Corporate Valuation, , p. 1 Institut for Regnskab, Tom Hansen Agenda of today Workshop Dialogue and coaching Exercise 15.2 Lectures The Negotiation day (16 November) Problems & challenges (chap 15, 19 & 4 articles): ·Uncertainty: Courtney ·Risk:Penman ·IPO’s:McCarthy ·IBO: Wright & Robbie ·CKM ch.15 and 19

Corporate Valuation, , p. 2 Institut for Regnskab, Tom Hansen Important dates Draft report & price Wednesday, Nov 13, evening ·Send to Tom Negotiation on Saturday Nov 16th Final report Monday, Nov 25, 12.00

Corporate Valuation, , p. 3 Institut for Regnskab, Tom Hansen Negotiation day - time schedule In and around room M st. round A’s (B’s observing) st. round B’s (A’s observing) app guest speaker PWC lunch & calculation (bistro open) nd. round A’s (-B observe) nd. round B’s (-A observe) break and presentation prep short negotiation presentation from each TEAM A’s: Coloplast 1, B&O 1, Vestas B’s: Coloplast 2, B&O 2, Wal-Mart, Micon

Corporate Valuation, , p. 4 Institut for Regnskab, Tom Hansen Final report inclusive of “negotiation process and outcome description” + “learning reflections” describe in the introduction of your report, who has written the different sections of the report. 3 copies of the final report (enclose your valuation model on electronic media (floppy disk or CD) to each copy) Deadline: Monday, Nov 25, at 12.00, hand in to Charlotte Løchte, c102

Corporate Valuation, , p. 5 Institut for Regnskab, Tom Hansen Strategy under Uncertainty (Courtney) Framework for uncertainty and its implication for strategy 4 levels of uncertainty 3 generic strategies (Postures) 3 types of action (Moves) The tradition has been to find the most likely outcome and create a strategy based on this, where the uncertainty got buried in the cash flow forecast. But this creates an either-or attitude to uncertainty. Instead the “residual” (after trends and analysis) uncertainty is characterized in 4 levels

Corporate Valuation, , p. 6 Institut for Regnskab, Tom Hansen Strategy under Uncertainty (Courtney) -each with its own strategic “logic” clear-enough (value chain, Porters 5, DCF) alternate futures (options, game theory) range of futures (no expected value, robustness) true ambiguity (indicators of drivers + analogies) The 3 generic strategies (postures) are shaping adapting reserving the right to play (special form of adapting on level 2-4)

Corporate Valuation, , p. 7 Institut for Regnskab, Tom Hansen Strategy under Uncertainty (Courtney) The 3 types of action (moves) are big bets options no-regret moves (always positive) e.g. L1 adapters: where and how to compete L2 shapers: try to increase the probability that a favored industry scenario will occur L3 shapers and adapters: reserving via organizational capabilities L4 shapers: provides vision that coordinates

Corporate Valuation, , p. 8 Institut for Regnskab, Tom Hansen Risk (Penman) Value of company = NOPLAT 1 * (1 - g/ROIC) WACC - g Equity risk consists of operating risk and financial risk Operating risk consist of ROIC / NOPLAT-risk and growth risk. Financial risk consist of Debt-risk and borrowing rate-risk in the WACC. ROIC/NOPLAT-risk (ROIC-tree, exhibit 9.8): ·EBITA/Revenues-risk (margin risk) ·Revenues/invested capital-risk (capital turnover risk) ·Tax-rate (Tax-risk) ·Operating liability risk - MV(Debt)

Corporate Valuation, , p. 9 Institut for Regnskab, Tom Hansen Risk (Penman) Growth-risk: uncertainty about a company’s investment opportunities (and hence the revenues growth) adds to risk. Financial risk: consists of risks concerning net borrowing costs (interest rate) times debt (financial leverage). If companies have fixed-interest-rate also risk regarding MV(debt) exist. Note that the different risks often interact. Further to equity risk the investor bears price risk due to market inefficiency and liquidity risk.

Corporate Valuation, , p. 10 Institut for Regnskab, Tom Hansen CKM ch 15 Dot.coms Characterized by high growth, -uncertainty and -losses “Investments” in acquiring customers are expensed and hence running through the income statement creating high net income losses. Make optimistic and pessimistic scenarios of the position of the company in 10, 12 or 15 years. For each scenario, evaluate: ·What will the market share of the company be in it’s product markets? and what will revenues of the company be? ·What operating margins will the company have in the different product markets? ·What will capital turnover be? Given the above, within each scenario: ·Work backwards to present, estimating revenues, margins and capital turnover for each year. ·Work further into the future (from scenario position) making explicit forecast and continuing value.

Corporate Valuation, , p. 11 Institut for Regnskab, Tom Hansen CKM ch 15 Dot.coms WACC: use industry-average beta and general market risk premium in each scenario to calculate each scenario value Weight the values of the scenarios with probabilities and test the company value sensitivity against these weights ·It is more or less the probabilities that determines the value of the company. Cash flow risk is taken care of by using scenarios -that is why we should use industry-average beta and general market risk premium in the WACC

Corporate Valuation, , p. 12 Institut for Regnskab, Tom Hansen CKM ch 19 Emerging markets Extra risks macroeconomic uncertainty political risks illiquid capital markets capital restrictions 3 approaches (to supplement each other) DCF by discounting expected cash flow by using cost of capital inclusive of country risk Local multiples Probability weighted scenarios (modeling risk explicitly) Beware of the accounts with regard to local accounting rules hyper inflation: real/ nominal rates ?

Corporate Valuation, , p. 13 Institut for Regnskab, Tom Hansen IBO: Investor led buy-out’s (Wright) 3 basic categories of investors ·industry / “trade” ·institutional investors (IBO) ·management (old or new) MBO/ MBI industry knowledge and synergy means lower uncertainty and higher gains for industry investors i.e. highest buyer value today the investor categories do mutate ·venture funds ·institutional investors + management (BIMBO) buying whole companies or parts ·carve out, spinn off, split, breaking due diligence often VERY important and diffenent for the differet categories

Corporate Valuation, , p. 14 Institut for Regnskab, Tom Hansen IPO’s: Initial public offering (McCarthy) How much is “left on the table” - 20% ? Over subscription = sold out first day ! Add extra selling ? Price too low ? ·Banks earn fee with no risk ? ·Is it sellers against share buyers or together with ? ·Impossible to forecast the “temperature” in the market ? 100 % increase the first day ?????????? Other valuation models ?