icai national seminar m&a-deal valuation

Deal Valuations: Beyond the Math

Anjana Vivek

[email protected]

Bangalore Branch of SIRC of The Institute of Chartered Accountants of India

National Seminar on Mergers and Acquisitions

14 June 2014

VentureBean Consulting Private Limited

Valuation: Questions ’to trigger thinking’

Valuation Methods

Valuation Process

Deal Valuation

In Summary

Agenda

2 2

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Questions.. . questions..AT THE START:

What does valuation of a company mean to you? Is it connected to

• Cash flow• Sales• Profit• Capacity• Other competitors• Mix of above


• Why do values of companies change from time to time?

• What drives the price of shares? Of company value?

• What is price, what is value? Is there a difference?

• A business worth a significant amount at a certain point in time may suddenly lose much of its value a very short while later.

Questions.. . questions..


• How can a company which is continually losing money and with negative cash flows have a high value?

• Does value depend on whether one wants to sell a company, to buy a minority stake or to buy the entire company?

• Will a strategic investor value a company differently from a financial investor?

• How does negotiation impact value in a deal?

Questions.. . questions..


Some different ways to value

• Cost vs. Market Value

• Historical vs. Replacement

• Differs depending on need of person doing valuation – buyer, seller, employee, banker, insurance company


Value to buyer: Underlying reason• Valued because of perception of expected return on

investment over some period of time

• Return may be in cash or in kind, tangible or intangible, or a combination of these

• Dear Driver: May not always be driven by stated business reasons, for example– This could be driven by the personal ambition of a CEO who

wants to manage a 1 billion USD Company; his company may acquire another company just to achieve this target, which may not be stated, known or visible to anyone

– This could be driven by other reasons, such as a tax benefit


M&A Deal Valuation

• In M&A deals, the usual stated reason to do the deal is that the value of the combined business is expected to be more than value of the individual companies

Value (A+B)

Value A + Value B



Valuation Methods

Valuation Process

Deal Valuation

In Summary

Agenda

9 9


Valuation methods

These can be broadly classified into:

• Cost based• Income based• Market based


Valuation methods

• Different experts have different classifications of the various methods of valuation

• Within these methods, there are sub-methods• Sometimes the methods overlap


Cost based methods

There are different ways of arriving at cost:

• Book value

• Replacement value

• Liquidation value

NOTE

These methods could become relevant when one is considering the accounting, legal and tax impacts of valuation; in deals related to M&As, JVs and partnerships etc..


Income Based methods

• Earnings capitalisation method or profit earning capacity value method

• Discounted cash flow method (DCF)


Market based method

• Also known as relative method• Assumption is that other firms in industry are

comparable to firm being valued• Standard parameters used like multiples of

revenue, EBIDTA, PAT, book value• Adjustments made for variances from

standard firms, these can be negative or positive; i.e. premiums and discounts are assigned


Exercise in Valuation - I

Plantation Co. Garden Co. Park Co.Enterprise market value/sales 1.4 1.1 1.1Enterprise market value/EBITDA 17.0 15.0 19.0Enterprise market value/free cash flows 20 26 26

Meadows Co.Sales Rs. 200 croresEBIDTA Rs. 14 croresFree cash flow Rs. 10 crores

How would you value Meadows Co. based on the market/industry information provided?


Plantation Co. Garden Co. Park Co. AverageEnterprise market value/sales 1.4 1.1 1.1 1.2Enterprise market value/EBITDA 17.0 15.0 19.0 17.0Enterprise market value/free cash flows 20.0 26.0 26.0 24.0

Application to Meadows Co. Average ValueSales Rs. 200 crores 1.2 Rs. 240 croresEBIDTA Rs. 14 crores 17.0 Rs. 238 croresFree cash flow Rs. 10 crores 24.0 Rs. 240 crores

Exercise in Valuation – I: Possible Solution


Papers Co Docs Co. Prints Co.Enterprise market value/sales 2.6 1.9 0.9Enterprise market value/EBITDA 10.0 21.0 4.0Enterprise market value/free cash flows 21.0 30.0 24.0

Application to PenPencil Co.Sales Rs. 300 croresEBIDTA Rs. 15 croresFree cash flow Rs. 7.5 crores

Exercise in Valuation - II

How would you value PenPencil Co. based on the market/industry information provided?


Papers Co Docs Co. Prints Co. AverageEnterprise market value/sales 2.6 1.9 0.9 1.8Enterprise market value/EBITDA 10.0 21.0 4.0 11.7Enterprise market value/free cash flows 21.0 30.0 24.0 25.0

Application to PenPencil Co. Average ValueSales Rs. 300 crores 1.8 Rs. 540 croresEBIDTA Rs. 15 crores 11.7 Rs. 175.5 croresFree cash flow Rs. 7.5 crores 25.0 Rs. 187.5 crores

As there is a wide value range, the application of the relative multiples does not look appropriate in this case. What are your thoughts on this?

Exercise in Valuation – II: Possible Solution



Valuation Methods

Valuation Process

Deal Valuation

In Summary

Agenda

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Valuation: Points to be factored

• Deal Drivers• Deal Issues

NOTE: Many M&As have not done as well as expected. To minimize this risk of over valuation, a proper due diligence review (DDR) exercise is to be done, with key mandates being careful review of the value drivers and business proposition and whether the value will be retained post the deal


Valuation: Points to be factoredValuation is calculated based on a financial model, in which the following are to be considered and factored:

• Nature of deal • Whether 1st round or later round of investment• Whether angel investor or VC or strategic

investor• Whether family and friends or other• Amount of money required • Stage of company - early stage, mezzanine

stage (pre-IPO), later stage (IPO)



• Key management: Performance, expertise, team diversity and capability etc.

• Project, product, USP• Industry scenario, global and local• Country scenario• Market, Total addressable market, opportunity, growth

expected• Competitive landscape, barriers to competition



• Historical performance• Future projections, pipeline• Quality of revenue; historical, and pipeline• Assets, tangible and intangible• Liabilities in financial statements, potential liabilities

and off Balance Sheet items• Cash flows expected and tracked alongside revenues

expected


• Strategic requirements and need for transaction• Demand / supply position• Flavor of the season

Initial ballpark valuation can also be a deal issue

Valuation: Points to be factored


Process of valuation

• Use more than one model• Have a rationale for the models used • Plan long term not short haul• Look at alternate scenarios• Discount for risks, assign probabilities • Arrive at range

A valuation range is preferable to a single number

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Process of valuation

Finally. .. after arriving at the value range. .. Ask yourself some fundamental questions

• Does the value reflect the strategic rationale for the transaction, factoring the past performance and the expected future?

• Does the value reflect the USP as compared to competition?

• Does the value reflect the quality of the management?

Most Importantly• Will the value be retained/realised and not lost post the

deal?



Valuation Methods

Valuation Process

Deal Valuation

In Summary

Agenda

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Deal Valuation

Depends on

• Buyer’s reason for buying • Seller’s reason for selling

• i.e Deal Drivers from the perspective of each of the parties to the deal


Deal Valuation

Calculated Value is Discounted or goes at a Premium, based on

• Deal issues from sellers perspective• Deal issues from buyers perspective

• It is therefore important to understand or attempt to understand what could be the Deal Issues from the perspective of each of the parties to the deal


Deal Valuation

Valuation is impacted by

• Due diligence findings• Deal structuring

• Deal Price and Terms can be modified/worked upon based on Deal structuring


Deal ValuationNegotiations can significantly impact price obtained/paid in a deal. This is driven by

• Strength of position (perceived position) from which negotiation is done

• Deal Boundaries.. i.e. points of walking away from the deal

• Trying to understand the Deal Boundaries from the other parties perspective

• Skill and talent of negotiator, Negotiation technique• Understanding/knowledge of industry and ecosystem• Communications made during the negotiations


Deal ValuationNegotiations are impacted by

• Hard work and preparation • Role playing and Scenario Planning of alternate

situations in advance

NOTE: A student from a family business, who participated in a negotiations game with a role play, managed to get Rs.2X from the sale of her business, when her family was expecting Rs.X. Her role play helped in negotiating. For those who would like to know more, details of the Role Play and learnings at anIIMB Program are @: http://bangalore.citizenmatters.in/blogs/entrepreneur-s-corner/blog_posts/1112-negotiating-insights

http://bangalore.citizenmatters.in/blogs/entrepreneur-s-corner/blog_posts/1112-negotiating-insights





Valuation Methods

Valuation Process

Deal Valuation

In Summary

Agenda

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In Summary• Build a Financial Model that captures elements of the

business model • Build a Financial Model that factors the Deal Rationale• Look at different valuation models, do the Maths, look at

Alternate Scenarios• Arrive at a Value Range• Keep an eye on the law and statutory regulations; these

also impact valuation and deal negotiation.• Plan for advisors/accountants/lawyers, due diligence

costs and other deal related costs

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In Summary• Prepare for negotiation, identifying deal issues and

possible Negotiation Strategies• Understand Deal Boundaries of … buyer and seller• Understand the points that could be points of walk away

from the deal• Prepare for capturing and Retaining Value Post the Deal• Plan for Long Term impact of decisions on valuation

Additional information/articles/resources available @

The VentureBean Knowledge Hub: VBC K.Hub• www.slideshare.net/anjanavivek• http://www.linkedin.com/company/venturebean-consulting-

private-limited

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http://www.slideshare.net/anjanavivek

http://www.linkedin.com/company/venturebean-consulting-private-limited

http://www.linkedin.com/company/venturebean-consulting-private-limited


In Summary

Valuation is

• Subjective and Objective

• Rational and Irrational

• Art and Science

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Thank You!

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icai national seminar m&a-deal valuation

Business

company value

b value

value b

market value historical

high value

average value sales

valuation buyer

various methods of valuation