M&A For Catalist Companies in Singapore

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How M&A Can Create New Value and the Methodologies for Valuation.

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M&A For Catalist Companies in Singapore

  1. 1. M&A for Catalist Companies Valuation Issues 5 March 2009
  2. 2. Smaller Cap = Higher Expected Return Long-Term Returns in Excess of CAPM Estimation for Decile Portfolios of the NYSE/AMEX/NASDAQ 1926 - 2007 Estimated Return in Size Premium Realised Return in Excess of Riskless Rate (Return in Excess Decile Beta Excess of Riskless Rate (N1) of CAPM) A B A-B 1 - Largest 0.91 6.10% 6.45% -0.35% 2 1.03 7.95% 7.27% 0.68% 3 1.10 8.51% 7.75% 0.76% 4 1.12 8.86% 7.93% 0.93% 5 1.16 9.64% 8.17% 1.47% 6 1.18 9.93% 8.33% 1.60% 7 1.24 10.26% 8.76% 1.50% 8 1.30 11.38% 9.18% 2.20% 9 1.35 12.07% 9.51% 2.56% 10 - Smallest 5.82% 1.41 15.77% 9.95% Mid-Cap, 3 - 5 (N2) 1.12 8.81% 7.88% 0.93% Low-Cap, 6 - 8 (N3) 1.22 10.29% 8.64% 1.65% 3.66% Micro-Cap, 9 -10 (N4) 1.36 13.25% 9.59% Source: SBBI Valuation edition 2008 Notes: N1 - Theoretical equity risk premium computed based on the Capital Asset Pricing Model N2 - Market capitalisations of US$2,411,794,001 - US$9,206,713,000 N3 - Market capitalisations of US$723,258,001 - US$2,411,794,000 N4 - Market capitalisations below US$723,258,000 2
  3. 3. How to improve valuation? P0 DIV * (1 + gn) = r - gn EPS0 Capitalisation multiples with varying WACC and g WACC 8% 9% 10% 11% 12% 13% 14% 15% 0% 12.5x 11.1x 10.0x 9.1x 8.3x 7.7x 7.1x 6.7x 1% 14.3x 12.5x 11.1x 10.0x 9.1x 8.3x 7.7x 7.1x 2% 16.7x 14.3x 12.5x 11.1x 10.0x 9.1x 8.3x 7.7x g 3% 20.0x 16.7x 14.3x 12.5x 11.1x 10.0x 9.1x 8.3x 4% 25.0x 20.0x 16.7x 14.3x 12.5x 11.1x 10.0x 9.1x 5% 33.3x 25.0x 20.0x 16.7x 14.3x 12.5x 11.1x 10.0x Note: Capitalisation multiples calculated as 1/WACC-g 3
  4. 4. How M&A Can Create New Value Taking advantage of economies of scale Improve target management Combine complementary resources Capture tax benefits Provide low-cost financing to a financially constrained target Create value through restructuring Penetrating new geographies Reducing competition 4
  5. 5. M&A require thorough preparation 5
  6. 6. Taking a Disciplined Approach to Find the Right Value Pre mium o ffe re d Year Averag e Me dium De als Transaction 1986 38.2% 29.9% 333 costs 1987 38.3% 30.8% 237 1988 41.9% 30.9% 410 1989 41.0% 29.0% 303 1990 42.0% 32.0% 175 1991 35.1% 29.4% 137 Synergies 1992 41.0% 34.7% 142 1993 38.7% 33.0% 173 generated 1994 41.9% 35.0% 260 1995 44.7% 29.2% 324 1996 36.6% 27.3% 381 1997 35.7% 27.5% 487 1998 40.7% 30.1% 512 1999 43.3% 34.6% 723 Value of 2001 2000 49.2% 41.1% 574 Stand 57.2% 40.5% 439 target after 2002 alone 59.7% 34.4% 439 realising 2004 2003 62.3% 31.6% 371 value of 30.7% 23.4% 322 synergies 2005 target 34.5% 24.1% 392 2006 31.5% 23.1% 454 Average 42.1% 31.0% 361 Median 41.0% 30.9% 366 Averag e 5 Ye ars 43.7% 27.3% 396 S ource : Me rge rs tat R evie w 6
  7. 7. M&A Valuation Post Deal Pre Deal Post Deal Pre Deal Business Impairment of Combinations assets FRS 12/38/103 FRS 36 Financial Share Based Instruments Payments FRS 32/39 FRS 102 7
  8. 8. Implications of FRS 103 - Overview Excess of purchase price over net assets acquired – formerly known entirely as “goodwill” has to be allocated to intangible assets Fair Value of Net Fair Value of Net previously not identified Tangible Assets Tangible Assets Purchase Purchase Technology Consideration Consideration Trade Name Identifiable Identifiable Identification Process Intangible Assets Intangible Assets Customer Relationships Copyrights Resulting Resulting Goodwill Goodwill 8
  9. 9. Different Types of Intangible Assets Marketing-related Customer-related Contract-based Technology-based Artistic-related • Trademarks, • Customer lists • Licensing, royalty, • Patented technology • Compositions, tradenames, brands standstill agreements • Computer software advertising jingles • Order or production • Service marks, backlog • Lease agreements • Unpatented • Pictures, certification marks photographs • Customer contracts • Construction permits technology • Internet domains and related customer • Franchise • Video and • Trade secrets relationships audiovisual material • Non-competition agreements • Registration agreements • Non-contractual • Operating and customer relationships broadcasting rights • Employment contracts • Advertising, construction, management, service or supply contracts 9
  10. 10. FRS 103 – Amortisation Financial Impact Monthly charge to Definite Amortisation Profit & Loss useful life over useful life Intangible Assets Impairment Loss Indefinite Annual charged to Profit & useful life impairment Loss M&A Considerations Are profit guaranteed inclusive of amortisation charges? Is the intangible Asset supportable by cashflow projections – auditors’ focus on revenue growth rate, profit margin and discount factor used. 10
  11. 11. Methodologies Valuation Approaches Market Approach Income Approach Cost Approach Value Estimate Value Estimate Value Estimate Based on multiples or Present value of Reproduction / prices from market earnings attributable replacement cost transactions involving to the asset; or costs adjusted for the sale of avoided as a result of depreciation & comparable assets owning the asset obsolescence Decreasing hierarchy for estimating value 11
  12. 12. FRS 103 – Resulting Goodwill Financial Impact Any impairment Goodwill Impairment? Loss charged to Profit & Loss M&A Considerations What does the goodwill represent? Synergies? Economies of Scale? Is the premium paid for acquisition supportable by cashflow projections used to test for annual impairment? 12
  13. 13. Comparison of Value Concepts 13
  14. 14. Impairment Test 14
  15. 15. Key Points Smaller Capitalisation = less attention from market investors = higher expected return = lower valuation (all else equal) Acquisitions or mergers can lead to higher capitalisation, lower risk and higher valuation, but… Consider the post deal valuation issues early, i.e. in the pre deal valuation exercise Impact on post merger/acquisition financials (definite lived vs. indefinite intangibles) Robustness of business model and forecast assumptions (pre deal “euphoria” can lead to serious post deal consequences) 15

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