Valuation – an Art or a Science Rebecca Pang, CFA, CBV
November 2015
CCFA Lunch & Learn Speaker Series
Valuation – an Art or a Science
Why it Matters
Valuation – a
Science
Valuation – an Art
Career Option
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Why it Matters?
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Corp Strat
Planning Risk Mgt
Tax Mergers & Acquisitions
Strategic Planning
Business Case
Investment Decision
Fairness Opinion
Litigation
Formal Valuation
Why it Matters
Valuation – a
Science
Valuation – an Art
Career Option
CCFA Lunch & Learn Speaker Series
Why it Matters? Myth-Busting
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Good valuation is to
determine an “Objective and true” value
All oranges are equal and
should cost the same.
Valuation is Timeless DCF is the best approach
Only the numbers, not process, matters
Valuation does not matter!
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Why it Matters
Valuation – a
Science
Valuation – an Art
Career Option
CCFA Lunch & Learn Speaker Series
Source: A. Damodaran, “Investment Valuation: Tools and Techniques for Determining The Value of Any Asset”
Valuation – the Art and Science of it
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• Definition of Fair Market Value
• Key Valuation Methodologies
• Comparable
• Precedent
• DCF
• Discount rate/WACC
• Terminal Value
• Weighting of approaches
• Industry differences
• Historical F/S adjustments
• Public vs. private
• No perfect comps or
precedents
• Discounts and premiums
• Inclusion of synergies
• Intangibles
Why it Matters
Valuation – a
Science
Valuation – an Art
Career Option
CCFA Lunch & Learn Speaker Series
Valuation – a Science What is Firm Value
Firm Value: The Present Value of all assets held by the firm; Say it differently, the collective value of all stakeholdings in a business
Claims
Excess Cash
Firm Value
Equity
Debt
=
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Why it Matters
Valuation – a
Science
Valuation – an Art
Career Option
CCFA Lunch & Learn Speaker Series
Valuation – a Science Various Approaches
Approaches
Market Approach
A. Publicly Traded Comparables
B. Precedent Transactions
Income Approach
C. Discounted Cash Flow Analysis (DCF)
Dividend Discount Model (DDM)
Cost Approach
Replacement Cost
Leveraged Buyout
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Why it Matters
Valuation – a
Science
Valuation – an Art
Career Option
CCFA Lunch & Learn Speaker Series
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Why it Matters
Valuation – a
Science
Valuation – an Art
Career Option
Valuation – a Science A. Publicly-traded Comparables
- Pick public comparables
- Pick metrics
- Calculate multiples
- Apply multiples to Target’ metrics
- Add control premium
- Widely accepted
- Easy and ubiquitous
- Reflect current mkt
- Reflect industry trends
- Reflect growth prospect
- Mkt not always efficient
- No perfect comparables
- Choice highly subjective
- Does not account for M&A premiums
- Value drivers can be manipulated
Quick and Dirty Way to Value a company in 3 mins!
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Why it Matters
Valuation – a
Science
Valuation – an Art
Career Option
Valuation – a Science B. Precedent Transactions
- Identify transactions
- Pick multiples
- Apply multiples to Target’ metrics
- Public information
- Realistic valuation since the past transactions were completed at defined multiples
- Show bidding trends
- Limited public trx
- No “pure-play”
- Wide range of value
- Past market conditions
If you believe history is a good indication of future…
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Why it Matters
Valuation – a
Science
Valuation – an Art
Career Option
Valuation – a Science C. Discounted Cash Flow
- Sum of future cash flow
- Discounted to today
- Terminal Value
- Most accurate
- Capture PV of cash, capital needs, risk
- Link to fundamental drivers
- Sensitivity analysis
- Difficult to apply
- Too many assumptions
- Wide range of values
- Difficult to tie to historical value or market
Likely most robust ….. However….
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Valuation – a Science C. Discounted Cash Flow
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Why it Matters
Valuation – a
Science
Valuation – an Art
Career Option
More specifically, a DCF valuation can be separated into the following steps:
Planning Period Terminal Period
1. Analyze historical performance
2. Forecast Future
Performance
3. Estimate WACC
4. Estimate TV
5. Calculate value &
Interpret results
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Why it Matters
Valuation – a
Science
Valuation – an Art
Career Option
Valuation – an Art Talking about Controversy
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Weighting of Valuation
Approaches
Industry Differences
Adjustments to Income
Statements
Discounts & Premiums
Inclusion of Synergies
Intangibles
Public vs. Private Perfect Comps and Precedents
Valuation – an Art Industry Differences
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Why it Matters
Valuation – a
Science
Valuation – an Art
Career Option
CCFA Lunch & Learn Speaker Series
Sector Multiples Used
Financial Services
Banks • Price/Book equity; Price/Tangible Book • Marked to market Asset Managers • EV/EBITDA
Start-up • Revenue multiples
Mining • EV/Reserve metrics
Growth firms • PEG
Manufacturing • Price/earnings
Retailing • EV/EBITDAR (excluding rental and lease expenses)
Oil & Gas • EV/EBITDAX (excluding exploration expenses)
Valuation – an Art Discounts & Premiums
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Why it Matters
Valuation – a
Science
Valuation – an Art
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Control Premium
Minority Discount
Illiquidity discount
Others
Valuation – an Art Intangibles
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Why it Matters
Valuation – a
Science
Valuation – an Art
Career Option
CCFA Lunch & Learn Speaker Series
• You may think about Brand… but it’s more than that
• An identifiable non-monetary asset without physical substance • An asset is a resource that is controlled by the entity as a result of past
events (for example, purchase or self-creation) and from which future economic benefits (inflows of cash or other assets) are expected
• Includes: patented technology, computer software, databases and trade secrets trademarks, trade dress, newspaper mastheads, internet domains
• video and audiovisual material (e.g. motion pictures, television programmes), customer lists, mortgage servicing rights, licensing, royalty and standstill agreements, franchise agreements, customer and supplier relationships, marketing rights
• Never double count!