Вы находитесь на странице: 1из 49

OCTOBER 2004

INTRODUCTION TO VALUATION METHODS USED IN INVESTMENT BANKING


C O N F I D E N T I A L
AN D
P R I V A T E
S T R I C TL Y
CONFIDENTIAL, FOR TRAINING PURPOSES ONLY
B A N KI N G
I N V E S T M E N T
I N
U S E D

This presentation was prepared exclusively for the benefit and internal use of the JPMorgan client to whom it is directly addressed and delivered (including
such client’s subsidiaries, the “Company”) in order to assist the Company in evaluating, on a preliminary basis, the feasibility of a possible transaction or
transactions and does not carry any right of publication or disclosure, in whole or in part, to any other party. This presentation is for discussion purposes
only and is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by JPMorgan. Neither this
M E TH OD S

presentation nor any of its contents may be used for any other purpose without the prior written consent of JPMorgan.

The information in this presentation may be based upon any management forecasts provided to us and reflects prevailing conditions and our views as of this
date, all of which are accordingly subject to change. In preparing this presentation, we have relied upon and assumed, without independent verification,
the accuracy and completeness of all information available from public sources or which was provided to us by or on behalf of the Company or which was
otherwise reviewed by us. In addition, our analyses are not and do not purport to be appraisals of the assets, stock, or business of the Company or any
VAL U ATI O N

other entity. JPMorgan makes no representations as to the actual value which may be received in connection with a transaction nor the legal, tax or
accounting effects of consummating a transaction.

Notwithstanding the foregoing (but subject to any applicable federal or state securities laws), JPMorgan and the Company may disclose to any and all
persons, without limitation, the tax treatment and tax structure of any transaction contemplated hereby and all materials (including opinions or other tax
analyses) relating thereto, so long as such disclosure is not made prior to the earlier of (x) public announcement of discussions relating to the transaction or
of the transaction itself and (y) the execution of an agreement to enter into the transaction.
T O

JPMorgan’s policies prohibit employees from offering, directly or indirectly, a favorable research rating or specific price target, or offering to change a
rating or price target, to a subject company as consideration or inducement for the receipt of business or for compensation. JPMorgan also prohibits its
research analysts from being compensated for involvement in investment banking transactions except to the extent that such participation is intended to
I N T R O D U C TI O N

benefit investors.

JPMorgan is a marketing name for investment banking businesses of J.P. Morgan Chase & Co. and its subsidiaries worldwide. Securities, syndicated loan
arranging, financial advisory and other investment banking activities are performed by J.P. Morgan Securities Inc. and its banking affiliates. JPMorgan deal
team members may be employees of any of the foregoing entities.

MICHIGAN BUSINESS SCHOOL


Agenda
B A N KI N G
I N V E S T M E N T

Valuation overview 1

Discounted cash flow 8


I N

Publicly traded comparable company analysis 17


U S E D

Comparable transactions analysis 23


M E TH OD S

LBO analysis 28
VAL U ATI O N

Additional valuation materials 36


T O
I N T R O D U C TI O N

MICHIGAN BUSINESS SCHOOL 1


Applications

Acquisitions Divestitures
Acquisitions Divestitures
How much should we How much should we
How much should we How much should we
pay to buy the sell our
pay to buy the sell our
company? company/division for?
company? company/division for?

Research
Research Fairness
Fairnessopinions
opinions
Should
Shouldourourclients
clientsbuy,
buy, IsIsthe
theprice
priceoffered
offeredforfor
sell
sellororhold
holdpositions
positionsinina a company/division
company/divisionfair fair
given
givensecurity?
security? (from
(froma afinancial
financialpoint
pointofof
view)?
view)?

Valuation
Hostiledefense
Hostile defense Public
Publicequity
equityofferings
offerings
IsIsour
ourcompany
company For
Forhow
howmuch
muchshould
shouldwe
we
undervalued/
undervalued/ sell
sellour
ourcompany/division
company/division
vulnerabletotoa araider?
vulnerable raider? ininthe
thepublic
publicmarket?
market?

New business Debt offerings


New business Debt offerings
presentations
O V E R VI EW

presentations What is the underlying


What is the underlying
Various applications value of the business/
Various applications value of the business/
assets against which
assets against which
debt is being issued?
debt is being issued?
VALUATI O N

MICHIGAN BUSINESS SCHOOL 2


Valuation methodologies

Valuation
methodologies

Publicly traded
Comparable Leveraged
Discounted cash comparable
acquisitions buyout/recap Other
flow analysis companies
analysis analysis
analysis

„ “Intrinsic” „ “Public market „ “Public market „ Value based on „ Liquidation analysis


value of valuation” valuation” debt
„ Break-up analysis
business repayment and
„ Value based on „ Value based on
return on „ Historical trading
„ Present value market trading multiples for investment performance
of projected multiples of comparable
free cash flows comparable companies in „ Value to a „ Private company
to all providers companies sale financial/LBO valuation
O V E R VI EW

of capital transactions buyer


„ How does a „ Expected IPO
firm’s financial „ Includes valuation
performance control
match to premium „ Premiums paid
VALUATI O N

market value? analysis

MICHIGAN BUSINESS SCHOOL 3


Approach to valuation

In
In arriving
arriving at
at a
a preliminary
preliminary valuation
valuation for
for its
its clients,
clients, JPMorgan
JPMorgan utilizes
utilizes several
several methodologies
methodologies that
that are
are
consistent with industry practices
consistent with industry practices

(1) Discounted (2) Publicly traded


cash flow comparable
Analyzes the companies
present value of Utilizes market
a company’s trading multiples
free cash flow from publicly traded
companies to derive
value

(3) Comparable (4) Leveraged


acquisition buy out
transactions Used to determine
O V E R VI EW

Utilizes data from range of potential


M&A transactions value for a company
involving similar based on maximum
companies leverage capacity
VALUATI O N

MICHIGAN BUSINESS SCHOOL 4


Equity value versus enterprise value

Enterprise value = Market value of all capital invested in a business1 (often referred to as
“transaction value”)
The value of the total enterprise: market value of equity + net debt

Equity value = Market value of the shareholders’ equity (often referred to as


“offer value”)
The market value of a company’s equity (shares outstanding x current
stock price)

Equity value = Enterprise value - net debt2

Assets Liabilities and shareholders’ equity

Net debt
Enterprise Enterprise
value value
O V E R VI EW

Equity value

1 Assume book value of debt approximates market value of debt


2 Net debt equals total debt + minority interest + capitalized leases + short-term debt - cash and cash equivalents
VALUATI O N

MICHIGAN BUSINESS SCHOOL 5


Equity value versus enterprise value (cont’d)

Equity
Equity value
value or
or offer
offer value
value Enterprise
Enterprise value
value or
or transaction
transaction value
value

„ Value for owners of business „ Value available to all providers of capital

„ Multiples of „ Multiples of
„ Net income „ Sales
„ After tax cash flow „ EBITDA
„ Book value „ EBIT
O V E R VI EW
VALUATI O N

MICHIGAN BUSINESS SCHOOL 6


Application example: Valuation summary

Implied
Implied share
share price
price

$64.60 $60.00
$60.00
$54.70 $55.50

$50.50 $55.00
50.00
$45.00 $50.40
$47.10

40.00
$34.75 $38.00
$37.30
$37.60 Current stock
30.00 price = $34.20

20.00
$19.25
O V E R VI EW

10.00
52-week 7.0x—9.0x Analyst price 1.6x LTM sales 7.0x—9.0x With synergies 7.0x—9.0x
trading range 2004E EBITDA target 9.8x LTM EBITDA 2008E EBITDA of $1,500mm 3 25% IRR
13.3x LTM EBIT 8.0%—11.0% LTM EBITDA
Public market Precedent discount rate
comparables 2 comparable transactions DCF analysis LBO
1 Share prices are based on 157.6 million diluted shares outstanding
2 Forecasts are based on JPMorgan research
VALUATI O N

3 Synergies assumed to be 6.0% of sales, capitalized at 8.0x

MICHIGAN BUSINESS SCHOOL 7


Agenda
B A N KI N G
I N V E S T M E N T

Valuation overview 1

Discounted cash flow 8


I N

Publicly traded comparable company analysis 17


U S E D

Comparable transactions analysis 23


M E TH OD S

LBO analysis 28
VAL U ATI O N

Additional valuation materials 36


T O
I N T R O D U C TI O N

MICHIGAN BUSINESS SCHOOL 8


DCF analysis: the process

Projections Project the operating results and free cash flows of a business over the
forecast period. The typical forecast period is 10 years. However, the
Step
Step 11 range can vary from five to 20 years depending on the profitability
horizon.

Discount rate Use the weighted average cost of capital (WACC) to


determine the appropriate discount rate range.
Step
Step 22

Terminal value Estimate the value of the business at the end of


the forecast period.
Step
Step 33

Present value Determine a range of values for the


enterprise by discounting the projected
F L OW

Step
Step 44
free cash flows and terminal value to the
present.
C A S H

Adjustments Adjust your valuation for all assets


and liabilities not accounted for in
Step
Step 55
D I S C O UN T E D

cash flow projections.

MICHIGAN BUSINESS SCHOOL 9


The first step in DCF analysis is projection of unlevered
free cash flows

„ Calculation of unlevered free cash flow begins with financial projections


„ Comprehensive projections (i.e., fully-integrated income statement, balance
sheet and statement of cash flows) typically provide all the necessary elements

„ Quality of DCF analysis is a function of the quality of projections


„ Often required to “fill in the gaps”
„ Confirm and validate key assumptions underlying projections
„ Sensitize variables that drive projections

„ Sources of projections include


„ Target company’s management
„ Acquiring company’s management
„ Research analysts
„ Bankers
F L OW
C A S H
D I S C O UN T E D

MICHIGAN BUSINESS SCHOOL 10


Free cash flow is cash available to creditors and owners
after taxes and reinvestment

„ Unlevered free cash flows can be forecast from a firm’s financial projections, even if
those projections include the effects of debt

„ Start your calculation with EBIT (earnings before interest and taxes)

EBIT (from the income statement)

Plus: Non-tax-deductible goodwill amortization

Less: Taxes (at the marginal tax rate)

Equals: Tax-effected EBITA

Plus: Deferred taxes1

Plus: Depreciation and any tax-deductible amortization

Less: Capital expenditures


F L OW

Plus/(less): Decrease/(increase) in net working investment

Equals: Unlevered free cash flow


C A S H
D I S C O UN T E D

1 Although beyond the scope of our current discussions, you should only include actual cash taxes paid in the DCF. Depending on the firm and industry, you may want to
adjust for the non-cash (or deferred) portion of a firm’s tax provision. The tax footnote in the financial statements will give you a good idea of whether this is a
meaningful issue for your analysis

MICHIGAN BUSINESS SCHOOL 11


Projections

Stand-alone
Stand-alone projections
projections for
for Company
Company X
X ($
($ millions)
millions)
Fiscal year ending December 31,
2001 2002 2003 2004E 2005E 2006E 2007E 2008E
Net sales $400.0 $440.0 $484.0 $532.4 $585.6 $644.2 $708.6 $779.5
EBITDA 80.0 88.0 96.8 106.5 117.1 128.8 141.7 155.9
Less: Depreciation 12.0 13.2 14.5 16.0 17.6 19.3 21.3 23.4
EBITA 68.0 74.8 82.3 90.5 99.6 109.5 120.5 132.5
Less: Taxes at marginal rate 27.2 29.9 32.9 36.2 39.8 43.8 48.2 53.0
Tax-effected EBITA $40.8 $44.9 $49.4 $54.3 $59.7 $65.7 $72.3 $79.5
Plus: Depreciation 16.0 17.6 19.3 21.3 23.4
Plus: Deferred taxes — — — — —
Less: Capital expenditures 20.0 22.0 24.2 26.6 29.3
Less: Incr./(decr.) in working capital 10.0 8.5 7.0 5.5 4.0
Unlevered free cash flow 40.3 46.8 53.8 61.4 69.6
Adjustment for deal date (40.3) — — — —
Unlevered FCF to acquirer $0.0 $46.8 $53.8 $61.4 $69.6

Memo: Discounting factor 0.0 0.5 1.5 2.5 3.5


F L OW

Discounted value of unlevered FCF $0.0 $44.6 $46.7 $48.4 $49.9


Discounted value of FCF 2004P—2008P $189.6
C A S H

Key assumptions:
Deal/valuation date = 12/31/04
Marginal tax rate = 40%
JPMorgan convention is to use the
Discount rate = 10% “mid-year” convention—which
D I S C O UN T E D

assumes cash flows happen


midway during the year

MICHIGAN BUSINESS SCHOOL 12


Weighted average cost of capital (WACC) formula

„ Most firms use a combination of debt and equity to fund their operations. The overall cost of
capital is the weighted average of the cost of debt and the cost of equity

WACC = rd * (Total debt) + re * (Total equity)


(Total cap) (Total cap)

More accurately stated the formula is:

WACC = rd * [D *(1-T)] + re * E
D+E D+E

E = market value of equity


D = market value of debt
T = marginal tax rate
re = return on equity (from CAPM)
rd = return on debt (assumed to be weighted average cost of debt¹)

„ Because interest is tax deductible, the true cost of debt is the after tax rate due to the ability
F L OW

of interest expense to shield taxes. The tax rate used should be the marginal tax rate for each
specific company
C A S H
D I S C O UN T E D

¹ In order to be more accurate, the analyst should try to estimate the current market cost of debt by looking at the market cost of debt of comparable companies (with similar
credit ratings)

MICHIGAN BUSINESS SCHOOL 13


Terminal values: The exit multiple method
In the EBITDA exit multiple method, a multiple is applied to the final year’s EBITDA to determine a
terminal value in the final year. This terminal value is discounted to the present and added to the
PV of the cash flows
A + B = C

Discounted Discounted terminal value Firm value Terminal value as percent


FCF at 2008P EBITDA multiple of at 2008P EBITDA multiple of of total firm value
Discount
rate 2004–2008 6.0x 7.0x 8.0x 6.0x 7.0x 8.0x 6.0x 7.0x 8.0x
8% $196.8 $687.5 $802.1 $916.7 $884.4 $999.0 $1,113.6 78% 80% 82%
9% 193.1 662.6 773.1 883.5 855.8 966.2 1,076.7 77 80 82
10% 189.6 638.9 745.4 851.8 828.4 934.9 1,041.4 77 80 82
11% 186.1 616.2 718.9 821.6 802.3 904.9 1,007.6 77 79 82
12% 182.7 594.5 693.5 792.6 777.2 876.3 975.3 76 79 81

- D = E

Equity value Equity value per share1 Implied perpetuity growth rate
Net debt at 2008P EBITDA multiple of at 2008P EBITDA multiple of at 2008P EBITDA multiple of
Discount
rate 12/31/04 6.0x 7.0x 8.0x 6.0X 7.0X 8.0X 6.0x 7.0x 8.0x
8% $100.0 $784.4 $899.0 $1,013.6 $19.17 $21.97 $24.77 0.2% 1.3% 2.1%
9% 100.0 755.8 866.2 976.7 18.47 21.17 23.87 1.1 2.2 3.0
10% 100.0 728.4 834.9 941.4 17.80 20.41 23.01 2.0 3.1 3.9
11% 100.0 702.3 804.9 907.6 17.16 19.67 22.18 2.9 4.0 4.8
F L OW

12% 100.0 677.2 776.3 875.3 16.55 18.97 21.39 3.8 4.9 5.8
C A S H

A review of the terminal value and implied perpetuity is


useful to help understand the drivers of the DCF value
D I S C O UN T E D

Note: DCF value as of 12/31/04 based on mid-year convention


1 Based on 40.0 million basic shares outstanding and 2.0 million options with a weighted exercise price of $8.13 calculated using the treasury method

MICHIGAN BUSINESS SCHOOL 14


Terminal values: The perpetuity method
In the perpetuity method the final year cash flow is used to determine the terminal value of the
cash flows
A + B = C

Discounted Discounted terminal value Firm value Terminal value as percent


FCF at perpetuity growth rate of at perpetuity growth rate of of total firm value
Discount
rate 2004–2008 2.5% 3.0% 3.5% 2.5% 3.0% 3.5% 2.5% 3.0% 3.5%
8% $196.8 $991.0 $1,095.4 $1,223.0 $1,187.8 $1,292.2 $1,419.8 83% 85% 86%
9% 193.1 811.9 883.8 968.9 1,005.0 1,077.0 1,162.0 81 82 83
10% 189.6 681.5 733.7 794.0 871.1 923.3 983.6 78 79 81
11% 186.1 582.6 622.0 666.7 768.7 808.1 852.8 76 77 78
12% 182.7 505.1 535.8 570.1 687.9 718.5 752.8 73 75 76

- D = E

Equity value Equity value per share1 Implied EBITDA exit multiple
Net debt at perpetuity growth rate of at perpetuity growth rate of at perpetuity growth rate of
Discount
rate 12/31/04 2.5% 3.0% 3.5% 2.5% 3.0% 3.5% 2.5% 3.0% 3.5%
8% $100.0 $1,087.8 $1,192.2 $1,319.8 $26.59 $29.14 $32.26 8.6x 9.6x 10.7x
9% 100.0 905.0 977.0 1,062.0 22.12 23.88 25.96 7.4 8.0 8.8
10% 100.0 771.1 823.3 883.6 18.84 20.12 21.59 6.4 6.9 7.5
11% 100.0 668.7 708.1 752.8 16.34 17.31 18.40 5.7 6.1 6.5
12% 100.0 587.9 618.5 652.8 14.37 15.12 15.95 5.1 5.4 5.8
F L OW

The PV of a growing perpetuity in year 5 is:


C A S H

FCF * (1+g)
(r - g)
D I S C O UN T E D

Thus, this PV 5 years forward must then be


discounted back to the valuation date
Note: DCF value as of 12/31/04 based on mid-year convention
1 Based on 40.0 million basic shares outstanding and 2.0 million options with a weighted exercise price of $8.13 calculated using the treasury method

MICHIGAN BUSINESS SCHOOL 15


Concluding DCF remarks

„ DCF analysis is a key valuation methodology

„ Three key variables


„ Projections/relevant and incremental cash flows (unlevered free cash flow)
„ Weighted average cost of capital (discount rate)
„ Residual value at end of the projection period (terminal value)

„ Remember
„ Validate and test projection assumptions
„ Determine appropriate cash flow stream
„ Utilize appropriate cost of capital approach
„ Carefully consider all variables in the calculation of the discount rate
„ Thoughtfully consider terminal value methodology
„ Sensitize appropriately (base projection variables, synergies, discount rates,
terminal values, etc.)
F L OW

„ Footnote assumptions in detail


„ Think about other value enhancers and detractors
C A S H

— NOLs
— Options, warrants, etc.
D I S C O UN T E D

Check it with a calculator!

MICHIGAN BUSINESS SCHOOL 16


Agenda
B A N KI N G
I N V E S T M E N T

Valuation overview 1

Discounted cash flow 8


I N

Publicly traded comparable company analysis 17


U S E D

Comparable transactions analysis 23


M E TH OD S

LBO analysis 28
VAL U ATI O N

Additional valuation materials 36


T O
I N T R O D U C TI O N

MICHIGAN BUSINESS SCHOOL 17


Overview

„ Comparable company analysis values a company by reference to other publicly-


traded companies with similar operating and financial characteristics. It compares
the public company value with operating statistics to calculate the valuation
multiple

„ Comparable companies values do not incorporate the “control” premiums reflected


ANALY SI S

in comparable acquisitions. Depending on market conditions, the comparable


companies' multiples may or may not be higher than comparable acquisitions’
multiples
C OM P ANY

„ The trick to comparable company analysis is to find good comparables


„ The bad news: no two companies are really comparable
„ The good news: it doesn't matter, because everybody else (equity research
analysts, traders, arbs, etc.) has to deal with the same problem
C O M P ARA B L E

„ Once you have chosen the comparable companies, calculate the implied value of
your company by multiplying the company’s historical and projected sales, EBIT,
EBITDA, net income, book value and other key operating statistics by the respective
comparable company multiples
T RAD E D
P U BLIC LY

MICHIGAN BUSINESS SCHOOL 18


Identifying the right peer group

„ The key to compiling a trading comparables analysis is to identify companies that are considered comparable
and that closely resemble the composition and function of the Company you are evaluating
„ SIC code search
„ Research reports
ANALY SI S

„ 10K

„ To find comparable companies, look for companies with similar characteristics to those of the business being
valued
C OM P ANY

Operational Financial

„ Industry „ Size
„ Product „ Leverage
C O M P ARA B L E

„ Markets „ Margins
„ Distribution channels „ Growth prospects
„ Customers „ Shareholder base
„ Seasonality
„ Cyclicality
T RAD E D
P U BLIC LY

MICHIGAN BUSINESS SCHOOL 19


Choosing the right metric

„ Even with standard metrics, certain multiples are more relevant for some industries than others
„ For many industries, FV/EBITDA multiples are the most common trading metric (e.g.
Industrials, Transportation, Distribution, etc.)
„ For other industries, P/E multiples are more widely followed (Pharmaceuticals, Restaurants,
Biotech, etc.)
ANALY SI S

„ Reading analyst reports will help you understand the metrics analysts use to value the sector
and the industry

„ Certain sectors have unique metrics


C OM P ANY

Telecommunications Natural resources Retail/Real estate

„ Enterprise value to „ Enterprise value to „ Enterprise value


— Run rate revenue (LQA) — Pretax Sec10 — Square footage
C O M P ARA B L E

— 2000 to 2002 revenue — EBITDAX — EBITDAR


— Net PPE (Latest 10-Q) — Reserves
— Route miles (Latest 10-Q) — Production
— Fiber miles (Latest 10-Q) „ Equity value
— Access lines (Latest 10-Q — Discretionary cash flow
and 1-year forward)
T RAD E D
P U BLIC LY

MICHIGAN BUSINESS SCHOOL 20


Managed care trading comparables

$
$ millions,
millions, except
except for
for per
per share
share data
data
FV/EBITDA4 P/E5
Share % of Equity
Company price1 52-wk. high value2 Firm value3 2004E 2005E 2004E 2005E LTGR5 2004E PEG
Large capitalization
WellPoint $111.05 94.0% $17,926 $19,164 8.9x 7.8x 15.6x 13.6x 15.0% 1.04x
Aetna 87.40 91.9% 14,598 16,211 8.7x 7.8x 12.9x 11.3x 15.0% 0.86x
Anthem 87.35 92.0% 12,264 13,927 7.4x 6.8x 14.0x 12.2x 15.0% 0.94x
ANALY SI S

Cigna 65.22 92.5% 9,273 10,773 7.7x 7.4x 11.3x 10.2x 10.0% 1.13x
Mean 92.6% 8.2x 7.5x 13.5x 11.8x 13.8% 0.99x
Median 92.2% 8.2x 7.6x 13.5x 11.7x 15.0% 0.99x
Mid c apitalization
Oxford $53.62 88.1% $4,561 $4,965 7.8x 7.3x 12.0x 10.9x 12.0% 1.00x
C OM P ANY

PacifiCare 38.25 89.5% 3,752 4,372 7.4x 6.5x 12.5x 10.5x 13.0% 0.96x
Coventry 42.63 90.2% 3,979 4,149 8.9x 7.7x 13.1x 11.4x 15.0% 0.87x
Humana 18.10 75.4% 2,973 3,616 6.8x 6.1x 11.1x 10.1x 13.5% 0.82x
Health Net 26.05 72.8% 3,028 3,427 5.4x 4.8x 9.3x 8.1x 13.5% 0.69x
WellChoice 36.75 94.5% 3,079 3,128 7.3x 6.4x 13.1x 11.5x 15.0% 0.88x
Mean 85.1% 7.3x 6.5x 11.9x 10.4x 13.7% 0.87x
C O M P ARA B L E

Median 88.8% 7.3x 6.5x 12.3x 10.7x 13.5% 0.87x


Small c apitalization
Sierra $35.98 92.7% $1,322 $1,324 8.0x 7.7x 13.3x 11.8x 15.0% 0.89x
American Medical Security 25.74 92.3% 397 427 7.1x 6.5x 12.0x 11.0x 15.0% 0.80x
Median 92.5% 7.5x 7.1x 12.6x 11.4x 15.0% 0.84x

Blended mean 90.3% 7.6x 6.9x 12.7x 11.2x 14.2% 0.90x


Blended median 92.4% 7.6x 7.1x 13.0x 11.4x 15.0% 0.88x
T RAD E D

UnitedHealth Group $65.41 95.5% $43,979 $46,379 11.2x 9.9x 17.4x 15.0x 17.0% 1.02x
1 As of 4/16/04
2 Based on diluted shares outstanding using the treasury stock method
3 Calculated using equity value plus debt
P U BLIC LY

4 Based on equity analyst research reports; includes investment income


5 Based on I/B/E/S

MICHIGAN BUSINESS SCHOOL 21


Concluding remarks on comparable companies

„ Trading comps are an important valuation metric for a number of reasons


„ Benchmark of how the equity market is valuing the company stand alone and relative to its peers
„ Every CEO knows his own multiples and those of his peers

„ Key steps for comps


„ Choose the right comparable companies and valuation metrics to focus on
ANALY SI S

„ Spread the comps correctly


„ Use the comps to determine a valuation range

„ Getting the comps correct


C OM P ANY

„ Ensure you have correctly captured the equity and net debt components
— Diluted shares (includes options using the treasury method and convertibles if in the money)
— Net debt includes preferreds, out of the money converts, capital leases, etc.
„ Ensure your income statement projections are uniform across your comps
— Adjust for extraordinary items and one time charges
C O M P ARA B L E

— Calendarize so that projections reflect the same time periods


— Check analyst projections to make sure they are treating all expense components the same
across the comps (e.g., amortization of intangibles)

„ Determining a value range


„ Thoughtfully consider the multiple range—using the mean/median is not thoughtful
T RAD E D

„ Calculate the value correctly (Firm value versus Equity value issue)
P U BLIC LY

MICHIGAN BUSINESS SCHOOL 22


Agenda
B A N KI N G
I N V E S T M E N T

Valuation overview 1

Discounted cash flow 8


I N

Publicly traded comparable company analysis 17


U S E D

Comparable transactions analysis 23


M E TH OD S

LBO analysis 28
VAL U ATI O N

Additional valuation materials 36


T O
I N T R O D U C TI O N

MICHIGAN BUSINESS SCHOOL 23


Overview of comparable transactions analysis

„ Comparable transactions analysis values a company by reference to other private market sales of
similar businesses.

„ The trick is to find the right comparable transactions and to ferret out the information required to
do the math. As in comparable companies analysis, look for acquisitions of companies in similar
industry spaces, with comparable operational and financial characteristics
„ Recent transactions are a more accurate reflection of the values buyers are currently willing to
pay than acquisitions completed in the further in the past because market fundamentals are
subject to dramatic change over the periods of time
„ Establish relative values of various component businesses i.e., break-up analysis)

„ Multiples should be based on the latest public financial information available to the acquiror at the
time of the acquisition
ANALY S I S

„ Develop understanding of M&A activity in industry


„ Relative activity
„ Who is buying?
T RA N SAC T I O N S

„ What are they buying (market share, technology, etc.)?


„ How much are buyers paying?
„ Deal technicals (e.g., termination fees, lock-up options, etc.)
C O MP AR ABL E

MICHIGAN BUSINESS SCHOOL 24


Overview of comparable transactions analysis (cont’d)

„ Comparable transaction analysis contains information about selected


acquisition transactions in the same industry as the company being
evaluated or in similar situations, e.g. LBO, hostile, reverse acquisitions

„ Purpose is similar to that of public comparables analysis except that by


looking at prior acquisitions, insight can be gained as to the premium paid
to gain control (i.e., control premium) of the target company, valuation
multiples, social issues, and technical transaction elements

„ In addition, “private market” values sometimes differ from public market


ANALY S I S

values
„ Measure private market value, including control value, strategic
benefits and synergies
T RA N SAC T I O N S
C O MP AR ABL E

MICHIGAN BUSINESS SCHOOL 25


Selected precedent managed care transactions

10-day LTM
premium 1-year forward¹ Transaction
Transaction paid value/ LTM EBIT /
Date Acquiror/ value (offer/ Transaction value/ Equity value/ adjusted adjusted Long term
announced target ($mm) average) LTM EBITDA net income members2 members2 growth rate3

4/26/04 UnitedHealth $4,999 7.8%4 13.3x


8.7x $3,714 $417 11.5%
/Oxford 13.1x

10/27/03 Anthem/ 17,529 20.4 19.0x


10.6x $1,792 $152 15.0%
WellPoint 15.9x

10/27/03 UnitedHealth 2,695 16.0 17.2x


10.6x $2,254 $202 16.0%
/MAMSI 15.2x

6/3/03 WellPoint/ 930 13.8 16.5x


12.1x $1,813 $125 20.0%
ANALY S I S

Cobalt 13.7x

4/29/02 Anthem/ 4,326 24.7 33.7x


19.8x $2,828 $125 15.0%
Trigon 20.8x

11/21/01 WellPoint/ 1,300 NA 26.1x


11.3x $1,506 $51 NA
T RA N SAC T I O N S

CareFirst 23.3x

10/18/01 WellPoint/ 1,358 45.1 22.6x $698 $106 NA


11.6x
RightCHOICE 20.2x

LTM/1-year forward
Mean5 11.9% 9.7x 15.3x/14.2x $2,984 $310 13.8%

Offer6 43.8% 9.8x 16.1x/13.8x $1,724 $154 10.0%


C O MP AR ABL E

1 Forward estimates based on equity research at the time of the transaction


2 Adjusted members calculated using 100% of risk members and 20% of non-risk members, as of most recent filing prior to announcement
3 I/B/E/S long term growth rate prior to announcement
4 Premium paid to the 10-day average stock price prior to the news of the rumored Wellchoice/Oxford transaction was 18.9%
5 Based on highlighted transactions
6 LTM EBITDA based on Company financials as of 6/30/04

MICHIGAN BUSINESS SCHOOL 26


Calculating the LTM (latest twelve months)

Period ending
Most recent
Fiscal year + period – one year prior to
most recent

QT-1 QT
ANALY S I S

Q1 Q2 Q3 Q4 Q1 Q2

Annual
T RA N SAC T I O N S

Example:
Example: Terra
Terra Industries
Industries LTM
LTM =
= 6/30/04
6/30/04
Annual Six months Six months LTM
(12/03) + 10-Q (6/04) – 10-Q (6/03) = (6/04)
Total revenue $2,292.2 $1,480.4 $1,447.0 $2,325.6
C O MP AR ABL E

Note: If the third quarter Form 10-Q is being used, revenues for nine months should be used when calculating LTM results, not three months

MICHIGAN BUSINESS SCHOOL 27


Agenda
B A N KI N G
I N V E S T M E N T

Valuation overview 1

Discounted cash flow 8


I N

Publicly traded comparable company analysis 17


U S E D

Comparable transactions analysis 23


M E TH OD S

LBO analysis 28
VAL U ATI O N

Additional valuation materials 36


T O
I N T R O D U C TI O N

MICHIGAN BUSINESS SCHOOL 28


LBO analysis provides another perspective on M&A transactions

„ A leveraged buyout is an acquisition transaction in which much of the purchase price is funded with
debt; usually done by financial sponsors

„ This type of capital structure provides the ability to “leverage” returns on a relatively small equity
investment, as cash flows generated during the investment period are used to pay down debt

„ Financial sponsors profit by exiting three to five years after the transaction
„ Sell the target to another buyer
„ Take the target public
„ Recapitalize the target

„ Assumptions regarding the investment transaction, the exit and the period between the acquisition
and the exit are critical to determining an appropriate capital structure and potential returns to
equity

„ M&A clients include both financial sponsors and strategic players


„ Financial sponsors typically pursue M&A transactions with different perspectives and objectives
(e.g., a shorter investment horizon)
„ Strategic buyers sometimes behave like financial investors (i.e., acquiring with the expectation
of selling in several years)

„ Financial sponsors generally analyze a transaction using LBO methodologies in the first instance
(and DCF, comparable companies/transactions analyses thereafter)

„ LBO valuation may be useful from a competitive point of view, as strategic players vie with
financial sponsors for the same assets
AN A L Y S I S
L B O

MICHIGAN BUSINESS SCHOOL 29


The process of LBO analysis

Develop an integrated model of the business that projects EBITDA and


Projections
Projections cash available for debt repayment over the investment horizon
(typically three to five years)

Estimate the multiple at which the sponsor can be expected to exit the
Terminal
Terminal value
value investment at the end of the investment period

Pro
Pro forma
forma Determine a transaction structure and a pro forma capital structure that
capitalization
capitalization result in realistic financial coverage

IRR
IRR Calculate returns (IRR) to the equity sponsor

Tweak the transaction/capital structure as needed to achieve harmony


Adjustments
Adjustments
AN A L Y S I S

(if possible) between IRR, leverage and valuation


L B O

MICHIGAN BUSINESS SCHOOL 30


The initial steps in an LBO analysis are identical to those
in a DCF analysis

„ The same financial projections developed for a DCF analysis can be used to build a
basic LBO model

„ Free cash flows are expected to be used to service debt, with positive flows to
equity typically coming at exit
„ Amount and predictability of free cash flows dictate whether a company is an
attractive or viable LBO target

„ Cash flows are not discounted

„ Terminal value drives valuation, and is calculated on the basis of multiples


„ Multiple of exit-year EBITDA is generally used to bound the valuation of the
enterprise in any possible exit scenario
AN A L Y S I S
L B O

MICHIGAN BUSINESS SCHOOL 31


Pro forma capitalization and transaction structure are set
forth in “sources and uses”

„ Sources should show the entire pro forma capitalization of the company, including
„ New debt
„ New equity
„ Rolled-over debt and equity

„ Uses of funds should address all parts of the target’s existing capital structure, as
well as transaction-related leakage
„ Refinancing existing debt
„ Transaction expenses
„ Equity purchase price
„ Debt and equity to be rolled-over

„ Sources must equal uses


„ Any debt or equity that is rolled-over shows up under both sources and uses
„ Always depict every part of the capitalization, whether it changes pro forma or
not
AN A L Y S I S
L B O

MICHIGAN BUSINESS SCHOOL 32


LBO models are driven by the characteristics of the
sources of capital for the transaction

Components
Components of
of capital
capital
„ Typically supplied by an investment or commercial bank
Senior
Seniordebt
debt „ Usually secured/most restrictive covenants
Sample inputs
„ Amortizing 5- to 8-year tenor
„ Revolving „ 30%–50% of total
„ Term capital
„ First in line at liquidation
„ LIBOR + 200-400 „ Lowest coupon
„ 5–8 years

„ Typically supplied by an investment or commercial bank or a mezzanine


Subordinated
Subordinateddebt
debt fund
Sample inputs „ Riskier debt/typically unsecured
„ Senior/sub notes „ 25%–35% of total
„ Primarily bullet structures
„ Discount notes capital
„ T + 350–650
„ Typical tenor is 10-year
„ 7–10 years „ High coupon

„ Typically supplied by an investment or commercial bank or a mezzanine


Mezzanine
Mezzaninesecurities
securities fund (often sponsor-affiliated)
Sample inputs
„ Multiple forms: Convertible debt, exchangeable debt, convertible preferred
„ Sub. debt (conv.) „ 0%–35% total capital
„ Preferred stock „ High teens/low 20s stock, PIK securities and warrants
„ PIK „ 7–10+ years „ Expected IRR in the 15—20% range
„ Warrants

„ Typically supplied by a financial sponsor


Common
Commonequity
equity „ Highest risk/cost of capital
AN A L Y S I S

Sample inputs
„ Sometimes “stapled” to high-yield paper to attract broader investor group
„ 20%–40% of total capital
„ Minimum annual returns >20%
„ 20%-30% IRR
„ 5–7 year horizon
L B O

MICHIGAN BUSINESS SCHOOL 33


Sample LBO valuation analysis

$
$ millions
millions
Exit multiple 6.5x 7.0x 7.5x
2008 projected EBITDA $556 $556 $556
Implied 2008 firm value 3,613 $3,891 $4,169
Plus: 2008 cash 36 $36 $36
Less: 2008 total debt (1,154) (1,154) (1,154)
Implied 2008 total equity value $2,496 $2,774 $3,052
Implied 2008 sponsor equity value1 $2,371 $2,635 $2,899
Required return 25% 30% 35% 25% 30% 35% 25% 30% 35%
Implied max. equity contribution $869 $728 $614 $965 $809 $683 $1,062 $890 $751
Plus: Maximum transaction debt
(@ 5.0x LTM EBITDA) $1,550 $1,550 $1,550 $1,550 $1,550 $1,550 $1,550 $1,550 $1,550
Implied firm value2 $2,419 $2,278 $2,164 $2,515 $2,359 $2,233 $2,612 $2,440 $2,301
Implied LTM EBITDA multiple 8.0x 7.5x 7.1x 8.3x 7.8x 7.4x 8.7x 8.1x 7.6x

Value sensitivity analysis 25% returns 30% returns 35% returns


Exit multiple Exit multiple Exit multiple
6.5x 7.0x 7.5x 6.5x 7.0x 7.5x 6.5x 7.0x 7.5x
Maximum leverage3 4.50x $2,336 $2,433 $2,530 $2,185 $2,266 $2,347 $2,062 $2,131 $2,199
4.75x 2,378 2,475 2,571 2,232 2,313 2,394 2,114 2,182 2,250
5.00x 2,419 2,515 2,612 2,278 2,359 2,440 2,164 2,233 2,301
1 Assumes management promote of 5%
2 Valuation as at 12/31/01
3 Leverage based on bank/bond case
AN A L Y S I S
L B O

MICHIGAN BUSINESS SCHOOL 34


IRR drivers

$
$ millions
millions
No operating Operating Operating
improvement/ improvement/ improvement and
At purchase No arbitrage No arbitrage arbitrage
EBITDA purchase multiple 7.0x
EBITDA on purchase date $100
Firm value at purchase date $700
Debt at purchase (5x EBITDA) 500
Equity value invested 200

EBITDA exit multiple 7.0x 7.0x 8.0x


EBITDA at exit $100 $128 $128
Firm value at exit 700 896 1,024
Debt (after paydown of $75 per yr.) 125 125 125
Equity value at exit 575 771 899
IRR (5-year exit) 23.5% 31.0% 35.1%

Three important factors drive IRRs:


1) De-levering
2) Operating improvement, and
3) Multiple expansion (arbitrage)
AN A L Y S I S
L B O

MICHIGAN BUSINESS SCHOOL 35


Agenda
B A N KI N G
I N V E S T M E N T

Valuation overview 1

Discounted cash flow 8


I N

Publicly traded comparable company analysis 17


U S E D

Comparable transactions analysis 23


M E TH OD S

LBO analysis 28
VAL U ATI O N

Additional valuation materials 36


T O
I N T R O D U C TI O N

MICHIGAN BUSINESS SCHOOL 36


Several other types of analysis are common in
M&A transactions

„ Pro forma analysis—what is the impact on the company of this merger/acquisition?


„ Earnings impact (accretion/dilution)
„ Growth impact
„ Multiple impact

„ Premiums paid analysis—how does the premium to be paid compare with prior
transactions?

„ Analysis at various prices (AVP)—At different prices what are the implied premiums
and multiples?

„ Contribution analysis (stock for stock deals)


MAT E RIA LS

„ Shareholders of each company receive shares in the merged entity—contribution


analysis looks at what each company gives versus what it gets

„ Shares traded analysis


„ Attempts to establish cost basis in shares
VALUA TI O N

„ Interloper analysis
„ On the buyside, tactically it is important to determine which other companies
may be interested in the target
ADDITI O N AL

„ Once other potential bidders have been identified it is important to analyze their
capacity to pay and the pro forma impact on their earnings

MICHIGAN BUSINESS SCHOOL 37


Purpose of pro forma analysis

„ Evaluate the impact of a merger or acquisition on the income statement and


balance sheet of a potential buyer

„ Pro forma analysis is used to determine


„ Pricing capacity of Acquirer to pay for Target based on certain key measures
„ Optimal form of consideration (cash, stock, other securities, combination)

„ Key measures
„ Dilution in earnings per share
„ Pretax synergies required to break even
„ Leverage/capitalization
MAT E RIA LS

„ Interest coverage
„ Post-transaction ownership
VALUA TI O N
ADDITI O N AL

MICHIGAN BUSINESS SCHOOL 38


Accretion/(dilution)

Proforma
Proforma calculation
calculation
Acquiror standalone EPS xxx
Acquiror NI xx
Target NI xx
Combined NI XX A

Transaction adjustments:
Amortization of identifiable intangibles (xx)
Incremental interest expense from transaction debt (xx)
Foregone interest income on cash (xx)
Amortization of transaction fees (xx)
MAT E RIA LS

Tax rate differential (xx)


Total transaction adjustments (XX) B

Pro forma net income A—B


Total shares outstanding xxx
VALUA TI O N

Pro forma EPS xxx


ADDITI O N AL

MICHIGAN BUSINESS SCHOOL 39


EPS accretion/dilution summary
$
$ millions,
millions, except
except per
per share
share data
data
EPS1 P/E
Current price 9/27/04 % 52-wk high 2004E 2005E 2004E 2005E
Target $22.67 99.3% $2.18 $2.43 10.4x 9.3x
Acquiror $57.99 97.9% $5.87 $6.70 9.9x 8.7x

$
$ millions,
millions, except
except per
per share
share data
data
Premium to Target

0% 20% 25% 30%


Implied offer price per share $22.67 $27.20 $28.34 $29.47
Implied exchange ratio2 0.39x 0.47x 0.49x 0.51x
Implied transaction value3 $373 $446 $465 $483
Implied Acquiror ownership 89.7% 87.9% 87.5% 87.1%
Target 2004E transaction P/E 10.4x 12.5x 13.0x 13.5x
Target 2005E transaction P/E 9.3x 11.2x 11.7x 12.1x

100% stock
2004E $—EPS ($0.08) ($0.24) ($0.27) ($0.31)
2004E %—EPS (1.3%) (4.0%) (4.7%) (5.3%)
Add’l pre-tax synergies to break even $5.8 $18.4 $21.5 $24.6
MAT E RIA LS

2005E $—EPS ($0.13) ($0.30) ($0.35) ($0.39)


2005E %—EPS (1.9%) (4.5%) (5.2%) (5.8%)
Add’l pre-tax synergies to break even $9.7 $23.8 $27.4 $30.9

Pro forma debt $735.5 $735.6 $735.7 $735.7


Pro forma capitalization 2,586.5 2,660.0 2,678.4 2,696.8
Pro forma debt/pro forma 2003E EBITDA 1.3x 1.4x 1.4x 1.4x
Pro forma debt/pro forma total cap 28.4% 27.7% 27.5% 27.3%

75% stock/ 25% cash


VALUA TI O N

2004E $—EPS $0.03 ($0.11) ($0.15) ($0.18)


2004E %—EPS 0.6% (1.9%) (2.5%) (3.1%)
Add’l pre-tax synergies to break even NM $8.3 $11.0 $13.7

2005E $—EPS $0.03 ($0.13) ($0.17) ($0.21)


2005E %—EPS 0.4% (2.0%) (2.5%) (3.1%)
Add’l pre-tax synergies to break even NM $9.9 $12.9 $15.9

Pro forma debt $820.5 $839.0 $843.6 $848.2


Pro forma capitalization 2,586.6 2,660.1 2,678.5 2,696.9
ADDITI O N AL

Pro forma debt/pro forma 2003E EBITDA 1.5x 1.5x 1.5x 1.6x
Pro forma debt/pro forma total cap 31.7% 31.5% 31.5% 31.5%

Note: Target estimates based on equity research, expect EPS, which is based on I/B/E/S; Acquiror estimates based on JPMorgan equity research; Assumes transaction date of 12/31/03, tax rate of 37.0%, 10.0% of excess purchase price
allocated to non-goodwill intangibles and amortized over 10 years, transaction expenses of 0.20% and financing fees of 0.10% for illustrative purposes; Assumes interest expense of 6.5%, existing Target debt is refinanced at this rate
1 Based on I/B/E/S
2 Exchange ratio calculated as offer price per share over Acquiror price of $57.99
3 Includes assumption of $33.3 million in Target debt

MICHIGAN BUSINESS SCHOOL 40


Bootstrapping

„ Potentially increasing your P/E by acquiring a company with a lower P/E and “bootstrapping”
Acquiror’s P/E

Finance club (FC) Consulting club (CC)


P/E multiple 20x 10x
Stock price $20.00 $10.00
EPS 1.00 1.00
Shares outstanding 1 1

„ FC acquires CC for stock. It takes 1/2 of FC stock to acquire CC


MAT E RIA LS

Earnings 2.00
Shares outstanding 1.5
EPS $1.33
Accretive, assuming multiple stays the same
Stock Price $26.66
VALUA TI O N
ADDITI O N AL

MICHIGAN BUSINESS SCHOOL 41


Premiums paid analysis for US targets

1
1 day
day prior
prior to
to announcement
announcement (median
(median %;
%; 2004YTD)
2004YTD) 1
1 month
month prior
prior to
to announcement
announcement (median
(median %;
%; 2004YTD)
2004YTD)
Median: 20% Median: 23%

30%
24% 25% 22% 22% 24%
15%
10%

$0.5-$1bn $1-$5bn $5-$10bn $10bn+ $0.5-$1bn $1-$5bn $5-$10bn $10bn+


# of transactions # of transactions
27 32 4 5 27 32 4 5

1
1 day
day prior
prior to
to announcement:
announcement: $0.5bn+
$0.5bn+ 1
1 month
month prior
prior to
to announcement:
announcement: $0.5bn+
$0.5bn+
MAT E RIA LS

1 1
Stock Cash Stock Cash

44% 52%
40% 38%
32% 36%
27% 26% 27% 29% 27% 31% 34% 28%
30%
VALUA TI O N

25%
20% 25%
22%
20% 18% 19% 13%
15%

1999 2000 2001 2002 2003 2004YTD 1999 2000 2001 2002 2003 2004YTD
ADDITI O N AL

Source: Thomson Financial


Note: Includes all transactions with US targets (friendly and hostile) from 1/1/99 to 7/31/04
1 Cash transaction if cash is greater than 40%

MICHIGAN BUSINESS SCHOOL 42


Analysis at various prices

$
$ millions,
millions, except
except per
per share
share data
data
Current Offer
Price per share $23.39 $30.00 $32.75 $33.00 $34.00 $35.00 $36.00
Implied premium/(discount) to:
Current price (9/10/04) $23.39 - 28.3% 40.0% 41.1% 45.4% 49.6% 53.9%
52-week high $27.76 (15.7%) 8.1% 18.0% 18.9% 22.5% 26.1% 29.7%
One month prior average price $22.60 3.5% 32.8% 44.9% 46.0% 50.5% 54.9% 59.3%
Three month prior average price $24.61 (5.0%) 21.9% 33.1% 34.1% 38.1% 42.2% 46.3%
Six month prior average price $25.20 (7.2%) 19.0% 30.0% 31.0% 34.9% 38.9% 42.9%
One year prior average price $23.83 (1.9%) 25.9% 37.4% 38.5% 42.7% 46.8% 51.0%

Implied equity value1 $377 $483 $527 $531 $547 $564 $580
Add: Total debt2 30 30 30 30 30 30 30
Implied firm value $407 $513 $558 $562 $578 $594 $610
MAT E RIA LS

Operating
Implied firm value multiples Metrics3
LTM revenue2 $740 0.55x 0.69x 0.75x 0.76x 0.78x 0.80x 0.82x
2004E revenue $744 0.55x 0.69 0.75 0.75 0.78 0.80 0.82
2005E revenue $799 0.51x 0.64 0.70 0.70 0.72 0.74 0.76
VALUA TI O N

LTM EBITDA2 $57 7.2x 9.0x 9.8x 9.9x 10.2x 10.4x 10.7x
2004E EBITDA $58 7.1x 8.9 9.7 9.7 10.0 10.3 10.6
2005E EBITDA $62 6.6x 8.3 9.0 9.1 9.3 9.6 9.9
Implied P/E multiples
LTM EPS2 $2.04 11.5x 14.7x 16.1x 16.2x 16.7x 17.2x 17.6x
ADDITI O N AL

2004E EPS $2.15 10.9x 14.0 15.2 15.4 15.8 16.3 16.8
2005E EPS $2.37 9.9x 12.7 13.8 13.9 14.3 14.8 15.2
1 Based on 16.1mm fully diluted shares outstanding as of 9/5/04 provided by management
2 As of 6/30/04

3 Based on management estimates

MICHIGAN BUSINESS SCHOOL 43


Contribution analysis

Contribution
Total
London Umbrella ($mm)

Revenue - 2004E 14.1% 85.9% $40,940

Revenue - 2005E 13.7% 86.3% $46,126

EBITDA - 2004E 14.0% 86.0% $4,868

EBITDA - 2005E 13.7% 86.3% $5,542

Net income - 2004E 14.1% 85.9% $2,850


MAT E RIA LS

Net income - 2005E 13.8% 86.2% $3,195


VALUA TI O N

Current equity value 8.9% 91.1% $48,695

Transaction equity value 10.1% 89.9% $49,360

Note: Estimates for London and Umbrella based on projections prepared by Umbrella management; analysis excludes transaction adjustments
ADDITI O N AL

MICHIGAN BUSINESS SCHOOL 44


Shares traded analysis

One-month
One-month Three-month
Three-month
Avg. daily trading vol (’000s) 53 Avg. daily trading vol (’000s) 53
Total shares traded (’000s) 1,167 Total shares traded (’000s) 3,320
Peak daily volume (’000s) 180 Peak daily volume (’000s) 180
VWAP $22.51 VWAP $24.60
High price $23.38 High price $27.25
Low price $22.07 Low price $22.07

45% 44%
29%
24% 25%
14%
6% 6% 7%

$22.00—22.25 $22.25—22.50 $22.50—22.75 $22.75—23.00 $23.25—23.50 $22.00—23.50 $23.50—25.00 $25.00—26.50 $26.50—28.00


Cum: 29% 35% 80% 94% 100% Cum: 44% 51% 75% 100%

Six-month
Six-month 1
1 year
year
MAT E RIA LS

Avg. daily trading vol (’000s) 56 Avg. daily trading vol (’000s) 61
Total shares traded (’000s) 7,132 Total shares traded (’000s) 15,420
Peak daily volume (’000s) 266 Peak daily volume (’000s) 266
VWAP $25.17 VWAP $23.57
High price $27.76 High price $27.76
Low price $22.07 Low price $19.75

27% 28% 42%


VALUA TI O N

21% 24% 25%


18%
8% 7%

$22.00—23.50 $23.50—25.00 $25.00—26.50 $26.50—28.00 $19—21 $21—23 $23—25 $25—27 $27—29


Cum: 21% 45% 72% 100% Cum: 8% 50% 75% 93% 100%

Note: As of 9/10/04
ADDITI O N AL

Source: Tradeline

MICHIGAN BUSINESS SCHOOL 45


Interloper analysis

Potential acquirors
Apogent Applied BioSystems Mettler-Toledo Thermo-Electron Waters
2003 cash EPS $1.36 $1.07 $2.53 $1.19 $1.60
Accretion/dilution - $ (0.07) 0.01 (0.11) (0.02) (0.08)
Accretion/dilution - % (5.0)% 1.3% (4.1)% (1.6)% (4.8)%
Incremental pretax synergies to break even 15.0 NA 9.5 6.2 20.4
% of target S,G&A 19% NA 12% 8% 26%

2004 cash EPS $1.66 $1.35 $3.26 $1.41 $2.00


Accretion/dilution - $ 0.04 0.08 0.13 0.06 (0.01)
Accretion/dilution - % 2.4% 6.0% 4.3% 4.2% (0.4)%
Incremental pretax synergies to break even NA NA NA NA 2.0
% of target S,G&A NA NA NA NA 2%

Ownership
MAT E RIA LS

PBSC 21% 11% 24% 13% 16%


Acquiror 79% 89% 76% 87% 84%

2003 Break even price $6.45 $9.41 $7.06 $7.48 $5.94


2004 Break even price $9.44 $12.96 $9.89 $11.08 $8.24
1 Based on Pedro offer of 0.311 shares per Pablo share, implying a price per share of $8.46 based on Pedro closing price of $27.19 on 7/12/03
VALUA TI O N

2 Assumes synergies of $30 million with 50% realized in 2003


ADDITI O N AL

MICHIGAN BUSINESS SCHOOL 46


Valuation references

„ Valuation—Measuring and Managing the Value of Companies,


Copeland, Koller and Murrin

„ Introduction to Business Analysis and Valuation,


Palepu, Bernard, & Healey

„ Mergers & Acquisitions,


Marren

„ The Quest for Value,


Stewart
MAT E RIA LS
VALUA TI O N
ADDITI O N AL

MICHIGAN BUSINESS SCHOOL 47

Вам также может понравиться