Cross Border M&A
Transcript of Cross Border M&A
Cross Border M&A
Cross Border Acquisition ProcessStage I Identification & valuation of the target Stage II Completion of the ownership change transaction (the tender) Stage III Management of the post-acquisition transition; integration of business and culture
Strategy & Management
Financial Analysis & Strategy
Valuation & negotiation
Financial settlement & compensation
Rationalization of operations; integration of financial goals; achieving synergies
Stock Valuation
The worth of something is its benet stream divided by an appropriate discount rate
Not just one benet stream Not just one discount rate
StepsDetermine benet stream Compare benet stream to its history Compare benet stream to its industry Adjust forecast as necessary based on analysis Choose discount/multiple consistent with the benet.Enterprise vs Equity Market approach vs Income approach vs Cost Approach
Steps (cont)Determine value at chosen level Adjust for non-participants at chosen level Further adjust for control, marketability, and liquidity
What Benet Stream?
Cash Flow vs EarningsCash FlowRepresents type of stream investors seek
EarningsEasy to identify
Basis for data in Ibbotson Considers balance sheet requirements
Requires cash to earnings conversion factor Ignores balance sheet requirements Morgan&CompanyA Strategy Implementation Consulting Group
Determining Free Cash FlowNet income Add: Income tax provision Add: Interest expense Earnings before interest & taxes (EBIT) Less: CASH taxes (Provision adjusted for deferred taxes and tax effect of interest) Net Operating Prot after Tax (NOPAT) Add: Depreciation & amortization Add (Subtract): Working Capital Decreases (Increases) Subtract: Capital expenditures Add (Subtract): Decreases (Increases) in Operating non-current assets Free Cash Flow $1,807 1,194 835 3,836 1,552 2,284 1,762 (284) (1,771) (6) $1,985
Historical vs ProjectedHistoricalLinear benet stream Capitalization Tax or divorce valuation
ProjectedNon-linear benet stream Discount rate
Non-tax and some litigation Start-up or emerging/ changing business Morgan&CompanyA Strategy Implementation Consulting Group
Mature company
The difference between discounting and capitalizing is in how we reect changes over time in expected cash ows:In discounting: Each future increment of return is estimated specically and put in the numerator. In capitalizing: Estimates of changes in future returns are lumped into one annually compounded growth rate, which is then subtracted from the discount rate in the denominator.Source: Shannon Pratt
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Enterprise Value = PV of FCF
What is a constant growth stock? One whose free cash flow is expected to grow forever at a constant rate, g.Source: Brigham Ehrhardt
For a constant growth stock,
If g is constant, then:
Source: Brigham Ehrhardt
Whats the stocks market value? D0 = 2.00, ks = 13%, g = 6%.Constant growth model:
=Source: Brigham Ehrhardt
$2.12 0.13 - 0.06
=
$2.12 0.07
$30.29.
What is the stocks market value one ^ year from now, P1?D1 will have been paid, so expected dividends are D2, D3, D4 and so on. Thus,
$32.10.
Source: Brigham Ehrhardt
If we have supernormal growth of 30% for 3 years, then a long-run ^ constant g = 6%, what is P0? k is still 13%.Can no longer use constant growth model at t = 0. However, growth becomes constant after 3 years.
Source: Brigham Ehrhardt
Nonconstant growth followed by constant growth:0ks=13% g = 30%
1g = 30%
2g = 30%
3g = 6%
4 4.6576
D0 = 2.00 2.3009 2.6470 3.0453
2.60
3.38
4.394
46.1135 ^ 54.1067 = P0 in s 1.9628 Conversion rate = USD / , 2/14/07 ^ in USD 106.2006 = P0Source: Brigham Ehrhardt
If g = -6%, would anyone buy the stock? If so, at what price?Firm still has earnings and still pays ^ dividends, so P0 > 0:
$2.00(0.94) $1.88 = = = $9.89. 0.13 - (-0.06) 0.19Source: Brigham Ehrhardt
Continuing Value or Terminal ValueCV = Free Cash FlowT+1 WACC g
ApproachesIncome Market Cost
Income Approach Buildup Method to get Ks
Ibbotson Build-Upks = rf + ERP + SP + SCRks = cost of equity rf = expected return of riskless asset ERP = expected equity risk premium SP = size premium SCR = specic company riskCustomer concentration, key person dependence, supplier concentration, abnormal competition, unstable regulatory environment, pending lawsuits, etc.
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Illustration - Ibbotson Build-UpSafe rate Equity risk premium Small stock premium Specific company risk After-tax net cash flow discount rate Long-term sustainable growth After-tax net cash flows cap rate for next year Divide by: 1 + growth rate After-tax net cash flow cap rate for this year Cash to earnings factor After-tax net income cap rate for this year Intangible earnings factor After-tax intangible cap rate for this year Divide by: 1 - tax rate Pre-tax intangible cap rate for this year or Pre-tax net income cap rate for this year = 37.37% + + + = = / = + = + = / = 5.60% 7.00% 3.00% 5.50% 21.10% 3.00% 18.10% 1.03% 17.57% 5.97% 23.54% 5.00% 28.54% 63.00% 45.31%
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Market Approach - CAPM Method to get Ks
CAPMks = rf + (B*ERP)ks = cost of equity rf = expected return of riskless asset ERP = expected equity risk premium B = beta
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Determining WACCWACC = (kd * % of debt to total capital) + (ke * % of common to total capital) + (kp * % of preferred to total capital)
Apply Discount Rate to Benet Stream
Morgan&Company 2007. All rights reserved. A Strategy Implementation Consulting Group
Enterprise to Equity CalcSubtract interest bearing debt,Apply appropriate premium/discount for control, marketability or liquidity,Then convert to per share basisMorgan&Company 2007. All rights reserved. A Strategy Implementation Consulting Group
Morgan&Company 2007. All rights reserved. A Strategy Implementation Consulting Group
Levels of ValuePublic ly Trad ed Eq
uivale
nt
Source: National Association of Certied Valuation Analysts
Morgan&CompanyA Strategy Implementation Consulting Group