VALUATION Flashcards
When are relative valuations best used?
When there is a lot of good market data available and true, similar companies exist. Not best when data is spotty and company is quite unique and can’t easily be compared to others.
When is intrinsic valuation best used?
Works well for stable, mature companies with predictable growth rates and profit margins. It doesn’t always work well for high-growth rate startups, companies on the brink of bankruptcy, and other situations where growth and margins are artificially high, low, or unpredictable
What criteria do we consider in relative valuations?
Two branches:
Business Specific criteria: Sector/Subsector, Products/Services, Customers/End Markets, Distribution Channel, Geography
Financial Criteria: Size of company, Growth Rate of Company, Profitability of company, Return on Investments, Credit Rating
AND for Precedent Transactions, you also need to consider Timing (after certain date).
What is liquidation valuation and when is it used?
Used as an asset-based valuation. You find equity value by subtracting the cost of paying off liabilities from the value generated from selling assets. NET ASSET VALUE.
What is an M&A Premium analysis?
You calculate the premium paid for the seller in each precedent transaction (paid $30 for a $20 company - 50% premium).
What is a future share price analysis?
You project the company’s future share price based on its P/E and then discount it back to present.
How do you analyse a company which has no profit or revenue?
If it is unprofitable, you can still potentially use revenue multiples or cash-flow based multiples, however a DCF may be useless unless you project it far into the future.
Moreover, if there is no revenue you could:
1) Look at alternate metrics (TEV/unique visitors, TEV/registered users)
2) For biotech or pharma, create a far-future DCF since potential profits may be more realisable based on past pharma performance and market size.
How do you conduct a precedent transactions/comparable companies analysis?
First you create a universe peer company set based on business and financial criteria (also timing criteria for precedent transactions too).
Next, you determine appropriate metrics and multiples for the companies or transactions and ranks these based on minimum, 25th, 75th percentiles, and maximum values. Then, you benchmark your target against these valuation multiples to determine a potential valuation range for your target, from which you can determine a potential share price range for the target
What are some issues with EBITDA and EBITDA multiples?
1) EBITDA hides the amount of debt principal and interest a company is paying each year, which can make the cash flow of a firm negative
2) EBITDA also hides the capital expenditure of the company (even through Depre.&Amortization it hides partial capital expenditure expenses)
3) EBITDA also hides working capital requirements (Accounts Payable, Receivable, Inventory) which can be very large at some firms and represent large portions of cash flow
4) EBITDA also may not represent some cash charges that occur in certain years, such as litigation issues, impairments, etc.
What is the difference between P/E, EBIT, EBITDA multiples?
P/E depends on the capital structure of a company since it includes payment to debt holders. Thus you use this for financial service firms where interest is critical to understanding the operations of a firm and where capital structures tend to be similar, due to regulation.
TEV/EBIT - includes D&A expenses so you are likely to use this when D&A is large and plays a substantial role into the firm’s operations (where fixed assets are important).
TEV/EBITDA - does not include D&A expenses so you use this when you don’t ultimately care as much about Capital Expenditures and want to compare companies on other bases
Can you give an example where precedent transactions may produce a lower value than comparable companies analysis
?
Yes, if there is a substantial mismatch between M&A and public markets. For example, no public companies have been acquired recently but many small private companies with low valuations. This may skew your analyses.
Why would a company with similar growth and profitability to its comparable companies be valued at a premium?
1) The company may have just released its earnings that were well-above expectations and its stock price has risen in response
2) The company has a key competitive advantage that is not reflected in its financials (IP or patents)
3) It has won a favourable ruling in a major lawsuit
4) It is a market leader in an industry and has a greater market share than competitors
How do you take a company’s competitive advantage in a valuation?
1) Potentially assign it a multiple at a higher percentile than the median (65th, 75th percentile)
2) Add a premium to some multiples
3) Use more aggressive projections for the company
If two companies have the exact same financial profile (revenue, growths, profitability) and are purchased by the same acquirer but the EBITDA multiple for one is twice the other, how could this happen?
1) One company process may have been a lot more competitive and had a lot more bidders on the target creating competitive tension and pushing the price upward
2) One company may have depressed stock price and was acquired at a discount
3) The companies may have been in different industries with different median multiples
4) The two companies may be using different accounting standards so EBITDA may have been calculated differently (non-gaap)
If you were buying a business, would you pay a higher EBITDA multiple for a firm that rented through lease, or owns and depreciates their machinery. Depreciation and lease expense are equivalent.
You would pay a higher multiple for the leased machinery if all else is equal.
For both companies, their TEV will be equivalent.
However, for companies who lease machinery, their EBITDA would be lower due to lease expenses, whereas depreciation is added back in the case of the other company.
