DESCRIPTION For a business any business looking to engage in acquisition activity it is critical to understand what your strategy is. Acquisition and investment is more than a financial exercise, there has to be a strategy intent as well. This document is in three main sections to help formulating an acquisition strategy: 1. Identifying the Acquisition Target and Process 2. Diligencing the Target 3. Evaluating Other Strategic Considerations Followed by a overview of valuation methodologies commonly used to value targets: 1. Public Market Comparables 2. Merger Market Comparables 3. DCF 4. Pro Forma This powerpoint is designed to give a good foundations and building blocks for those interesting in learning more about the above techniques.

1. Complete Guide to Building an
Acquisition Strategy and
Valuation Methodologies

2. IDENTIFYING AN ACQUISTION TARGET
A
There are various aspects to consider when searching for an acquisition
target
Key Aspects of Value to an Acquiror
Competitive
Advantage
•
Strong market position
through large, stable user
base or other competitive
edge
Important Market
Segment
•
Operates key commercial
platform with potential for
strong cash growth
Robust Financial
Performance
•
Healthy business with track
record of strong cash flows
and resilient earnings
Access to
New Geographies
•
Target has established
positions in new or high
growth markets where the
Acquiror is not present
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• Market is of key strategic
• Strong top-line growth
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• Expertise in a particular
importance in the value
trajectory
•
division or area
•
Target's strengths can be
leveraged throughout
Acquiror's organization
chain
•
•
Target's products or services
can catalyze growth of
Acquiror's existing
businesses
Disciplined cost
management
relatively difficult to expand
into organically
Ideal Acquisition Target
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3. IDENTIFYING AN ACQUISTION TARGET
A
Aligning Acquisition Strategy to Seller Process
Competitive Auction
• Formal process with organized disclosure on business
sold via information memos and management
presentations
— Auctions usually have a longer timetable
— Higher chance that Acquiror’s interest may be
leaked to public
Negotiated Transaction
• Less formal process with:
— More flexibility in requesting specific or
customized information
• Greater access to Target’s management team
• In a limited negotiation, Acquiror can:
— Push for exclusivity to remove concerns over
• When drawn into a
This isbidding warcompetitive view bid thecan presentation. For further details and download
only a by positioning each Acquiror full
partial auction, of
interloper intervention
avoid a
— Enjoy more room
strategically in two-tiered processes
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creatively
— E.g. bid conservatively in first round to learn more
about other bidders and preserve valuation
flexibility
• Acquiror should also conduct an interloper analysis to
— Identify potential financial or strategic buyers
– E.g. Acquiror can decide whether to acquire
entire business or carve out specific assets
• Limited competition suggests a higher likelihood for
Acquiror to capture pre-emptive value
— Assess their ability to pay
— Estimate rivals’ ability to achieve synergies with
Target
— Evaluate impact to market landscape if Target falls
into competitor’s hands
Strategic positioning in a buyside approach can vary significantly depending on whether
Seller is running a competitive auction or engaged in exclusive negotiations with Acquiror
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4. DILIGENCING THE TARGET
B
Diligencing the Target entails reviewing the market, financials and the
business…
Key Areas
Details
•
•
Market
Overview
Size and scope of markets
Key economic drivers
•
Expected regulatory changes that could change competitive landscape
•
Key competitors
— Historical, current and anticipated
— Strengths/weaknesses vs. peers
This is only a partial view of indicators and expected trends
• Key performance the full presentation. For further details and download
• Historical audited financials www.straticx.com/store.html
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•
Projected financials and near-term
•
Variance between historical budgets and actual performance
•
Capital structure and expected maturities
•
Marketing and customer acquisition strategy vs. peers
•
Financials
Customer mix
— Focus on high or low share customers
— Mix of customer demographics
Business
•
Outlook on required capex over next few years
— Could changes in technology etc derail those projections?
•
Cost structure vs. peers
3

5. CONTENTS
1. Formulating an Acquisition Strategy
A. Identifying the Acquisition Target and Process
B. Diligencing the Target
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Evaluating Other Strategic Considerations
2. Overview of Valuation Methodologies
There are several critical aspects to a well thought-out acquisition strategy for enterprise assets
4

6. CONTENTS
1. Formulating an Acquisition Strategy
A. Identifying the Acquisition Target and Process
B. Diligencing the Target
This is only a partial view of the full presentation. For further details and download
C. please goto: www.straticx.com/store.html
Evaluating Other Strategic Considerations
2. Overview of Valuation Methodologies
There are several critical aspects to a well thought-out acquisition strategy for enterprise assets
5

7. OVERVIEW OF VALUATION METHODOLOGIES
Valuation Methodologies and Key Issues
Methodology
Key Sensitivities
•
Trading multiples of comparable companies
•
Quality of comparables
•
To determine the relative value of companies within the
sector
•
Market environment
•
Consistent accounting treatment
•
Forward-looking multiples
•
1
Public data
Public Market
Comparables
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• Market view of the full
• Quality of further details
• Takes into consideration acquisition premium
• Historical multiples
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•
Generally limited public data
•
Merger Market
Comparables
Market conditions at time of transaction
•
Discounted
Cash Flow
(“DCF”)
4
Pro Forma
Analysis
Present value (―PV‖) of projected unlevered free cash
flows (―FCFs‖)
•
Quality of financial forecasts (large number of
assumptions)
•
Discounted at weighted average cost of capital
(―WACC‖)
•
Discount rate
•
Terminal value / perpetuity growth rate
•
3
Impact of a transaction (growth, margins, credit rating,
etc.)
•
Affected by financing capital structure
•
Affected by accounting (purchase price allocation)
•
Assess whether a transaction is accretive / dilutive to
EPS
•
Not indicator of fundamental value
•
Near-term vs. long-term impact
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8. OVERVIEW OF VALUATION METHODOLOGIES – PUBLIC MARKET
1
1
Financial ratios should be compared across different sectors
Benchmarking of Market Multiples – Example Output
2013E EV / Sales
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2013E EV / EBITDA
Sector 1
Sector 2
Sector 3
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9. OVERVIEW OF VALUATION METHODOLOGIES – PUBLIC MARKET
1
1
Overview of the Discounted Future Value Approach
Discounted Future Value Approach
Overview
•
Consider the start-up when the business model approaches maturity, and achieves positive EBITDA and longer-target margin targets
•
The start-up can be valued with a 1-year forward multiple on future financial metrics based on projected future forward multiples
•
The resulting valuation is subsequently to today to find the present value of the start-up business
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Illustrative Calculation Methodology
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Forward 2017
“Steady” EBITDA
x
1 Year Forward
Multiple
=
Future Value
at 2016
Discount
4 Years
Present Value Today at
2013
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10. OVERVIEW OF VALUATION METHODOLOGIES – MERGER MARKET
2
Analysing precedent transactions will give a snapshot of multiples
being paid
Selected Precedent Transactions – Example Output
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Date
_
_
_
_
_
_
_
_
_
_
_
_
_
_
Acquirer
_
_
_
_
_
_
_
_
_
_
_
_
_
_
Target
_
_
_
_
_
_
_
_
_
_
_
_
_
_
Transaction Value
_
_
_
_
_
_
_
_
_
_
_
_
_
_
Period
_
_
_
_
_
_
_
_
_
_
_
_
_
_
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11. OVERVIEW OF VALUATION METHODOLOGIES - DCF
3
3
There are three main components of a Discounted Cash Flow Analysis
A
Determination of
Free Cash Flows
•
B
Calculation of
Terminal Value
•
Projections (5 – 10 years)
Value of business /
cashflows post projection
period
•
Value of business in
projection period
•
DCF
Analysis
Exit multiple method
— a growth
This is onlySalespartial view of the full presentation. For furtherPerpetuity growth method
details and download
•
— Margins
(steady
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— Capex
— Change in Working
Capital
C
Calculation of
Discount Rate
•
Incorporates time value of
money
•
WACC vs. Equity
discounting
•
Discount Rate
— Acquiror, Target or
Sector?
— Risk Free Rate
— Beta
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12. OVERVIEW OF VALUATION METHODOLOGIES - DCF
3B
Terminal value serves as proxy for present value of cash flow stream
that is to be generated after the projection horizon
• Terminal value serves as proxy for present value of cash flow stream that is to be generated after the projection
horizon (usually 5 to 10 years)
— Ideally when business is in steady state
• Calculate PV of terminal value and add to PV of projected cash flows to arrive at a total value for the company
The two
This •is onlyprincipal terminal valuation approaches are:
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Methodology
Benchmarks
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FCF in Year after Final Year
•
Industry growth rate
WACC – Growth Rate
•
General economic growth rate
•
Differentiate real growth vs.
inflation
TV = EBITDA x Exit Multiple
•
Current trading multiples
•
•
Mid-cycle trading multiples
•
M&A multiples
TV
=
Perpetuity
Method
TV
Exit
Multiple
=
FCF5 x (1+g)
WACC – g
Assumes sale/IPO of business at
multiple of final year’s sales,
EBITDA, EBIT or other metric
•
Compare results to check
assumptions
•
Alternatively, calculate terminal
value through one method and
back out the ―implied‖
assumption for the other
method (e.g. implied perpetuity
growth of a certain exit multiple)
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13. OVERVIEW OF VALUATION METHODOLOGIES – PRO FORMA
4
Pro Forma Analysis is a method of calculating financial results in order
to emphasize either current or projected figures
Key Inputs to Consider
• Mix of financing
— Stock vs. cash
• Financing Cost (incremental debt to finance the
acquisition)
Considerations
• Impact of target to pro forma growth and margin profile
— Potential multiple impact
— Level of diversification vs. product concentration
• Synergy Analysis
— Interest expense on new debt issued
— Cross-selling opportunity
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— Cost savings potential
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• Accounting Treatment
— Excess purchase price allocated to asset write-up
– Depreciated / amortized over how long?
• Transaction Costs
— Amount required to breakeven (if dilutive) vs.
amount that is achievable
• Balance sheet impact
— Credit rating
— Financing fees, advisor fees
— Ability to de-lever
— Merger costs
— Pro forma ownership
• Taxes
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14. OVERVIEW OF VALUATION METHODOLOGIES – PRO FORMA
4
4
Company A Acquires Company B – An Illustrative Example
Illustrative EPS Accretion / (Dilution) Analysis
Sensitivity Analysis
Deal Terms
2013E EPS Accretion
10.00
20.0%
12.00
500
6,000
Financing Terms
Debt Financing (50%)
Equity Financing (50%)
3,000
3,000
Acquisition Share Price
5.3%
Pre-Tax Cost of Debt
Company B Share Price (US$)
Premium Over Purchase Price
Acquisiton Share Price (US$)
Company B Shares Outstanding (mm)
Implied Takeover Equity Value
10.00
11.00
12.00
13.00
14.00
3.0%
8.9%
7.5%
6.2%
4.8%
3.5%
3.5%
8.6%
7.1%
5.7%
4.3%
3.0%
4.0%
8.2%
6.7%
5.3%
3.9%
2.5%
4.5%
7.9%
6.4%
4.9%
3.4%
2.0%
5.0%
7.5%
6.0%
4.5%
3.0%
1.5%
13.00
14.00
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Company A Share Price
20.00
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Company A Pre-Deal Shares Outstanding
1,000
Company A Post-Deal Shares Outstanding
1,150
2014E EPS Accretion
EPS Accretion / (Dilution)
Company A Net Income
Company B Net Income
Post-Tax Interest Expense @ 4.0% Pre-Tax¹
Pro Forma Net Income
Company A Pro Forma EPS (US$)
Company A Status Quo EPS (US$)
EPS Accretion / (Dilution)
1
2013E
Acquisition Share Price
2014E
2,000
500
(78)
2,422
2,200
550
(78)
2,672
2.11
2.00
5.3%
2.32
2.20
5.6%
5.6%
Pre-Tax Cost of Debt
(US$ mm)
10.00
11.00
12.00
3.0%
9.1%
7.7%
6.4%
5.0%
3.7%
3.5%
8.8%
7.4%
6.0%
4.6%
3.3%
4.0%
8.5%
7.0%
5.6%
4.2%
2.9%
4.5%
8.2%
6.7%
5.2%
3.8%
2.4%
5.0%
7.8%
6.3%
4.8%
3.4%
2.0%
Assumes corporate tax rate of 35%
13

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