1Firm Valuation
2What is the “VALUE” of a firm?
3Valuation is in the eye of the beholder The value of a firm is can vary based on  circumstances & the type of buyer Fai...
4Why do we need to value companies?  To determine the price at which to offer new   securities  To determine the price a...
5   There is a relationship between control & valueHIGH --------- VALUATION---------- LOW                                 ...
63 Measures of Firm Value Market Value of Equity - MVE Total Enterprise Value - TEV Book Value - BV
7Public market value of equity If a Company is listed on a stock exchange and its equity  shares are publicly traded, the...
8 Public market value of equityMVE = Share Price x Fully Diluted Shares Outstanding
9Public market value of equity Share price    Can be found from many publically available sources    Use closing share ...
10Treasury stock method - ESOP (A) Add all potential common shares that a company may  be required to issue in connection...
11Treasury stock method – ESOP Use only “vested” or “exercisable” employee stock  options Use only “in the money” option...
12 Treasury stock method – employee stock options   JAKK Stock price as of 9/20/2010 - $22.00   JAKK Basic shares as of ...
13Treasury stock method – Convertible Securities Convertible securities are a combination of debt  and equity Major comp...
14Treasury stock method – Convertible Securities (A) Add all new shares that would be issued if “in the  money” convertib...
15Treasury stock method - Convertible Securities ExampleCurrent stock price                                = $55.00Face ...
16Treasury stock method convertible notesOn November 10, 2009 the Company sold an aggregate of$100.0 million of 4.50% Conv...
17MVE is not the same as Shareholder’s Equity (Book Value)  Book value =     the total amount shareholders contributed t...
18Shareholder’s equity in SEC filings  Additional paid in capital       The proceeds a company receives from the sale of...
19MVE is not the same as Shareholder’s Equity (Book Value)      BOOK VALUE OF EQUITY         MARKET VALUE OF EQUITYCompany...
20Total Enterprise Value MVE reflects only the value of a firm to common  shareholders MVE ignores other capital provide...
21TEV is not effected by capital structure TEV is the value of a company’s operations independent  of how the company cho...
22TEV is not effected by capital structure   355 Maple Street                   355 Maple Street   Current Owner’s Mort...
23Why do we subtract cash to calculate TEV  355 Maple Street is for sale for $600k  We purchase the house with:     $30...
24Three measures of firm value1. Market Value of Equity (MVE)    Share price x Fully diluted shares outstanding1. Total E...
25Valuation frameworks Comparable Public Companies                                                Relative Multiple Based...
26Relative Multiple Based Approaches A valuation multiple is the ratio between a financial metric  and a measure of value...
27Relative Multiple Based Approaches  Two types of multiples:     Operating or unlevered     Equity or levered  Levera...
28Relative Multiple Based Approaches Always match unlevered measures of value with unlevered  financial metrics Always m...
29Comparable Public Companies Analysis
30Comparable Public Companies Analysis - COMPS  You can value a target company based on how similar   companies trade in ...
31Selecting a universe of comparable public companies    This process is as much art as it is science    Differences in ...
32Why do different companies trade at different valuation multiples?   What do multiples represent?   How do we select t...
33Financial Profile - Size      Generally measured in market capitalization or revenue      Differences in size can impa...
34Financial Profile - Profitability  Generally measured by:       Gross margin       EBIT margin                 Enterp...
35      Financial Profile - ProfitabilityM ultiples Analysis                                     Share                    ...
36Financial Profile - Growth Historical & forward looking Higher growth equates to higher valuation multiples Examine f...
37Financial Profile – Return on investment  Ratios that employ a measure of profitability in the   numerator and a measur...
38Other factors effecting multiple variances between firms  Strength of management  Barriers to entry  Regulatory prote...
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Valuation 4

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Valuation 4

  1. 1. 1Firm Valuation
  2. 2. 2What is the “VALUE” of a firm?
  3. 3. 3Valuation is in the eye of the beholder The value of a firm is can vary based on circumstances & the type of buyer Fair market value (FMV) Minority interest Controlling interest  Financial buyer  Strategic buyer
  4. 4. 4Why do we need to value companies?  To determine the price at which to offer new securities  To determine the price at which to buy or sell a company  To determine the price at which to purchase or sell an ownership interest in a company  To determine tax implications  Generational transfer
  5. 5. 5 There is a relationship between control & valueHIGH --------- VALUATION---------- LOW Strategic Buyer Financial Buyer (Private Equity) Minority Interest LOW ------------------- CONTROL-------------------- HIGH
  6. 6. 63 Measures of Firm Value Market Value of Equity - MVE Total Enterprise Value - TEV Book Value - BV
  7. 7. 7Public market value of equity If a Company is listed on a stock exchange and its equity shares are publicly traded, then you can derive its equity valuation based upon the share price and number of shares outstanding This type of valuations is known as:  Public Market Valuation  Market Value of Equity (MVE), or  Market Capitalization The “Public Market Valuation” provides one perspective on the Company’s valuation: it illustrates at what value minority shareholders are willing to buy and sell the equity shares of that company MVE only reflects value to common stock owners and does not consider other company stakeholders/capital providers
  8. 8. 8 Public market value of equityMVE = Share Price x Fully Diluted Shares Outstanding
  9. 9. 9Public market value of equity Share price  Can be found from many publically available sources  Use closing share prices as of the night prior to valuation date Shares outstanding - BASIC  Basic shares outstanding found on page 1 of both 10K and 10Q  Use most recent filing date Basic share count  8Ks may contain information on additions/subtractions to Basic shares since most recent K or Q Shares outstanding – FULLY DILLUTED  Basic shares + additional shares from:  In the money employee stock options, and,  In the money convertible securities
  10. 10. 10Treasury stock method - ESOP (A) Add all potential common shares that a company may be required to issue in connection with:  Employee stock options (B) Assume proceeds from exercise are used to buy back common shares in the open market at the current company stock price and calculate # of purchased common shares (C) Subtract # of repurchased commons shares (B) from (A) = NET DILLUTIVE SHARES FROM ESOP
  11. 11. 11Treasury stock method – ESOP Use only “vested” or “exercisable” employee stock options Use only “in the money” options Use closing stock price from day before valuation date
  12. 12. 12 Treasury stock method – employee stock options  JAKK Stock price as of 9/20/2010 - $22.00  JAKK Basic shares as of 6/30/2010 10Q – 27,911,076 JAKK ESOP Information from 12/31/2009 10K:Outstanding Exercisable Weighted Weighted Weighted Average Average AverageOption Price Number Life Exercise Number ExerciseRange of Shares in Years Price of Shares Price$11.56 - 19.27 148,271 3.13 $ 16.21 148,271 $ 16.21$19.85 - 22.01 258,944 1.56 $ 21.23 210,044 $ 21.04$22.11 - 22.11 37,500 5.00 $ 22.11 37,500 $ 22.11
  13. 13. 13Treasury stock method – Convertible Securities Convertible securities are a combination of debt and equity Major components:  Face amount – amount borrowed, generally in $1,000 denominations  An interest rate  A repayment date  Conversion rights Conversion rights give the holder the right to exchange their debt for equity in the security issuer The amount of equity a holder receives in exchange for their debt claim depends on the conversion price
  14. 14. 14Treasury stock method – Convertible Securities (A) Add all new shares that would be issued if “in the money” convertible securities were converted (B) Subtract the claims associated with convertible securities from balance sheet  Most often debt or preferred stock (C) Make interest expense adjustment to relevant period income statement
  15. 15. 15Treasury stock method - Convertible Securities ExampleCurrent stock price = $55.00Face amount of convertible security = $1,000Conversion price = $25.00Conversion ratio ($1,000/Conversion price) = 40The Conversion ratio can be interpreted as how many shares of stockan issuer would need to issue per $1,000 of face value of theconvertible securityIf the Convertible holder exercises their conversion right they give upthe right to receive repayment of their $1,000 at a 4% interest rate inexchange for 40 shares of the issuers common stock A Conversion Price less that current stock price = “in the money” 40 X $55 = $2,200 > $1,000Dilutive Shares = Face/Conversion Price = 1,000/25 = 40
  16. 16. 16Treasury stock method convertible notesOn November 10, 2009 the Company sold an aggregate of$100.0 million of 4.50% Convertible Senior Notes due 2014 (the"Notes"). The Notes are senior unsecured obligations ofJAKKS, will pay interest semi-annually at a rate of 4.50% perannum and will mature on November 1, 2014.The conversion rate will initially be 63.2091 shares of JAKKScommon stock per $1,000 principal amount of notes(equivalent to an initial conversion price of approximately$15.82 per share of common stock), subject to adjustment incertain circumstances. Prior to August 1, 2014, holders of theNotes may convert their Notes only upon specified events.Dilutive Shares = 100.0mm/15.82 = 6.32mm shares
  17. 17. 17MVE is not the same as Shareholder’s Equity (Book Value)  Book value =  the total amount shareholders contributed to a company based on the price they paid for shares when the company initially sold the shares +  the retained earnings a company has accumulated at the time of measurement  Or…Assets - Liabilities
  18. 18. 18Shareholder’s equity in SEC filings  Additional paid in capital  The proceeds a company receives from the sale of common stock in excess of the stock’s “PAR VALUE”  Comprehensive income/(loss)  Direct adjustments to shareholder’s equity not reflected in a company’s retained earnings
  19. 19. 19MVE is not the same as Shareholder’s Equity (Book Value) BOOK VALUE OF EQUITY MARKET VALUE OF EQUITYCompany IPO Current Stock Price $56.0Shares Sold 10 Shares Outstanding 45Price per Share $25.0Capital Raised $250.0 MVE $2,520.0Company Follow-On Offering 1Shares Sold 15Price per Share $33.0Capital Raised $495.0Company Follow-On Offering 1Shares Sold 20Price per Share $42.0Capital Raised $840.0Retained $425.0Equity Book Value $2,010.0
  20. 20. 20Total Enterprise Value MVE reflects only the value of a firm to common shareholders MVE ignores other capital providers Total Enterprise Value (TEV) is a measure of the value of claims held by all capital providers to a company including all ownership interests and debtTEV = MVE + Debt + Preferred Stock + Minority Interest – Cash
  21. 21. 21TEV is not effected by capital structure TEV is the value of a company’s operations independent of how the company chooses to finance itself The TEV formula dictates that any change in the amount of any capital item will be equally offset by an equal change in another capital item Base Case Adj. Pro forma MVE $750.0 $750.0 PLUS Debt $250.0 $100.0 $350.0 PLUS Pref. Stock $35.0 $35.0 PLUS Min. Interest $15.0 $15.0 (LESS) Cash ($50.0) ($100.0) ($150.0) Enterprise Value $1,000.0 $0.0 $1,000.0
  22. 22. 22TEV is not effected by capital structure 355 Maple Street  355 Maple Street Current Owner’s Mortgage = $0  Current Owner’s Mortgage = $500,000 Sale Price = $600,000  Sale Price = ?
  23. 23. 23Why do we subtract cash to calculate TEV  355 Maple Street is for sale for $600k  We purchase the house with:  $300k Mortgage (Debt)  $300k Equity (MVE)  TEV = $300k Debt + $300k MVE = $600k  Suppose 355 Maple Street has a secret room with $100k cash that we get to keep if we buy the house  We purchase the house for $700k  $300k Mortgage (Debt)  $400k Equity (MVE)  TEV = $300k Debt + $400k MVE - $100k Cash = $600k  Because the MVE already reflects the cash value exactly we would be double counting if we did not subtract cash
  24. 24. 24Three measures of firm value1. Market Value of Equity (MVE)  Share price x Fully diluted shares outstanding1. Total Enterprise Value (TEV)  MVE + Debt + Pref. Stock + Min. Int.- Cash1. Book Value of Equity  Assets – Liabilities, or  Common stock + additional paid in capital + retained earnings+ comprehensive income/(loss)
  25. 25. 25Valuation frameworks Comparable Public Companies Relative Multiple Based Precedent Transactions Discounted Cash Flow Intrinsic Cash Flow Based Internal Rate of Return (IRR)
  26. 26. 26Relative Multiple Based Approaches A valuation multiple is the ratio between a financial metric and a measure of value  Example: TEV/ Revenue Multiple  If TEV = $1,000 and Revenue = $100  TEV/ Revenue Multiple = $1,000/$100 = 10x By comparing multiples calculated for comparable companies/transactions you can derive implied valuations for target firms  Target Firm Revenue = $50  Comparable companies average TEV/Revenue = 10x  Implied Target TEV = $50 x 10 = $500
  27. 27. 27Relative Multiple Based Approaches  Two types of multiples:  Operating or unlevered  Equity or levered  Leverage refers to the relative amount of Debt/Equity used to finance a company  TEV is an unlevered measure of value  MVE is a levered or equity measure of value  Metrics are also unlevered or levered  Revenue  EBIT Unlevered  EBITDA  Net Income Levered
  28. 28. 28Relative Multiple Based Approaches Always match unlevered measures of value with unlevered financial metrics Always match levered measures of value with levered financial metrics Measure of Value Financial Metric Multiple TEV Revenue TEV/Revenue TEV EBIT TEV/EBIT TEV EBITDA TEV/EBITDA MVE Net Income MVE/Net Income Share Price EPS P/E NEVER MIX UNLEVERED & LEVERED TEV/Net Income
  29. 29. 29Comparable Public Companies Analysis
  30. 30. 30Comparable Public Companies Analysis - COMPS  You can value a target company based on how similar companies trade in the public markets STEP TASK 1. Select comparable public company universe 2. Spread key income statement, balance sheet, and cash flow information 3. Calculate key financial ratios, performance metrics and trading multiples 4. Benchmark comparable company statistics from 3 against target company 5. Determine appropriate multiples and multiple ranges 6. Calculate implied valuation ranges for target company
  31. 31. 31Selecting a universe of comparable public companies This process is as much art as it is science Differences in comparable company universes can lead to wide variances in implied valuation ranges Business Profile Financial Profile Industry Size* Sector Growth Products & Services Profitability Business Model Credit Profile Customers Capital Structure Geography
  32. 32. 32Why do different companies trade at different valuation multiples? What do multiples represent? How do we select the appropriate multiples to asses the value of a Target firm? The goal is to select a range of multiples from companies that are most similar to the Target  Business Profile  Financial Profile ALL ELSE EQUAL
  33. 33. 33Financial Profile - Size  Generally measured in market capitalization or revenue  Differences in size can impact valuation multiple differences  Why?  Risk  Economies of scale  Purchasing power  Liquidity  Access to capital  Growth prospects  Size impact on multiples is generally not linear but tiered
  34. 34. 34Financial Profile - Profitability Generally measured by:  Gross margin  EBIT margin Enterprise Value Multiples  EBITDA margin  Net income margin Equity Value Multiples All else equal, higher margins translate into higher multiples  From each dollar of sales more earnings are available for respective capital providers
  35. 35. 35 Financial Profile - ProfitabilityM ultiples Analysis Share Price % off 52- Market Enterprise TEV / Revenue TEV / EBITDA Price / EarningsCompany Name Ticker 12/19/2008 week High Capitalization Value Cash Debt LTM FYE+1 LTM FYE+1 LTM FYE+1Kraft Foods, Inc. KFT $26.67 23.7% 39,345.0 59,201.0 737.0 20,593.0 1.39x 1.35x 9.4x 9.1x 13.8x 14.0xConAgra Foods, Inc. CAG 15.98 35.7% 7,144.4 10,236.7 296.4 3,388.7 0.85x 0.81x 8.1x 6.9x 13.8x 11.0xH.J. Heinz Company HNZ 37.25 29.7% 11,741.7 16,547.3 927.7 5,733.2 1.58x 1.63x 8.9x 9.1x 12.8x 12.9xGeneral Mills, Inc. GIS 59.00 18.1% 19,975.0 27,495.7 $639.6 $7,918.0 1.91x 1.89x 11.2x 10.0x 16.7x 15.1xKellogg Co. K 42.63 27.1% 16,284.5 21,149.5 684.0 5,549.0 1.67x 1.62x 8.8x 9.0x 13.7x 14.2xMedian 27.1% $16,284.5 $21,149.5 $684.0 $5,733.2 1.58x 1.62x 8.9x 9.1x 13.8x 14.0xMean 26.9% $18,898.1 $26,926.0 $656.9 $8,636.4 1.48x 1.46x 9.3x 8.8x 14.2x 13.4xM argins Analysis Revenue Growth EBITDA Growth EPS Growth LTM CapEx % EBIT Margin EBITDA Margin Net MarginCompany Name FYE 07-08 FYE 08-09 FYE 07-08 FYE 08-09 FYE 07-08 FYE 08-09 of Revenue LTM FYE+1 LTM FYE+1 LTM FYE+1Kraft Foods, Inc. 8.4% 17.6% -5.9% 12.9% -5.5% -4.7% 3.0% 12.5% 12.6% 14.8% 14.9% 6.7% 6.4%ConAgra Foods, Inc. 10.2% 9.3% -7.2% 14.6% -4.1% 18.8% 3.4% 8.0% 9.3% 10.5% 11.6% 4.3% 5.1%H.J. Heinz Company 11.9% 0.6% 8.5% -2.5% 6.7% 7.4% 2.8% 14.9% 14.9% 17.7% 17.9% 8.7% 9.0%General Mills, Inc. 9.7% 6.4% 7.7% 2.0% 11.9% 0.9% 4.0% 13.9% 15.7% 17.0% 19.0% 8.3% 9.1%Kellogg Co. 8.0% 11.0% 6.3% 0.6% 10.5% -1.6% 3.7% 16.0% 15.1% 18.9% 18.0% 9.3% 8.8%Median 9.7% 9.3% 6.3% 2.0% 6.7% 0.9% 3.4% 13.9% 14.9% 17.0% 17.9% 8.3% 8.8%Mean 9.6% 9.0% 1.9% 5.5% 3.9% 4.2% 3.4% 13.1% 13.5% 15.8% 16.3% 7.5% 7.7%
  36. 36. 36Financial Profile - Growth Historical & forward looking Higher growth equates to higher valuation multiples Examine financial metrics  Sales, EBIT, EBITDA, Net Income, EPS For early stage companies  Sales and other operating metrics: Customers, Locations, Employees Growth and size can be offsetting Must examine growth & profitability together
  37. 37. 37Financial Profile – Return on investment Ratios that employ a measure of profitability in the numerator and a measure of capital in the denominator How efficient is a firm at providing a return to capital providers Return on Invested Capital (ROIC) EBIT / Avg. Net Debt + Total Equity Return on Equity (ROE) Net Income / Avg. Shareholder Equity Return on Assets Net Income / Avg. Assets
  38. 38. 38Other factors effecting multiple variances between firms Strength of management Barriers to entry Regulatory protection Geopolitical risks M&A activity

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