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Macro Issues in Valuation for M&A: Business Valuation Article
 

Macro Issues in Valuation for M&A: Business Valuation Article

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Macro Issues in Valuation for M&A - Mr. Chander Sawhney of Corporate Professionals at ASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30th April,2013 ...

Macro Issues in Valuation for M&A - Mr. Chander Sawhney of Corporate Professionals at ASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30th April,2013

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Valuation;
Mergers & Acquisition;
Macro Issues in Valuation for Mergers & Acquisition;
M&A Case Study

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Macro Issues in Valuation for M&A: Business Valuation Article Macro Issues in Valuation for M&A: Business Valuation Article Presentation Transcript

  • Macro Issues in Valuationfor M&ABy: Chander Sawhney(FCA, CS, Certified Valuer (ICAI)Asst. Vice PresidentSEBI REGISTERED (CAT -I) MERCHANT BANKERGgddASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30thApril,2013
  • AGENDAASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30thApril,2013- Valuation;- Mergers & Acquisition;- Macro Issues in Valuation for Mergers & Acquisition;- M&A Case Study
  • VALUATIONASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30thApril,2013
  • Valuation Valuation is the process of determining the “Economic Worth” of an Asset or Companyunder certain assumptions and limiting conditions and subject to the data available on thevaluation date.Source -International Valuation Standard Council Depends upon :• Mergers• IPO• RBI• Income Tax• ESOP• Companies Act• SEBI• Stock ExchangePurpose Regulatory Accounting• Purchase PriceAllocationDispute Resolution• Company Law Board/Courts• Impairment /Diminution• Arbitration• Mediation• Acquisitions /Investment• VoluntaryAssessmentASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30thApril,2013
  • Key Facts of ValuationThe Value of a business, by whatever valuation method it is obtained, is not the selling price of thebusiness. Value is an economic concept based on certain data & assumptions, however Price iswhat a Buyer is willing to pay keeping in consideration the Economic and Non Economic factors likeEmotions, Perception, Greed Etc which cannot be valued as such.The Value is a subjective term and can have different connotations meaning different things todifferent people and the result may not be the same, as the context or time changes.Valuation is more of an art and not an exact science. The Art is Professional Judgment and Scienceis Statistics. Mathematical certainty is neither determined nor indeed is it possible as use ofprofessional judgment is an essential component of estimating valueThough the value of a business can be objectively determined employing valuation approaches, thisvalue is still subjective, dependent on buyer and seller expectations and subsequent negotiationsand the Transaction happens at negotiated price only.PRICE IS NOT THE SAME AS VALUETRANSACTION CONCLUDES AT NEGOTIATED PRICESVALUATION IS HYBRID OF ART & SCIENCEVALUE VARIES WITH PERSON, PURPOSE AND TIMEASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30thApril,2013
  • CASH FLOWINVESTOR ASSIGN VALUE BASED ON THE CASH FLOW THEY EXPECT TORECEIVE IN THE FUTURE- Dividends / distributions;- Sale of liquidation proceeds;VALUE OF A CASH FLOW STREAM IS A FUNCTION OF-Timing of cash Receipt;- Risk associated with the cash flow;ASSETSOPERATING ASSETS- Assets used in the operation of the business including working capital, Property, Plant &Equipment & Intangible assets;- Valuing of operating assets is generally reflected in the cash flow generated by the business;NON - OPERATING ASSETS- Assets not used in the operations including excess cash balances, and assets held forinvestment purposes, such as vacant land & Securities;- Investors generally do not give much value to such assets and Structure modification may benecessaryKey drivers of valuationASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30thApril,2013
  • Broad Approaches to ValuationASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30thApril,2013Applicability of a particularapproach depends uponOn whose behalf? – onebuyer vs another buyer, buyervs seller;For what purpose? –independent strategicacquisition, group companyconsolidation, cross bordertransactionWhen? – distress situation,industry downturn, boom etc
  • MERGERS&ACQUISITIONASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30thApril,2013
  • M&A is primarily driven with motive of achieving Inorganic growth and Synergy i.e. thepotential additional value gain from combining two firms, either from operational orfinancial sources.However, certain studies have shown that most – but not all – M&A fail to deliver valueand bridge the price-value gapOne of the reasons is that the aggressive promoters in consultation with eager advisorsmay result in pushing up the acquisition price; Resultantly, the value often gettransferred from acquirer’s shareholders to target company’s shareholders;M & AASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30thApril,2013
  • M&AMergers AcquisitionsStockPurchaseCOURT PROCESS NON - COURT PROCESSTypes of M & ASEBI[TAKEOVER CODE]Note: Asset Purchase under Acquisition is IgnoredASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30thApril,2013391-394 ofCompanies Act
  • Valuation for MergerAPPLICABLE LAW FOR VALUATION FOR MERGER:1.Companies Act, 1956 [Section 391- 394];2.Fairness Opinion [Clause 24 (h) of the Listing Agreement];3.SEBI Notification [CIR/CFD/DIL/5/2013], dated 4thFebruary, 2013KEY HIGHLIGHTS OF SEBI NOTIFICATION1. Approval of the Scheme by SEBI on recommendation of Stock Exchange;2. Recommendation of Audit Committee of the Listed Co. on the valuation done byIndependent Chartered Accountant;3. Uploading of the Valuation Report on the Website of Co. and Stock Exchange;4. Filing of Complaint Reports;5. Meeting of Shareholders through Postal Ballot and e-Voting;None of the aforesaid laws provide for specific valuation approaches under Mergers;“Valuation is generally the Starting Point of the M&A process”
  • Valuation for Merger.. Contd..4. Judicial Pronouncements;WHETHER VALUATION IS REQUIRED FOR MERGER?In the matter of Shreya’s India (P) Ltd. v. Samrat Industries (P) Ltd. the Regional Director (RD)raised an objection that no valuation report has been filed and that the exchange ratio foramalgamation has not been worked out by an independent valuer.“The Hon’ble High Court of Rajasthan overruled this objection and sanctioned the scheme ofamalgamation by holding that there was no legal or factual impediment to grant sanction to thescheme of amalgamation.”WHETHER ANY VALUATION METHODOLDY IS REQUIRED FOR MERGER?Though there are no specific methodology prescribed for valuation under Merger, howeverIn Hindustan Lever Employees Union v. Hindustan Lever Ltd and Others, Bombay HighCourt -“accepted the ratio of 2:2:1 as Income, Market and Asset Approach on which the valuationwas based.”ASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30thApril,2013
  • Valuation for AcquisitionAPPLICABLE LAW:SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011FREQUENTLY TRADEDSHARESINFREQUENTLYTRADED SHARESTraded Turnover of Shares ≥ 10%[In the Last Twelve Calendar Months precedingthe Month of Public Announcement (P.A.)]Traded Turnover of Shares < 10%[In the Last Twelve Calendar Months precedingthe Month of Public Announcement]Method of Valuation1.Highest Negotiated Price Per Share under agreementattracting the obligation to make P.A.2.The volume weighted avg. price paid or payable byacquirer or PAC during the 52 Weeks;3.The Highest Price paid or payable by acquirer or PAC inlast 26 Weeks;4.Volume weighted average Market Price of Shares for aperiod of 60 trading daysHIGHEST PRICE AMONG ALL IS THE VALUE PER SHAREFOR P.A.Method of Valuation1.Book value,2.Comparable Trading Multiples;Such other Parameters as are customary forvaluation of shares of such companiesASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30thApril,2013
  • Macro Issues of Valuation inMERGERS & ACQUISITIONASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30thApril,2013
  • Fair Value in M&A ?Fair Value is “The price at which an entity would change hands between a willing buyer andwilling seller, neither being under compulsion to buy or sell and both having reasonableknowledge of all relevant facts.”M&A VALUATIONS MAY HOWEVER DEPART FROM THEIR FAIR VALUES ON ACCOUNT OF:oValuing Acquisition Targets on Standalone basis and Valuing them with SynergyoDistress Sale Vs. Desperate BuyoEmpirical Evidenceo Control Premiums and Minority & Marketability DiscountsoComparable Transaction Multiples (CTM) and Price of Recent Investments (PORI)oCompetitive Positioning and Risk in Corporate AcquisitionsoValuation of Intangible Assets and Purchase Price Allocation (PPA)ASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30thApril,2013
  • Swap Ratio Valuation• In case of a merger valuation, the emphasis is on arriving at the relative values of theshares of the merging companies to facilitate determination of the swap ratio– Hence, the purpose is not to arrive at absolute values of the shares of the companies• The key issue to be addressed is that of fairness to all shareholders– This is particularly important where the shareholding pattern and shareholders varybetween the two companies• There are established legal precedence for merger valuation methodologies– Valuer’s role is to incorporate case specific factors and use appropriate methodologies soas to determine a fair ratio– Usually, best to give weight ages to valuation by all methods– Market price method and Earnings methods dominate.ASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30thApril,2013
  • • If the exchange ratio is set too high, there will be a transfer of wealth from thebidding firm’s stockholders to the target firm’s stockholders.• If the exchange ratio is set too low, there will be transfer of wealth from thetarget firm to the bidding firm’s stockholders.17Impact of Swap Ratio ValuationASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30thApril,2013
  • “Beauty lies in the eyes of the beholder; valuation in those of thebuyer”• An investor seeking to acquire control of a company is typicallywilling to pay more than the current market price of the company.Control premium is an amount that a buyer is usually willing topay over the fair market value of a publicly traded company toacquire controlling stake in a company.• Control can be direct (shareholding or Authority to appoint Board)or indirect (veto power, casting vote etc)• Research has shown that the control premium in India has rangedfrom 20% to 37% in the past few years having median of 30%.Control Premium and Takeover BidFinancialYearNo. ofTransactionsMedianPremium2006 25 37%2007 29 20%2008 38 26%2009 44 29%2010 22 31%2011 42 32%Total 228 30%ASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30thApril,2013
  • CASE STUDYCalculation of ExchangeRatio in M&A andIndependent Buyer-Seller perspectiveASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30thApril,2013
  • Features of Steel Company*o Frequently Traded Listed Companyo Low Profit Margin, due to high Power Costo Running in Low Capacity Utilization due to poor supply of PowerFeatures of Power Company*o Unlisted Companyo Company is implementing the Power Plant of 9.5 MW , The Production is expected to start with inYearAcquisition Rationaleo Location Advantage, both companies have their unit in same Locationo Synergistic benefits- (Captive Power Plant will reduce the Operating cost, because Steel Industryis energy consuming)o Tax benefit from the unabsorbed losses of Power Companyo Up the value chaino Capacity utilization will increase in existing steel business, due easy availability of Power*Common Promoter GroupMerger of a Unlisted Power Company into Listed SteelManufacturing CompanyASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30thApril,2013
  • EXCHANGE RATIO & VALUATION –MERGER• Valuation on Steel Company• Valuation on Power CompanyValuation Method Rs Crores Weights Value of Company Weighted ValueMarket Cap 2 100 200Income Method 2 95 190NAV 1 150 150Fair Value of Company 108Valuation Method Rs Crores Weights Value of Company Weighted ValueMarket Cap 2 NA NAIncome Method^ 2 90 180NAV 1 50 50Fair Value of Company 76.67^ considering 3 years forward earnings and 80-90% Capacity utilization basisMerger of a Unlisted Power Company into Listed SteelManufacturing CompanyASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30thApril,2013
  • Pre Merger Shareholding of Steel CompanyCategory No of shares % HoldingPromoter 5,000,000 50%Public 5,000,000 50%Total 10,000,000 100%Pre Merger Shareholding of Power CompanyCategory No of shares % HoldingPromoter 5,000,000 100%Public - -Total 5,000,000 100%Post Merger Shareholding of Steel CompanyCategory No of shares % HoldingPromoter 12,099,074 71%Public 5,000,000 29%Total 17,099,074 100%Independent Buyer-Seller PerspectiveValuation of Power business on as isbasis – Rs.55 croresAssets MethodEarnings Method (Includespremium for the license)Valuation of Power businesstaking into account synergies –Rs. 70 croresAn independent Buyer would bidan amount in excess of valuationon standalone basis (Rs. 55crores) and below Synergyvaluation (Rs.70 crores).Acquisition Price would finallydepend on negotiations.Pre and Post ShareholdingASSOCHAM National Conference on "Value Creation through Mergers & Acquisitions ” – 30thApril,2013
  • Any Specific Valuation Query may be mailed @info@corporatevaluations.in / chander@indiacp.comM: +91 9810557353; Ph: 011-40622252W: www.corporatevaluations.in; corporateprofessionals.comMr. Chander Sawhney(FCA, CS, Certified Valuer (ICAI)Disclaimer:This presentation contains information in summary form and is therefore intended for general guidance only. It is not intended to be asubstitute for detailed research or the exercise of professional judgment. Neither corporatevaluations.in nor any other member of theCorporate Professionals organization accept any responsibility for loss occasioned to any person acting or refraining from action as aresult of any material in this presentation. On any specific matter, reference should be made to the appropriate advisor.© 2013, Corporate Professionals. All rights reserved23