valuation for m and a
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valuationTRANSCRIPT
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Valuation for Mergers &
Acquisitions- Including
Case Studies
-- CACA ParagParag VedVed
December 27, 2014December 27, 2014
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M & AM & AM & AM & A IntroductionIntroductionIntroductionIntroduction
Liberalization of economy and reforms programmes have
resulted in a 'churn' in the industrial and services sector.
Companies are resorting to acquisitions as a means to
consolidate and grow rapidly.
effectively with the multinationals and exploring the world
markets.
As a result, there is a manifold increase in the level of M &
A activity.
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Corporate RestructuringCorporate RestructuringCorporate RestructuringCorporate Restructuring
It is significant modification made to the debt, operations or
structure of a company.
This type of corporate action is usually made when there are
Corporate RestructuringCorporate RestructuringCorporate RestructuringCorporate Restructuring
significant problems in a company, which are causing someform of financial harm and putting the overall business in
jeopardy.
The hope is that through restructuring,
a company can eliminate financial harm and
improve the business
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Motives for RestructuringGain BetterCompetitive
Position
Achieve GrowthAnd
Survive
Strategic Reasons
Focus onCore Activities
AchieveEconomies of
Scale
Cont
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Motives for Restructuring (cont.)Dividend
Distribution Tax
minimisation
Fund Raising
Financial Reasons
Utilisation ofExcess Cash
Tax Planning &Reducing Costs
Cont
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Motives for Restructuring (cont.)Diversification Entering into a
new segment
Bail OutTakeovers
Other Reasons
FamilySeparation
Warding-offPredators
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Modes of Restructuring
M & A
MergersAcquisitions Demergers Others
SharePurchase
AssetPurchase
Subsidiar -isation
CapitalReduction
Buy-Back
SlumpSale ItemizedSale
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Acquisitions / Takeovers:
An acquisition, also known as a takeover, is the buying of one
company (the target) by another.
Types:
AssetAssetAssetAsset PurchasePurchasePurchasePurchase:::: This type of transaction leaves the target
Acquisitions / TakeoversAcquisitions / TakeoversAcquisitions / TakeoversAcquisitions / Takeovers
company as an empty s e . t s urt er v e nto:
a) Slump Sale
b) Itemised Sale
ShareShareShareShare purchasepurchasepurchasepurchase:::: The buyer buys the shares, and therefore
control, of the target company Examples: Reliance Industries acquiring 95% in Infotel
Broadband Pvt. Ltd.
Cont
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SlumpSlumpSlumpSlump SaleSaleSaleSale:::: Section 2(42C) of the Income Tax Act, 1961 definesSlump Sale as the transfer of one or more undertakings as a
result of the sale for a lump sum consideration without valuesbeing assigned to the individual assets and liabilities.
Example: Grasim sold sponge iron unit to WelspunPower for Rs. 1030 crores.
Acquisitions / TakeoversAcquisitions / TakeoversAcquisitions / TakeoversAcquisitions / Takeovers (cont.)
ItemisedItemisedItemisedItemised SaleSaleSaleSale:::: Sale of assets & liabilities with values assignedseparately for each item of assets & liabilities.
SlumpSlumpSlumpSlump SaleSaleSaleSale vsvsvsvs.... ItemisedItemisedItemisedItemised SaleSaleSaleSale:::: In case of itemised sale, unlike
slump sale, it is possible to pick and choose assets andliabilities. Also, the consideration is identifiable against eachitem.
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A Business We Understand;
Favorable Long Term Economics;
Warren Buffetts criteria for Business
Acquisition
Able and Trustworthy Management; and
A Sensible Price Tag
Source : 2007 letter to Shareholders.
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Partner in growth
Make independent assessment
Role of Finance Team in the Process
of Acquisition
Protect interest of all stakeholders
Ensure adherence to all the laws/ regulations
Follow proper Corporate Governance
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MERGER
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Mergers:
In business or economics a merger is a combination of two
companies into one larger company.Types:
HorizontalHorizontalHorizontalHorizontalHorizontalHorizontalHorizontalHorizontal mergersmergersmergersmergersmergersmergersmergersmergers take place where the two merging
companies produce similar product in the same industry
MergersMergersMergersMergers
VerticalVerticalVerticalVerticalVerticalVerticalVerticalVertical mergersmergersmergersmergersmergersmergersmergersmergers occur when two firms, each working atdifferent stages in the production of the same good,
combine.
ConglomerateConglomerateConglomerateConglomerateConglomerateConglomerateConglomerateConglomerate mergersmergersmergersmergersmergersmergersmergersmergers take place when the two firms
operate in different industries. ForwardForwardForwardForwardForwardForwardForwardForward Merger of target into the acquirer
ReverseReverseReverseReverseReverseReverseReverseReverse Merger of acquirer into the target
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DEMERGER
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Demerger: corporate strategy to sell off subsidiaries or divisions of a company
Demergers
Pre Post
Assets, liabilitiesof
undertaking B
transferred to BLtd.
Undertaking A Undertaking BAB Ltd B LtdAB LtdUndertaking A Undertaking B
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Valuation Concept Value Price
Valuation not an exact Science, More of Art andSubjective assessment
Value varies with situations
Date specific
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Merger/Demerger
PrivateEquity
IPO/ FPO
Buyback of
Shares
Purchase /
Sale ofBusiness
WhyWhy
am y
Separation
PPA
Portfolio Valueof Investments
RegulatoryApproval
Litigation
Impairment/IFRS
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Steps in Valuation
Obtaining information
Management Discussion and
Industry Overview Data analysis and review
Selection of method
Applying Method Conducting sensitivities on
assumptions
Assigning Weights Recommendation
Reporting
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Sources of Information
Historical data such as audited results
of the company Future projections
Stock market quotations
Discussions with the management ofthe company
Representation by the management
Data on comparable companies Market surveys, news paper reports
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Analysis of Company
SWOT Analysis
Profitability Analysis- Past and
vis--vis industry Ratio Analysis
P&L Ratios
Expense & Profitability ratios Balance Sheet Ratios
Quick Ratio/ Current Ratio
Turnover Ratios Liquidity Ratios
Debt Equity- of Company &
Industry
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Earning based approach
Discounted Cash Flow
Earnings Multiple Method
Principal Methods of Valuation
Market Price
Market Comparables
Asset Based Approach Net Assets Method
Replacement Value/Realisable Value
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Following adjustments may be called for:
Investments Surplus Assets
Auditors Qualification
Common Adjustments
Preference Shares ESOPs / Warrants
Contingent Liabilities/Assets
Tax concessions Findings of Due Diligence Reviews
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Considers Cash Flow and NotProfits
Cash is King
Discounted Cash Flow (DCF)
Free Cash Flow (FCF) FCF to Firm
FCF to Equity
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DCF Parameters
Cash Flows Projections
Horizon period
Growt rate
Discounting
Cost of Equity
Cost of Debt
Weighted Average Cost of
Capital (WACC)
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Cash Flows
Business
Plan
Business
Cycle
Working
Capital
CapitalExpenditure
DepreciationAmortization
Tax
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Factors to be considered for reviewing
projections:
Industry/Company Analysis
Dependence on single customer/ supplier
DCF - Projections
nsta e capac ty
Existing policy/ legal framework
Capital expenditure increasing capacities
Working capital requirements Alternate scenarios / sensitivities
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Weighted Average Cost of Capital (WACC)
DCF Discounting
D E(D + E) (D + E)
KeWACC = x Kd + x
D = Debt
E = Equity
Kd = Post tax cost of debt
Ke = Cost of equity
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DCF - Terminal value
Terminal Value is the residual value of business at the
end of projection period used in discounted cash flow
method.
Terminal Value
LiquidationApproach
Multiple
Approach
Stable GrowthApproach
29
DCF A E l
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DCF An Example(. )
201415 201516 201617 201718 201819 170 187 205 226 248
:
69 70 72 73 75
81 85 90 94 99
320 342 367 393 422
: 25 25 50 25 25
39 49 61 54 62
77 83 90 97 105
141 157 201 176 192
201617 230
3%
2,257
13.50% 0.88 0.78 0.68 0.60 0.53 0.53
158 144 113 131 122 1,198
1,866
: (350)
: (50)
: (800)
: 120
: 1,000
1,786
. 7,969,000
( . 10) 224
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Market Cap/PATPrice to Earnings
Multi le:
Earnings Multiple Method
Commonly used Multiples
Enterprise Value/EBITDAEnterprise Value
to EBITDAMultiple:
Enterprise Value/SalesSales Multiple:
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Enterprise Value/EBITDA Multiple Method
Determination of Maintainable EBIDTA
Capitalisation Rate/Multiple
Not affected by the pattern of Fundingadopted by Company/ Comparable
Companies
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Based on past performance and /or
projections
Non-recurring & extraordinary itemsexcluded
Enterprise Value/EBITDA Multiple Method
(simple or weighted). Current EBIDTA isaccorded the highest weight
Projected EBIDTA discounted for inflation
Finally appropriate multiple is applied toarrive at the value
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Multiples
Multiples to be applied represent the growth
prospects/ expectations of the Company
Factors to be considered while deciding themultiple:
Past and Ex ected Growth of the Earnin s
Performance vis--vis Peers
Size & Market Share
Historical Multiples enjoyed on the Stock
Exchange by the Company and its peers
EV/EBIDTA A E l
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EV/EBIDTA An Example & (. .)
201112 201213 201314 98 116 136
: /
28 17 18
25 15 15
4 20
7 9
10 10 10
74 51 63
: 7 8 9
15 15 15
15
10 10 10
58 32 48 92
56 113 165
: 59 63 65
: 70 75 79
185 251 309
EV/EBIDTA A E l
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EV/EBIDTA An Example
(. .) .
201112 185 1 185
201213 251 2 501
201314 309 3 927
6 1,613
269
7
,
: (350)
: (800)
: 1,000
: (50)
: 120
1,802
. 7,969,000
( . 10 ) 226
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Evaluates the value on the basis of prices quoted on
the stock exchange
Thinly traded / Dormant Scrip Low Floating Stock
Significant and Unusual fluctuations in the Market Price
Market Price Approach
It is prudent to take weighted average of quotedprice for past 6 months
Regulatory bodies often consider market value as
important basis Preferential allotment, Buyback,Takeover Code
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Market Price Method An Example
2014 30,747,312 4,009,275,753 2014 12,040,227 2,697,868,740
2014 19,663,244 3,976,264,011
2014 16,118,953 3,503,216,645
2014 18,115,567 4,767,062,216
2014 29,408,604 6,535,415,743
126,093,907 25,489,103,108
( .) 202
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Generally applied in case of unlistedentities
Estimates value by relating an elementwith underlying element of similarlisted companies.
Market Comparables
Based on market multiples ofComparable Companies
Book Value Multiples
Industry Specific Multiples
Multiples from Recent M&A Transactions.
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NAV Formula
Total Assets
(excluding Miscellaneous Expenditure and debit balancein Profit & Loss Account)
Less: Total Liabilities
The Value as per Net Asset Method is arrived as follows:
NET ASSET VALUE
Share Capital
Add: Reserves
Less: Miscellaneous Expenditure
Less: Debit Balance in Profit & Loss Account
NET ASSET VALUE
OR
NAV A E l
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NAV An Example
(. .)
700
950
() 20 , & 1,290
& (960)
330
(350)
1,650
/ ():
50
(50)
(800) 850
. ( . 10 ) 7,969,000
107
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Selection of Methods
Situation Approach
Knowledge based companies Earnings/Market
Manufacturing Companies Earnings/ Market/ Asset
Brand Driven companies Earnings/MarketA Matured company Earnings/Market
Investment/Property companies Asset
Company going for liquidation Asset
Generally Market Approach is used in Combination
with other methods or as a cross check
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Methods throw a range of values
Consider the relevance of each methodologydepending upon the purpose and premise ofvaluation
Mathematical wei hta e
Reaching a Recommendation
Professional judgment Subjective Value
F i V l
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Fair Value
( .)
( .)
(
.)
107 1 107
/ 226 1 226
224 1 224
202 2 404
5 961
( .) 192
O h V l D i
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Other Value Drivers
Final Price is a result of negotiations
D t ti
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Documentation
Appointment Letter
Purpose & Scope of Valuation
Valuation Date
Commonly used Methodologies
Timelines
Limitations Representation Letter
No material omissions on part of themanagement
Confirmation of all inputs/ information used inthe valuation
Responsibility for providing information lies
with Management
V l ti R t
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Valuation Report
Introduction/ Background
Purpose of Valuation
Key Financials
Sources of Information
Important consideration & assumptions
Valuation Workings
Fair Value Recommendation
Exclusions and Limitations
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Case Study on Valuation
or er er
Before Merger
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Shareholders of XShareholders of X Shareholders of YShareholders of Y
Before Merger
X LtdX Ltd Y LtdY Ltd
49
After Merger
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Option 1Option 1 Option 2Option 2
ShareholdersShareholdersof X & Yof X & Y
ShareholdersShareholdersof X & Yof X & Y
ShareholdersShareholdersof X & Yof X & Y
Option 3Option 3
After Merger
X LtdX Ltd Y LtdY Ltd New Co. ZNew Co. Z
Note- Based on the swap ratio, the shareholders of the transferorcompany are issued shares of transferee company
50
E h g R ti
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.
Exchange Ratio
.
Exchange Ratio
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( .)
28 1 28 30 1 30
/ 72 2 144 42 2 84
Exchange Ratio
5 298 5 200
( .) 60 40
: 3 , 2
Case Laws
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Exchange Ratio not disturbed by Courts unless objectedand found grossly unfair
Miheer H. Mafatlal Vs. Mafatlal Industries (1996) 87 ComCases 792
Dinesh v. Lakhani Vs. Parke-Davis (India) Ltd. (2003) 47SCL 80 (Bom)
Case Laws
Valuation will take into account number of factors suchas prospective yield, marketability, the general outlook forthe type of business of the company, etc. Mathematicalcertainty is not demanded, nor indeed is it possible
Viscount Simon Bd in Gold Coast Selection Trust Ltd. vs.Humphrey reported in 30 TC 209 (House of Lords)
Case Laws
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Case Laws
It is fair to use combination of three well known methods -
asset value, yield value & market value
(
Company rather than giving to outsiders who will startfrom scratch
( (
Cont
Some Issues
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Some Issues
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Valuation is not an
objective exercise.
ny preconcep ons
and biases that an analystbrings to the process will
find their way into the
value.
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