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Implementation

Implementation. Valuing a Business II. NYU. Prof. Ian Giddy New York University. What’s a Company Worth?. Acquisition LBOs Restructuring. Flexics. Equity Valuation: Application to M&A. Prof. Ian Giddy New York University. What's It Worth?. Valuation Methods Book value approach

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Implementation

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  1. Implementation

  2. Valuing a Business II NYU Prof. Ian Giddy New York University

  3. What’s a Company Worth? • Acquisition • LBOs • Restructuring Flexics

  4. Equity Valuation: Application to M&A Prof. Ian Giddy New York University

  5. What's It Worth? Valuation Methods • Book value approach • Market value approach • Ratios (like P/E ratio) • Break-up value • Cash flow value -- present value of future cash flows

  6. How Much Should We Pay? Applying the discounted cash flow approach, we need to know: 1. The incremental cash flows to be generated from the acquisition, adjusted for debt servicing and taxes 2. The rate at which to discount the cash flows (required rate of return) 3. The deadweight costs of making the acquisition (investment banks' fees, etc)

  7. Equity Valuation in Practice • Estimating synergies • Estimating business restructuring • Estimating financial restructuring • Application to Basix • Valuation in a bidding context

  8. The Gains From an Acquisition Gains from merger Synergies Control Top line Bottom line Financial restructuring Business Restructuring (M&A)

  9. The Basics IBM is considering the acquisition of Basix, Inc. The shares are trading at a P/E of 11, far below IBM’s P/E of 18. Based on past performance the company is expected to earn $2 per share next year, an increase from the current EPS of $1.93. If IBM acquires Basix, the long-run EPS growth rate could be raised to 5.5%. The Treasury bond yield is 4.5%, the company’s beta is 1.3 and the long run market return is 11.5%. Is the company worth buying at a P/E of 12? At how much of a premium should we say fugedaboudit?

  10. Basix Source: basix.xls

  11. Valuation in a Bidding-War Context

  12. The Network

  13. How Much Premium Can a Buyer Pay? Applying the discounted cash flow approach, we need to know: • The incremental cash flows to be generated from the acquisition, adjusted for debt servicing and taxes • The rate at which to discount the cash flows (required rate of return on equity) • The deadweight costs of making the acquisition (investment banks' fees, etc) • Cost of losing out!

  14. What is Conrail Worth? • Stand-alone value • Market value: $71.00 • Comparables • Discounted present value • Value to acquirer • Value in bidding-war context

  15. What is Conrail Worth?

  16. But Where Are the Profits? January 2001 http://www.railwayage.com/jun01/conrail_split.html

  17. But Where Are the Profits? S&P500 NSC CSX

  18. Leveraged Buyouts

  19. M&A and Leverage Takeover? Company has unused debt capacity Leveraged buyout? Leveraged recapitalization?

  20. InterActiveCorp Company has unused debt capacity? Sources: biz.yahoo.com, businessweek.com

  21. Private Pitfalls • Methods: same • Problems: • No market price • No history of reported information • Data provided can be distorted

  22. Private Pitfalls • Revenue overstated? • Costs understated? Overstated? • New costs that will be incurred? • Intangible value?

  23. Typical LBO Sequence Company gets bloated or slack and stock price falls IPO or sale of company LBO financing lined up LBO offer made LBO completed Restructuring • Efficiencies • Divestitures • Financial ? years 3-9 months 5-7 years

  24. LBO: A Temporary Capital Structure Stage 1: Pre-LBO Stage 2: LBO financing Stage 3: LBO refinancing Stage 4: Debt paydown COST OF CAPITAL DEBT RATIO

  25. 12-Step Method • Evaluating cost of deal • Estimating borrowing capacity • Estimating cash costs of funding • Estimating growth rates of sales, expenses, etc • Projecting cash flows (FCFF and FCFE) • Projecting debt amortization • Calculating terminal value of FCFE and FCFF • Estimating costs of capital to find PV • Making sense of the deal

  26. What Would it Cost to Buy Kodak? Source: biz.yahoo.com

  27. Cost of the Deal lbocapacity.xls

  28. Borrowing Capacity From table lbocapacity.xls

  29. Capital Structure lbocapacity.xls

  30. LBO Financing NEWCO Cost of purchasing the business Senior debt $457 What securities? What returns? What investors? Mezzanine Equity $25

  31. Cash Flows and Debt Repayment

  32. Exit Company gets bloated or slack and stock price falls IPO or sale of company LBO financing lined up LBO offer made LBO completed Restructuring • Efficiencies • Divestitures • Financial ? years 3-9 months 5-7 years

  33. Restructuring

  34. Equity Valuation: Application to Restructuring Prof. Ian Giddy New York University

  35. Corporate Financial Restructuring Why Restructure? Proactive Example: Sealed Air Defensive Example: Loewen 1996 Distress Example: Loewen 1999 Management acts to preserve or enhance shareholder value Management acts to protect company, stakeholders and management from change in control Lenders and shareholders lose, but try to work out best way to minimize loss

  36. Restructuring Operational Business Portfolio Financial Restructuring • Restructuring: Any substantial change in a operational structure, business portfolio, financial structure, or ownership and control. • Designed to increase the value of the firm

  37. Average Impact of Restructuring on Company Performance Source: Bowman et al, “When Does Restructuring Improve Economic Performance?”

  38. Novartis: Financial Restructuring Divested Non-core business Fixed the cash and working capital Fixed the capital structure Assets Liabilities Cash Debt Equity Fixed Assets

  39. MANAGERS PHOTRONICS Price? SELLER Case Study: Flexics

  40. Corporate Restructuring:It’s All About Value • How can corporate and financial restructuring create value? Assets Liabilities Operating Cash Flows Debt Or fix the financing Fix the business Equity

  41. Restructuring Checklist

  42. Summary

  43. Valuation is a Key to Unlock Value • Value with and without restructuring • Consider means and obstacles • Who gets what? • Minimum is liquidation value Valuation Going Concern After Restructuring Liquidation

  44. Summary: What’s It Worth?

  45. Conclusion? • Valuation techniques force the recognition of assumptions – cost of capital, risk, growth rates, and which numbers matter • Valuation is an essential management tool • Can these approaches be used to change the way your company evaluates its investment decisions? How?

  46. Further Reading • Books: • Damodaran on Valuation • DePamphilis: Mergers, Acquisitions, and Other Restructuring Activities • Web Site: • Damodaran Online: http://pages.stern.nyu.edu/~adamodar • Cheat sheets: www.barcharts.com

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