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

2. 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)

3. 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

4. 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)

5. 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

6. LBO (cont.)

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

8. 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

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

10. Example: Valuation Techniques
AT&T buying Time Warner

11. Peer Comps

12. 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

13. Precedent Transactions

14. Precedent Transactions (cont.)

15. DCF

16. 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?

17. Questions?
Quick shout-out to Edgar the SEC database of filings for having detailed presentations on telecom takeovers:
5_ex99c7.htm
This one on the steel industry is interesting too:
eexv99wxcyx2y.htm