1. Styrelsemöte Sandvik AB 2007-01-31
Bilaga 1. Finansiell analys
Acquisition Request Financial Analysis “Valuation method” Instruction KA/Group Business Control
70115Bil 1-Finansiell analys-Värderingsmetod

2. Document Information Version history Date Version Comment 2010-09-01
Title: Acquisition Request
Description:
Responsible: KA/Robert Lindström
Valid as of: 1 September 2010
Version history
Date
Version
Comment
v.1
Financial analysis-Valuation method

3. Acquisiton Description
Styrelsemöte Sandvik AB
Bilaga 1. Finansiell analys
Acquisiton Description
Content:
Background
Company description
Strategic adequacy
Business plan and business organisation
Financial analysis - valuation
DCF - Cash flow based valuation of the acquisition candidate
EBIT multiple - How listed capital goods companies are valued in relation to sales and profitability
Key figures - Effects on Sandvik’s key figures from the acquisiton
Management and integration of the company
Risk analysis
Funding
Additional questions
Formal Request
Financial analysis-Valuation method
70115Bil 1-Finansiell analys-Värderingsmetod

4. Styrelsemöte Sandvik AB 2007-01-31
Bilaga 1. Finansiell analys
Valuation Methods
The DCF valuation (discounted cash flow) is based on future forecasted cash flows generated by the acquired company. WACC (weighted average cost of capital) is used when discounting the cash flows, based on capital and risk structure, currently 10% in Sandvik.
Multiple valuation is based on the valuation of listed companies within similar market segments in relation to EBIT or Price/Earnings.
When combining DCF with these two measures it gives you a valuation interval, which states the potential max- and minimum value of the acquired object.
Guidelines have been established in accorance to the WACC-level. For a valuation of potential acquisiton obejcts, 10 % should be used.
Financial analysis-Valuation method
70115Bil 1-Finansiell analys-Värderingsmetod

5. Acquisiton Description
Styrelsemöte Sandvik AB
Bilaga 1. Finansiell analys
Acquisiton Description
Discounted Cash Flow (DCF)
The value of the company is based on the cash flow which is estimated
Future-oriented assumptions are based on projections, market evaluation and at least three years historical data according to actual outcome of the coming three years
The number of forecasted years are 5-8, after that, a long term growth rate is estimated, which shouldn’t exceed the last three years average outcome and the next three years future forecast
The level of the discount rate (WACC) is based on 10%
Multiple Valuation (see page 5)
Indication on valuation of capital goods companies as a supplement to the discounted cash flow valuation, P/E or EBIT multiple
Key Figures
The analysis of the acquisition shall also show the effect on Sandvik’s key figures
The effect on earnings per share for the future three year period
The effect on SVA for the future three year period
The effect on turnover, EBIT, ROCE, EPS
Goodwill/Surplus Value
Calculation of the effect on goodwill and effect on the performance depending on depreciation rate
Balance sheet and income statement should be specified explicit
Sensitivity analysis ±1 % growth rate and WACC-level should be illustrated
Financial analysis-Valuation method
70115Bil 1-Finansiell analys-Värderingsmetod

6. Styrelsemöte Sandvik AB 2007-01-31
Bilaga 1. Finansiell analys
Multiple Valuation
The method is used to evaluate the value of the acquisition candidate
P/E multiple should be used for an acquisition of listed companies were P refers to the contemplated price per stock and E refers to earnings per share. The contemplated P/E-ratio should be compared with the actual P/E ratio to which the company’s stock is traded on the stock exchange.
EV/EBIT should be used when a company is being valuated partly, i.e. acquisition of assets, when the acquired assets are valued to a calculated value according DCF, i.e. Enterprise Value, which is compared to EBIT. A comparison of what the corresponding multiple should be can then be made.
Financial analysis-Valuation method
70115Bil 1-Finansiell analys-Värderingsmetod

7. Styrelsemöte Sandvik AB 2007-01-31
Bilaga 1. Finansiell analys
Multiple Valuation
Multiple valuation
To be used as a supplement/support to the DCF valuation to ensure that the value of the acquistion candidate is reasonable in relation to the valuation of capital goods companies on the stock exchange.
As an example, the average valuation of companies is 1,30 x sales and 12 x EBIT, based on sales for year 2005
Multiple calculation is done after proposed price and compared to respectively Business Area standard/market level
Enterprise Value (EV) Debt free value of the company
EBIT Earnings before interest and tax
P/E Price per share in relation to earnings per share
Financial analysis-Valuation method
70115Bil 1-Finansiell analys-Värderingsmetod

8. Example of DCF-valuation
Styrelsemöte Sandvik AB
Example of DCF-valuation
Bilaga 1. Finansiell analys
Debt free value (EV value) of the company is MSEK
WACC 10.0 %
EV/EBIT 6.6
based on terminal value, growth …………., EBIT ………….
Financial analysis-Valuation method
70115Bil 1-Finansiell analys-Värderingsmetod