Professional Documents
Culture Documents
Part II
Theory of the Market Approach
The Basic Idea
Observe prices paid by willing buyers to willing sellers for similar assets
Invoke the Law of One Price: identical assets must have identical prices
Overview
Highly liquid public capital markets constantly re-price stocks through buyers
and sellers who are well informed and have no special motivations or
compulsions to buy or sell (think of definition of Fair Value or Fair Market
Value)
This constant re-pricing gives up-to-the minute evidence of prices that buyers
and sellers agree on relative to certain metrics perceived to drive their values
(revenue, margins, cash flow, etc.)
In Practice
Estimate the value of the subject company by analyzing the prices paid for
similar companies relative to some benchmark (e.g. price relative to
earnings)
Example: If comparable companies trade in the stock market at 12 times
earnings, and your company has earnings of $1 per share, then you might
conclude that investors would pay $12 per share for your stock if it were
publicly traded
Market Comparable Method Overview
Using the Market Comparable Method involves three main phases and
numerous steps.
If above conclusion results in Total Enterprise Value, subtracting Net Debt will result in the Equity Value
Market Comparable Method Selecting Guideline Companies
Which factors to look at very much depends on the industry that the
subject company operates within
Selecting Comparable Companies
Key Statistics
Size indications (Sales, Gross Profit, EBITDA, etc.)
Historical and Forward
Profitability (margins)
Growth profile
Return on investment
Credit profile (leverage, debt-to-EBITDA)
Once guideline companies statistics are collected and analyzed, and guideline companies
selected, value measures are calculated
Value measures are typically multiples computed by dividing the enterprise value or equity
value as of the date in question by some relevant economic metric
Some variables such as forecasted cash flow, earnings or revenues for the company
may be projected by security analysts and used as a value measure
MVIC / Sales
Market Value
Business MVIC / EBITDA
of Debt
Enterprise MVIC / EBIT
Value (MVIC)
Common Multiples of MVE:
Its important to know which metrics are commonly used in the subject
companys industry, which often change over the business cycle
Challenges in Selecting Market Multiple
Selection Criteria
Mean, Median, Mode
Comparability based on growth rate, profitability, etc.
Existence of outlier multiples at either end of the spectrum can skew results
Need to be Cognizant of low or negative denominators as they can render the comparable
multiple meaningless
2,153.4 264.8x
250.0x
2,000
1,726.0
TEV/EBITDA MULTIPLE
200.0x
1,551.3
1,500
EBITDA
150.0x
1,000
97.9x 100.0x
500
50.0x
125.8
49.2
6.9x 9.1x 8.6x
0 0.0x
11/30/2007 5/31/2008 11/30/2008 5/31/2009 11/30/2009
Source:
Capital IQ EBITDA TEV/EBITDA
Market Transaction Method - Introduction
Overview
General comments
Its common to consider transactions over a fairly long time horizon for the following reasons:
There are fewer transactions where data regarding the transaction and target company is
readily available
Acquisition pricing multiples seem to fluctuate somewhat less over time than public stock
market pricing multiples
Criteria for selecting market transactions are similar to those for selecting publicly traded
guideline companies
In situations where limited transaction data are available, the criteria may have to be
broadened somewhat
Calculation of multiples is performed in the same manner as the Market Comparable
Method
Process for selecting and weighting the multiples calculated to apply to the value
measures of the subject company is similar to that applied in the Market Comparable
Method
Application of multiples to subject company is the same as in the Market Comparable
Method
Need to understand the nature of transaction and the motivations of the parties involved in
the transaction
Market Transaction Method Overview
Using the Market Comparable Method involves three main phases and
numerous steps.
If above conclusion results in Total Enterprise Value, subtracting Net Debt will result in the Equity Value
Selecting Guideline Transactions
Considerations
Time Period
Guideline Company transactions
Market conditions
Deal Dynamics
Public/Private
Percent acquired
Locate the Necessary Financial Information
Historical financials
10-K, 10-Q, 8-K, other SEC filings
Financial databases (e.g., CapitalIQ)
Projected financial information
Equity research reports
First Call or IBES
Financial databases (e.g., CapitalIQ)
Market Data
Rating agencies websites
Bloomberg
CapitalIQ
FactSet)
Calculate Key Statistics, Ratios and Multiples
Key Statistics
Size indications (Sales, Gross Profit, EBITDA, etc.)
Profitability (margins)
Growth profile
Return on investment
Credit profile (leverage, debt-to-EBITDA)
Trading Multiples
Enterprise Value Multiples
EBITDA
EBIT
Sales
Equity Multiples
Earnings
Sales
Sector Specific
E.g., Alarm monitoring company - multiple of monthly
recurring income
Adjustments for Synergies
Guideline Transaction Method
Pros
Market-based
Relativity
Simplicity
Objectivity
Current
Cons
Market-based
Time lag
Absence of comparable acquisitions
Availability of information
Acquirers basis for valuation
Special Considerations in Applying Market Transaction Method
Value of
restricted
$6.00 per stock of public
share company
Additional 20% discount
for private company stock Additional discount
(taken from publicly for public company
traded equivalent value stock Value of non-
$8 per share) marketable
$4.40 per minority (lack of
share control) shares
26
Valuation Ranges
NPV
Precedent Transactions
Market Comparables
Enterprise Value
0 Valuation in $M