SIC Weekly Educational Component 10/24/16 Valuation Techniques SIC Weekly Educational Component 10/24/16

Peer Comparables Ratios that compare the target company to companies on the market This is a quick method though it lacks nuance Market sentiment and cyclicality play a big role in the image of a company that peer comps create Certain comps matter in certain industries and at certain times (for example: software companies will have a very small tangible book value so P/B is probably meaningless)

Precedent Transaction Looks into what was paid for similar companies Market dynamics matter: no two transactions are ever identical It’s important to find examples that are as similar as possible in size and company function, corporate structure, etc. Valuation based on multiples of different metrics like revenue, book value, earnings, etc

Discounted Cash Flow (DCF) “Intrinsic Valuation Technique” Model free cash flow potential and discount it back to the present As with all modeling, the assumptions play a large role in the output (i.e. garbage in garbage out)

Leveraged Buyout (LBO) Analyzes the return on investment of a purchased company when it is purchased with a mix of debt and equity As the debt is paid off, (definitionally) equity in the company grows

LBO (cont.)

Which Valuation Method Gives the Highest Valuation? Lowest? Among: LBOs, DCFs, Precedent Transactions, and Peer Comps High To Low

Highest: Precedent Transactions Control premium* (this is the biggest component) Public market premium Willingness to pay extra for assumed synergies Threat of lawsuit if the payout to existing shareholders is too low

Lowest: LBO Risky Investment needs to provide PE sponsor with a certain threshold rate of returns (IRR)

Example: Valuation Techniques AT&T buying Time Warner

Peer Comps

Simple peer comps that can be found in 2 minutes or less: P/S = Price to Sales P/E = Price to Earnings P/CF = Price to Cash Flow

Precedent Transactions

Precedent Transactions (cont.)

DCF

LBO Determine the purchase price, the amount of debt and equity financing, and assign interest rate percentages Calculate free cash flow and the cash available to pay down the newly issued debt and the interest Calculate the rate of return on the equity portion of the financing to determine if the financing composition is good / if the company is a good target Is the company a good target?

Questions? Quick shout-out to Edgar the SEC database of filings for having detailed presentations on telecom takeovers: https://www.sec.gov/Archives/edgar/data/1126216/000114420413068965/v36368 5_ex99c7.htm This one on the steel industry is interesting too: https://www.sec.gov/Archives/edgar/data/1203748/000095012310077446/o64203 eexv99wxcyx2y.htm