Accenture: Module 12

Accenture: Module 12 Kevin Overholt 4/23/2014

Agenda • Background of Accenture • Initial Valuation Models • Analysis of Initial Models • Operating Leases • Share Incentive Plans • Restricted Share Units • Adjustments to Models • Final Valuation

Background of Accenture • Accenture is a global leader in the information technology services industry. • Spinoff of Arthur Andersen’s consulting branch. • Three core businesses are technology consulting, software development, and outsourcing services. • Most recent share price is $79.64 with a market cap of $53.05 billion.

Accenture’s Financial Statements • Balance Sheet • Relatively small Total Assets and Total Liabilities • Zero Long-Term Debt • Largest account balance is Cash • In reality, largest asset is people- not located on the Balance Sheet • Conclusion: NEA is likely zero • Income Statement • ~70% of revenues go directly to salary/service expense • Steady growth in Net Income (roughly 10% annually) • 93-94% of income comes from services, 6-7% from non-enterprise activities

NEA Problem • What to do about NEA? • Only true enterprise asset = Net Receivables • Instead of NEA, use Net Receivables • Instead of ΔNEA, use ΔNet Receivables • This will alter “true” value of FCF, EATO, REI, and AGR, which throws off the comparability of the models. • What to do?? Exercise Professional Judgment

DCF Model (Initial)

Residual Income Model (Initial)

Abnormal Enterprise Growth Model (Initial)

Analysis of Initial Models • Obviously the value of the company is different, as the various figures derived from NEA are different. • Which model is best? • Given the NEA problem, none of the models appear very accurate. • The DCF model is the most accurate, as it has the lowest amount of assumptions. • Important to note: all over the current market cap

Operating Leases – Discount Rate • Because Accenture does not currently utilize any capital leases, it is impossible to determine the IRR. • Assuming a 8% rate:

Operating Leases: Effect • Assuming a 35% marginal tax rate: • EPAT is increased by the Rent Expense adjustment • FEAT is increased by the depreciation expense and interest expense from the lease obligation • Net Income receives the net of these adjustments

Employee Stock Options

Employee Stock Options 5. Value of Options Exercisable at 8/31/2013 $169,328,948 -2. Value of Options Exercisable at 8/31/2012 w/ end year prices $268,495,398 +3. Value of Exercisable Options $86,878,660 +4. Value of Cancelled Options $2,425,055 =6. Share Based Compensation $(9,862,735) Adjustments: Decrease Net Financial Assets: $200,828,614 Decrease Ending Net Financial Assets: $169,328,948 Decrease EPAT: $9,862,735 Decrease FEAT: 67,666,784 - 84,453,605 $16,786,821

Restricted Share Units • Estimated Additional Liability not on Balance Sheet = (78.14-52.32)*31,709,044 = $818,727,516

Restricted Share Units • Adjustment: Add the Estimated Future Liability to the Deferred Revenues account on the Balance Sheet = $818,727,516 • Other side can flow through Income Statement  Retained Earnings

Adjustments to Models • Because the models don’t include FEAT or NFL, the main adjustment will be to EPAT.

DCF Model (Final) • Loss of Enterprise Value of roughly $20 Billion

Residual Enterprise Income Model (Final) • Loss of Enterprise Value of roughly $28 Billion

Abnormal Enterprise Growth Model (Final) • No loss in Enterprise Value. Math balances out.

Conclusions • Although Accenture is very difficult to value, given inherent problems with its enterprise assets, it is possible to reach a semi-strong conclusion regarding its enterprise value. • The three models ranged from $78 billion to $121 billion, with an average value of $94 billion. • If I were a professional valuation expert, I would inquire with the company to the value of its enterprise assets, especially the proprietary value of its human capital. • Given a current enterprise value of 61.46 billion (finance.yahoo.com).. Buy, buy, buy.

Questions?

Accenture: Module 12