure of Private equity Funds
Private equity funds that invest in companies are founded:
To collect funds from investors who do not have an opportunity to invest directly in companies
Invest in companies and
After a certain time to sell these investments and leave the companies.
Investors investing in private equity fund (individuals, entities, etc.) + Fund management company=Private equity fund-invest ment 1
-invest ment 2
-invest ment 3
10 Largest Players and Amounts
TPG Capital
Goldman Sachs Principal Investment Area
The Carlyle Group
Kohlberg Kravis Roberts (KKR)
The Blackstone Group
Apollo Global Management
Bain Capital
CVC Capital Partners (Citibank)
First Reserve Corporation
Hellman & Friedman
In 2011 investors have invested 270 billion USD into the funds.
In 2011 246 billion USD of private equity investments have been made by the funds.
Again in 2011 252 billion USD were thrown out of the investments that the funds had made.
As of the end of March 2012, the size of private equity funds have exceeded 2 trillion USD.Out of this 950 billion USD is the amount that is ready to be invested.
The Investment strategies of private equity funds
Growth capital funds:
Generally invest in the form of minority partnership in mature companies willing to expand their businesses, enter new markets or invest.
Firms looking for growth capital are those who at a certain part of their lives, are willing to finance an important change.
These firms are more mature than those looking for venture capital, are able to create turnover and profit, but unable to finance important expansions.
Venture capital funds:
Refer to equity investments made for launch and early development of a business.
Venture capital investments typically focus on companies developing new technology, new marketing techniques or producing products that haven’t proved itself yet.
The turnover and earnings statistics of firms that receive venture capital investments are not formed yet.