Acquisition and Valuation of Business Venture
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Transcript of Acquisition and Valuation of Business Venture
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October 5, [email protected] 0
Acquisition andValuation of
Business Venture
Na, Yong Sik
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Issues in Acquisition
Acquisition valuations are complex, because thevaluation often involved issues like synergy andcontrol, which go beyond just valuing a targetfirm. It is important on the right sequence,including
When should you consider synergy?
Where does the method of payment enter the
process. Can synergy be valued, and if so, how?
What is the value of control? How can you
estimate the value?
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Steps involved in
Acquisition Valuation Step 1: Establish amotive for the acquisition
Step 2: Choose atarget
Step 3:Value the target with the acquisitionmotive built in.
Step 4: Decide on themode of payment - cash
or stock, and if cash,arrange for financing - debtor equity.
Step 5: Choose theaccounting method for themerger/acquisition -purchase or pooling.
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Process Overview
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Business Valuation Steps - 1
Define Purpose
Understand size & characteristics of Client
Assessment of People and Markets
Gather Additional Data
Recast Financial Statements Ratio Analysis / Industry Comparison
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Business Valuation Steps - 2
Application of Valuation Methods
Reconciliation
AdjustmentsValuation Report
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Financial problems (68,6%) Lack of information (48%)
Lack of qualification (48%) Deficits in planning (30,1%) Family problems (29,9%)
Overestimation of own resources (20,9%) Influences from outside (15,4%)
Reasons for giving up the venture
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Preparing to sell
Strategic and financial considerations
Assembling the transaction team
Types of sale processes Pre-marketing
Marketing efforts
Documents Process
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Strategic/Financial consideration
Strategic
Horizontal vs. Vertical (Distribution)
Diversification Eliminate competitor
Financial
Growth (organic vs. M&A); relative risk Scale
Utilize excess capital (reinvest); returns
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Auction Process
Deal structuring considerations
Due diligence (buy and sell side)
Buy side evaluation
Bidding process
Negotiation
The Definitive Agreement
Closing the deal
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Components of Value
Statutory Net Worth
Embedded Value = SNW+ Value of In-
force Business
Actuarial Value = EV + Value of NewBusiness
Buyers Value = Actuarial Value +
Strategic Value Integration Costs
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Actuarial Appraisal
DCF analysis, where:
Distributable Cash flow
= After-tax Earnings Increase in Required Capital
= Premium + Investment Income
Benefits Expenses Commissions Increase in Statutory Reserves Taxes Increase in Required Capital
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Tax Issues
Understanding the impact of federal and statetax issues on M&A transactions
Transaction structuring can be highly tax-sensitive
Post-closing tax opportunities affect the value of thetarget
Investigating tax issues is an important part of the
due diligence process
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Integration
Successful outcome of acquisition hingeson integration!
Comparatively little typically spent onintegration vs. acquisition
Goal is to capture the value drivers usedto justify the acquisition to the board
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Making it work
Essentially change management
Leadership
Speed Communication
Planning
Project management
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Making it work
Essentially change management
Leadership
Speed Communication
Planning
Project management
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Risk and Return
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Valuation MethodsDiscounted Cash Flow
- Machine to produce 100 USD bill in 3 years
- Risk = 0
- Discount rate = 8% (time value of money)
- No input needed
Value of machine?(one time in year 3) 100/(1.08)3 = 79.4
(every year) 100/0.08 = 1250
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Discounted Cash Flow
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Discounted Cash Flow[1/4] Free Cash Flow
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Discounted Cash Flow[2/4] Calculate Terminal Value
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Discounted Cash Flow[3/4] Discount Rate
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Discounted Cash Flow[4/4]
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Liquidation Value
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Relative Value
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Market Comparable
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Exit Value (VC Method)
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Summary Method
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Financial Statement Analysis
Basic ratio analysis
DuPont Model (ROE in three parts) Return on assets Asset turnover Leverage
Financial Statement Quality Risk of manipulation Risk of bankruptcy
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Preparing Forecasted Financials
1) Are prior financials reasonable startingpoint?
2) Prepare forecasted financial statements
3) Utilize excel (including circular arguments)
4) Develop reasoning skills
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Prepare estimates of value
1) Theory of valuation
Numerous techniques but ALL begin with theidea of discounted cash flows
2) Calculate discount rates
Theory and practice very different in this area
Finance theory focuses on capital asset pricing
model In practice, frequently use build-up method
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PER
Price/earning ratio
Interpretation of the PER Level future equity earnings of the firm. Expected return on the investments made by the
firm, ROE.
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Limitations of PER model
Estimates post-acquisition earnings for target forone period, and assumes this level will bemaintained.
No explicit recognition of the time pattern of
earnings growth. Does not explicitly consider the investor-perceived
risk of the target firms earnings.
Problems in selection of benchmark PER
Despite limitations, model provides valuation basedon capital market consensus view of value ofearnings.
Widely used by the investment community.
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EVM / EBITDA
Enterprise value multiple (EVM) Enterprise value /earnings before interest
and tax (EV/EBIT)
Its cash flow variant Enterprise value/earnings before interest, tax, depreciationand amortization (EV/EBITDA)
EBIT = pre-tax return to both
shareholders and debt holders Since most firms funded by equity and
debt, sum of equity and debt values =
value of the firm or enterprise.
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EVM / Firm value
Adding back non-cash expensesdepreciation and amortization, EBITDA =operating cash flow.
EVM widely used by investment analystsAsset based valuation
Tobins q=
Firm value = Replacement cost of assets+ Value of growth options
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Fair Market Value
Fair Market Value is defined as the value
that a willing seller and a willing buyer, both
being informed of the relevant facts aboutthe company, could reasonably conduct a
buy-sell transaction, neither party under any
compulsion to do so.
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Purposes of valuation
Business Sale
Business Purchase
Bank Financing
Estate Planning Estate Taxes
Gifting
Divorce
Partner Buy In/Out
ESOP(Employee Stock
Ownership Plan) Inter-Generation
Other
Always dealing with two sides someone wants a highervaluation, someone wants a lower valuation.
One side is frequently the IRS.
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Market Evaluation
Size of Market in area
Growth in area
Companys Position
Top Customers
Concentration
Company Growth
Desire-ability ofproduct/service
Location, Location,
Location
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Example - Hightech AG
Valuation of Hightech AG
Company founded 2002
Service company Screening for Biotech companies
First revenues from screening services
Requires investment of: EUR 100000 Financing stage: First Stage
Valuation according to DCF method
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Example - Hightech AG
Data of Hightech AG
Good, experienced management
Medium market size, little expansion possibilities /
ambition Product innovation small, me-too, inexpensive
production
Qualitative analyses produces thefollowing data:
Discount rate (d): 35% (medium risk)
Growth rate (g): 7%
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Example - Hightech AG
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Example - Hightech AG
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Example - Hightech AG
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Example - Hightech AG
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Example - Hightech AG
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Example - Hightech AG