Seminar 10 Flashcards
Private co valuation (22 cards)
How to value a private company?
There are multiple approaches to valuing a private company, and the most appropriate approach is dependent on the nature and ops of the firm / based on the stage of PLC in which it is in
1) Introduction: Asset based approach
- value of co’s net assets (A - L)
- future FCF difficult to predict
2) Growth: Income approach
- company rapidly growing
- FCF, RI
3) Mature: Market approach
- comparable - similar transactions
Private v Public firms (7)
1) Stage of development:
- Private: less mature
- Public: usually in later stages of PLC
2) Size:
- Private: smaller, higher risk, higher risk premiums ; no access to public equity financing
- Public: larger and have access to public equity financing
3) Managerial ownership
- Private: usually mgmt have substantial ownership –> reduce agency costs
- Public: greater public ownership –> need more corp gov
4) Managerial quality and depth:
- Private: lower quality –> limited prospects and growth opps, increasing risks
- Public: higher quality
5) Quality of information:
- Private: lower quality, higher risk and lower valuations
- Public: higher quality (quarterly reporting), higher pressure to make timely, detailed disclosured
6) Focus of investors:
- Private: usually LT focus
- Public: more emphasis on ST (quarterly earnings, growth rate)
7) Tax mgmt:
- Private: greater emphasis due to tax advantage for private owners
- Public: less emphasis
3 broad reasons + eg. for private co valuation
1) Transaction related: M&A, IPO, private financing, bankruptcy, compensation
2) Litigation: S/H dispute, damages
3) Compliance: tax filings, financial reporting
Formula for normalised earnings
Formalised earnings = Reported earnings + adjustments for nonrecurring items, noneconomic items, unusual items etc.
- adjustment to market, industry standards
- account for expected synergies
Financing v Strategic buyer
- Strategic: focus on LT, increase value to co
- Financing: focus on ST, does not increase value to co
3 methods for income method (specific to this chapter) + elaborate
1) FCF: 2 stage = PV of expected future CF + PV of TV
2) Capitalised CF: 1 stage = STABLE** growth
3) RI model (excess earnings method)
Illustrate RI / excess earnings model
- rationale
Split box!
- Total returns = returns due to tangible assets (WC + FA) + returns due to intangible assets (excess earnings)
- Excess earnings = earnings remaining after deducting required returns on WC and FA (tangible assets)
- used to value intangible assets in very small companies
Formula for calculating intrinsic value of firm based on RIM + how to derive intrinsic value
V firm = V wc + V fa + V ia
1) Find excess returns (RI) from normalised earnings – NE - Return from WC and FA
2) Intrinsic value from IA/RI = RI*(1 + g)/(r - g)
3) Value firm = V wc & FA + IV of RI in 2)
Use CAPM model to derive cost of equity for private co?
Nah, not appropriate to use beta x ERP if private co has no intention of going public
Ke = Rf + (beta x ERP) [2]
How to calculate expanded CAPM?
Expanded CAPM = Rf + (beta x ERP) + small stock premium + company specific risk [4]
- takes into consideration premium for small size and company specific risk
How to calculate Ke based on built up approach?
Ke = Rf + ERP + Small stock premium + Company specific risk + Industry risk premium [5]
- no beta, just add risk premiums
Market approach based on?
3 market approaches?
- based on similar transactions
1) Guideline public co method: multiples of comparable cos
2) Guideline transaction method: pricing multiples from sale of entire co
3) Prior transaction method: actual transactions in the stock of private co
Process of guideline public co method?
Pros & Cons?
- Pros: large number of guideline companies and a wealth of info about them
- Cons: comparability and subjectivity of risk and growth adjustments built into pricing multiples
Process:
- identify group of comparable companies
- derive pricing multiples for guideline companies
- adjust pricing multiples for relative risk and growth prospects
Factors to consider for guideline transaction method?
When is this method most suitable?
Factors:
- synergies
- contingent considerations
- noncash considerations
- avail of transactions
- changes between transaction and valuation dates
Most relevant for valuing controlling interest in private co
What is prior transaction method?
When is this method most suitable?
Pros and Cons?
- based on actual transaction in stock of subject company, valuation based on actual price paid of the multiples implied from the transaction
- most relevant in valuing minority equity interest of company
- Pros: most meaningful evidence of value since it is based on actual transX of stock
- Cons: less reliable if transX are infrequent
What is MVIC
market value of invested capital
Estimate equity value of firm for
1) Standalone basis
2) Strategic buyer
3) Financial buyer
1) Ve = MV invested capital x (1 - discount for increased risk)
2) Ve = MV invested capital x (1 - discount for increased risk) x (control premium from past transX)
3) Ve = Vf - Vd
What is control premium?
The amount a buyer is willing to pay over the current market price in order to acquire a controlling share in that company.
What is asset approach based on?
Cons?
Most appropriate for?
- Value of ownership = FV assets - FV liabilities
- Cons: difficult to value intangible, special purpose tangible assets etc
- Most relevant for financial services firm, REITs, resource firms, small co w limited intangibles or early firm with little intangibles
What is DLOC
Lack of control discount = 1 - [1 ÷ (1 + control premium)]
What is DLOM
Lack of marketability discount
- for private co
Formula for total discount of DLOC and DLOM
Total discount = 1 - [(1 - DLOC)(1 - DLOM)]
