corporate valuation 2002 - 1 institut for regnskab, tom hansen 1 getting started-agenda introduction...

Corporate Valuation 2002 - 1Corporate Valuation 2002 - 1

Institut for Regnskab, Tom Hansen

1

GETTING STARTED-agenda• Introduction

– Aim– Means– Literature– Report– What to do– Exam– Practicalities

• Lecture: Background• Next week



2

Aim• Create an understanding for Corporate Valuation (C.V)

and the thinking lying behind

• Obtain an insight into C.V. in theory and practice

• Practice skills in C.V.• Via 4 elements:

– Literature– Lectures– Workshop/Reports/Negotiations– 2 Guest speakers focusing on essentials



3

Means

• 1 COACHED WORKSHOP (Monday, 8.55-9.40) + 2 LECTURES (Monday, 9.50-11.30) PER WEEK

• SATURDAY NOV 16TH WHOLE DAY (9.00 - 17.00)!

• GROUPS AND TEAMS • REPORTS TO BE DELIVERED• ACTIVE PARTICIPATION / DIALOG



4

Literature

• Copeland, Koller & Murrin: Valuation 3ed.• Articles (see handout) - copy from SL



5

The report

• Purpose: To evaluate the value of one corporation from a buyer or seller perspective

– Analyzing historical performance (accounts)

– Business strategy analysis

– Financial analysis (developments in stock market)

– Prospective analysis (forecast/value)

• To negotiate the price of the corporation with other buyers/sellers (16. November)

– Learnings from negotiations and the valuing process should be included in the final report (25. November)



6

Please do - THIS WEEK• Form groups (3-4 persons per group, Danes and

non-Danes together) • and Teams (3 groups per team, and one company

per team)• Decide in the teams on which group is buyer and

which is seller (1 against 2 / 2 against 1)• Choose a company and inform me on Email

– and get my acceptance1. Mail group participants, group name and team name,

contact-mail, company, buyer/seller to me ([email protected]) (at the latest on 13. September)

1. Prepare a work plan2. To be formalized sep 16th



7

Please do - LATER

• Give a presentation during the workshops (exercises)

• Mid stage report (1 A4)– Monday, Oct 21, evening

• Draft report & price– Wednesday, Nov 13, evening

• Negotiation on Saturday Nov 16th• Final report

– incl. “negotiation process and outcome description” + “learning reflections”

– Monday, Nov 25, evening



8

POSSIBLE TYPES OF COMPANIES • QUOTED - NONQUOTED • BIG - SMALL• HIGH TECH- GOOD OLD LOW TECH• BRANDED - MASS PRODUCTS• B2B - B2C• SUCCESFULL - CRISIS• INTERNATIONAL-REGIONAL-LOCAL• DANISH -FOREIGN• SINGLE BUSINESS -MULTIBUSINESS



9

Exam

Grades are given on the basis on:• the group report, and• workshop participation on November 16

There will be no “normal” examination.



10

PRACTICALITIES

• PHOTOCOPIES OF ARTICLES• 1 cd (Excel Spreadsheet + User manual)

– Charlotte Løchte, c102 (10.00-14.00)

• COOPERATE IN TEAMS ON COLLECTION OF BASIC INFORMATION MATERIAL BUT PLEASE DO NOT SPY !!!!!!!

• AND HAVE FUN !• Email: [email protected]



11

Background lecture• Which value

– market– owner / new owner– fair / correct

• Valuation converts a forecast into a price - using a method and some data

• How do you get the forecast and how do you convert it into a prize ?

• Each method has its own focus and (data) requirements/ assumptions

• Should it be based on dividends, earnings, cash flow, or what ?

• How historic should it be ?– Should the accounts be used ?– How long into the future ?



12

The valuation-method ”tree”ONE PERIOD:• MULTIPLES (e.g. P/E, Times revenues, Times EBITDA, Times

EBIT, #number of customers)• NET ASSET VALUE (=booked equity) (all assets? At what value?)

– going concern (immaterial / goodwill)– realization / liquidation

MULTIPLE PERIODS:• FLOWS

– direct 1: dividends– indirect: free cash flow - debt

• NET ASSETS AND FLOWS– abnormal earnings + book value (Edward-Bell-Ohlson)

PEER GROUP: (diff. in dividend, leverage, growth, risk?)– on earnings and equity



13

STEPS in the valuation

• Business Strategy analysis– industry structure– corporate strategy

• Accounts analysis– quality of earnings

• Financial analysis– performance assessment

• Prospective analysis– forecast– valuation



14

New Foundations 1

• The nature of the firm has changed. – Away from asset intensive, vertically integrated firms, with top down

control over employees.– Towards firms offering (almost) purely human capital (consultants

and technology firms) - (where the (valuable) employees have the right and possibility of leaving).

• Because– Physical assets have become less unique and valuable (improvement

in capital markets, drop in communication costs)– Increased worldwide competition have increased the demand for

talented employees– Firms grips for human capital is weakened (easier access to finance,

many independent suppliers). Many alternative employment opportunities.



15

New Foundations 2

• This has consequences for the valuation of companies, because ”the growth options are up for grabs”.

• We need a new approach to valuing firms that is consistent with the new nature of firms.

• Basis is a theory of the firm (ex: complementarity, collection of growth options).– What is the unit-of-analysis (are the firm boundaries stable) ?– How is value generated ?– How is this value distributed between equity and the other

stakeholders ?



16

Corporate Architect (PWC)

Increase shareholder value by value based management

• Shaping strategy and management (fig.2.2)– Develop the concept (valuation of entities)

– Use it in strategic decision making (investments & targets)

– And in operating decisions making (planning & budgeting)

– Institutionalize it in culture, perf.measurements, and incentives

• Linking the management processes in a ”finance value line” (fig.1.4)



17

Rationality

4 main decision making models

• rational

• bounded-rational

• political

• garbage can

The profit max./SHV approach is declining in relevance down the models



18

Evode Group 1

• Andrew Simon is chairman of Evode Group with 5 different divisions.

• After many years with profitable growth, the turnover in 1991 is 6% down from 1990 to £m. 279 and profit after tax is more than halved from £m. 15,2 to £m. 7,3. The stock price is down to p. 43 more or less equivalent to the intrinsic value of p. 46 calculated based on cash flows.

• Analysts forecast a 1992 profit of £m. 8,9.• What should Andrew Simon do ?



19

Evode Group 2

• A hostile takeover bid from Wassal of p. 80 turns up - calculated by its CEO Chris Miller based on Peer Group multiples, indicating a value of p. 112. Evodes stock price rises to p. 103

• Andrew Simons fights back signaling profit

improvements in 1992 to £m.10,2 - so Chris Miller quickly improves his bid to p. 95.

• What’s next ?



20

Evode Group 3

• A "white knight" Laporte and its CEO Ken Minton takes up 6,1% of the shares at 100 p. announcing it will make a bid above p. 100 for the rest. The offer is p. 120 paid in "paper" and gets the deal.

• Its own shares falls 10% in total - although its

assessment of the acquisition value of Evode is p. 240.

Should anybody have acted otherwise ?



21

Next

• 3 hours• Workshop (8.55-9.40)

– Groups, teams and companies– Workplan presentation by each team - on

Overhead please– Exercise: 2,7 – 2,9 – 2.10– Dialog and coaching

• Lecture: What to Measure and Manage CKM: 1, 2, 3 + Articles

corporate valuation 2002 - 1 institut for regnskab, tom hansen 1 getting started-agenda introduction...

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