7. Fair Values - January 1, 200X Goodwill E N T I T Y E N T I T Y Market Value of Equity Market Value of Debt Assets and Liabilities of an Enterprise Working Capital Tangible Fixed Assets Portfolio Proprietary Technology TM Patents Intellectual Property Rights Contracts Customer Relationship … Software
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9. Purpose of Valuation License Purchase/Sale Transactions Debt / Equity Strategic alliance … Transaction Price Financial and tax purposes IAS/IFRS-/ US GAAP-Accounting (Purchase Price Allocation and Impairment Test) Communication internal external (capitalmarket) Portfolio Management Corporate Strategy Collateral Business Intellectual Property Finance
11. Basic Valuation Concepts Future benefits are the driver of the value of assets Net Present Value Discounted Cash-flow methods Expected income of an alternative investment Income Approach Market Price Market Transaction Method Judgement of others in the marketplace Market Approach Reproduction Cost Replacement Cost Amount of Expenses Cost Approach Real Options Approach
12. Methodology of Income Approach Time Historical Performance Financial Projections Capitalizing with Cost of Capital Future Cash Flows of the Subject Asset DCF – Method Net Present Value
13. Market Approach – Basic Idea Valuation of an asset using known transaction prices of comparable assets Example: Application of Sales Multiples Sales Comparable Asset Transaction Price Comparable asset Sales Asset to be valued Market Vaue Asset to be valued Value Asset to be valued = Transaction Price Comparable Sales Comparable * Sales Asset to be valued
19. Valuation of the Protected Technology Products Competitor Patent- portfolio Patente Pa 3 Pa 5 Pa 1 Pa 7 Pa 4 Pa 6 Pa 2 P 1 P 2 P 1 P 2 Improvements, Features Fundamental Invention P 3 Complementary Protection Valuation of Patent Portfolio or Single Patents Know How
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23. Residual Value Method / Excess Earnings (Formula Method) January 1, 200X Asset to be valued E N T I T Y E N T I T Y Market Value of Equity Market Value of Debt Enity Value (Income Approach) ./. Value of all other assets (e.g. Fixed assets, trademarks, Contracts) = Value of asset to be valued Valuation of Core Asset Application is limited - Example Contribution to a joint venture Other interpretations of approach Assump t i ons Risk of overerstimating Working Capital Tangible Fixed Assets Portfolio Proprietary Technology TM 2 TM 1 Intellectual Property Rights Contracts Customer Relationship … Software
24. Approaches to Calculate Residual Value Income of Business Unit Entity Value of Business Unit Capitalization Excess Earnings Approach Residual Value Approach ./. Value of all Other Assets, e.g. Tangible Fixed Assets, Working Capital, Trademarks Residual Value Income of Business Unit ./. Contribution of all Other Assets to Income of Business Unit Return on Assets Return of Assets Excess Earnings Capitalization Residual Value ! =
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26. Project Future Cash Flows - Application of Lifecycle Analysis Typical Life Cycle- models D A T A Plausibility check of data Modelling Price Volume 1 Research Studies Benchmarks Analysis of Products Analysis of Technology 2 3 4 5 Business Plan business industry
27. Determination of Capitalization Rate Januar 1, 200X Goodwill Market Value of Equity Debt Intangible Assets X Cost of Equity X Cost of Debt (after Tax) Asset specific Risik high low Rate of Return on individual Asset Weighted Average Cost of Capital Asset Specific Risk Premium = + / - Weighted Average Rate of Return on total Assets Weighted Average Cost of Capital = Working Capital Tangible Fixed Assets
28. WACC to WARA – Example Weighted Average Cost of Capital to Weighted Average Return on Assets
30. Definition of Cost of Equity Application of Capital Asset Pricing Model Risikfree Rate i Market Risik Premium (r m – i) ß (Measure for Systematic Risik) Cost of Equity r E + .
32. Tax Amortisation Benefit (TAB) Maximum Amount to be Payed for an Asset Tax Deductability of Purchased Asset: Net Present Value of future tax benefits based on depreciation/amortisation of purchase price Incremental Income + Residual Value + Relief-from- Royalty + Market Approach - Cost Approach (+/-) Purchase Price Allocation Asset Deal – Share Deal?
33. Tax Amortisation Benefit - Basics Fair Value = NPV (FCF) + TAB TAB = t * NPV (Depreciation) Depreciation = Fair Value / n TAB = NPV (Fair Value / n) Fair Value = NPV (FCF) + NPV (Fair Value / n)
36. Plausibility Check of Valuation Results 30 40 50 60 80 70 90 100 80 40 115 15 Value Mio. € Tangible fixed assets Working Capital Patent and Trademark Portfolio Estimate of business value 350 Value of goodwill Business Value Going Concern Other Intanbible Assets
40. Balance Sheet „Packaging Solution“ December 31, 2006 (Mio. EUR) Goodwill Patents Trademarks Other Intangible Assets E N T I T Y E N T I T Y Market Value of Equity Market Value of Debt to be determined Equity : Ratio of Peer Group 60 : 40 Working Capital 75 Tangible Fixed Assets 100
41. General Assumptions Market Research Annual Growth Rate after 2009 about 2% Background Mature market, very long lifecycle Technology Research Expectation of new technology after 2013
45. Calculation of Discount Factors 1 1,0908 1 1,0908 1 1,0908 2 1 1,0908 3 1 1,0908 4 1 1,0908 5 1 1,0908 6 1 1,0908 7 Weighted Average Cost of Capital 9,08% Discount Factor
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48. Projection of Future Revenues Assumptions Sales Projection Annual Growth Rate after 2009 2% Background Mature market, very long lifecycle, expectation of new technology after 2013 Business Plan Extrapolation
53. Incremental Income Analysis TAB = Tax Amortisation Benefit Application of incremental income analysis is critical! The key issue is to identify the Incremental Income.
54. Residual Value Method / Excess Earnings (Formula Method) January 1, 200X Asset to be valued E N T I T Y E N T I T Y Market Value of Equity Market Value of Debt Enity Value (Income Approach) ./. Value of all other assets (e.g. Fixed assets, trademarks, Contracts) = Value of asset to be valued Valuation of Core Asset Application is limited - Example Contribution to a joint venture Other interpretations of approach Assump t i ons Risk of overerstimating Working Capital Tangible Fixed Assets Portfolio Proprietary Technology TM 2 TM 1 Intellectual Property Rights Contracts Customer Relationship … Software
55. Residual Value & Excess Earnings Approach Income of Business Unit Entity Value of Business Unit Capitalization Excess Earnings Approach Residual Value Approach ./. Value of all Other Assets, e.g. Tangible Fixed Assets, Working Capital, Trademarks Residual Value Income of Business Unit ./. Contribution of all Other Assets to Income of Business Unit Return on Assets Return of Assets Excess Earnings Capitalization Residual Value ! =
57. Residual Value & Excess Earnings Approach Income of Business Unit Entity Value of Business Unit Capitalization Excess Earnings Approach Residual Value Approach ./. Value of all Other Assets, e.g. Tangible Fixed Assets, Working Capital, Trademarks Residual Value Income of Business Unit ./. Contribution of all Other Assets to Income of Business Unit Return on Assets Return of Assets Excess Earnings Capitalization Residual Value ! =