1. Implementation

2. Prof. Ian Giddy New York University Valuing a Business II NYU

3. Copyright ©2003 Ian H. Giddy Valuation 3 What’s a Company Worth?  Acquisition  LBOs  Restructuring Flexics

4. Equity Valuation: Application to M&A Prof. Ian Giddy New York University

5. Copyright ©2003 Ian H. Giddy Valuation 5 What's It Worth? Valuation Methods  Book value approach  Market value approach  Ratios (like P/E ratio)  Break-up value  Cash flow value -- present value of future cash flows

6. Copyright ©2003 Ian H. Giddy Valuation 6 How Much Should We Pay? Applying the discounted cash flow approach, we need to know: 1.The incremental cash flows to be generated from the acquisition, adjusted for debt servicing and taxes 2.The rate at which to discount the cash flows (required rate of return) 3.The deadweight costs of making the acquisition (investment banks' fees, etc)

7. Copyright ©2003 Ian H. Giddy Valuation 7 Equity Valuation in Practice  Estimating synergies  Estimating business restructuring  Estimating financial restructuring  Application to Basix  Valuation in a bidding context

8. Copyright ©2003 Ian H. Giddy Valuation 8 The Gains From an Acquisition Gains from merger SynergiesControl Top lineFinancial restructuring Business Restructuring (M&A) Bottom line

9. Copyright ©2003 Ian H. Giddy Valuation 9 The Basics IBM is considering the acquisition of Basix, Inc. The shares are trading at a P/E of 11, far below IBM’s P/E of 18. Based on past performance the company is expected to earn $2 per share next year, an increase from the current EPS of $1.93. If IBM acquires Basix, the long-run EPS growth rate could be raised to 5.5%. The Treasury bond yield is 4.5%, the company’s beta is 1.3 and the long run market return is 11.5%. Is the company worth buying at a P/E of 12? At how much of a premium should we say fugedaboudit?

10. Copyright ©2003 Ian H. Giddy Valuation 10 Basix Source: basix.xls

11. Copyright ©2003 Ian H. Giddy Valuation 11 Valuation in a Bidding-War Context

12. Copyright ©2003 Ian H. Giddy Valuation 12 The Network

13. Copyright ©2003 Ian H. Giddy Valuation 13 How Much Premium Can a Buyer Pay? Applying the discounted cash flow approach, we need to know:  The incremental cash flows to be generated from the acquisition, adjusted for debt servicing and taxes  The rate at which to discount the cash flows (required rate of return on equity)  The deadweight costs of making the acquisition (investment banks' fees, etc)  Cost of losing out!

14. Copyright ©2003 Ian H. Giddy Valuation 14 What is Conrail Worth?  Stand-alone value  Market value: $71.00  Comparables  Discounted present value  Value to acquirer  Value in bidding-war context

15. Copyright ©2003 Ian H. Giddy Valuation 15 What is Conrail Worth?

16. Copyright ©2003 Ian H. Giddy Valuation 16 But Where Are the Profits? http://www.railwayage.com/jun01/conrail_split.html January 2001

17. Copyright ©2003 Ian H. Giddy Valuation 17 But Where Are the Profits? CSX S&P500 NSC

18. Copyright ©2003 Ian H. Giddy Valuation 18 Leveraged Buyouts

19. Prof. Ian Giddy New York University Leveraged Buyouts

20. Copyright ©2003 Ian H. Giddy Valuation 20 M&A and Leverage Leveraged buyout? Company has unused debt capacity Leveraged recapitalization? Takeover?

21. Copyright ©2003 Ian H. Giddy Valuation 21 Sources: biz.yahoo.com, businessweek.com InterActiveCorp Company has unused debt capacity?

22. Copyright ©2003 Ian H. Giddy Valuation 22 Private Pitfalls  Methods: same  Problems:  No market price  No history of reported information  Data provided can be distorted

23. Copyright ©2003 Ian H. Giddy Valuation 23 Private Pitfalls  Revenue overstated?  Costs understated? Overstated?  New costs that will be incurred?  Intangible value?

24. Copyright ©2003 Ian H. Giddy Valuation 24 Typical LBO Sequence Company gets bloated or slack and stock price falls LBO offer made LBO completed Restructuring  Efficiencies  Divestitures  Financial ? years3-9 months5-7 years IPO or sale of company LBO financing lined up

25. Copyright ©2003 Ian H. Giddy Valuation 25 LBO: A Temporary Capital Structure COST OF CAPITAL DEBT RATIO Stage 1: Pre-LBO Stage 4: Debt paydown Stage 2: LBO financing Stage 3: LBO refinancing

26. Copyright ©2003 Ian H. Giddy Valuation 26 12-Step Method  Evaluating cost of deal  Estimating borrowing capacity  Estimating cash costs of funding  Estimating growth rates of sales, expenses, etc  Projecting cash flows (FCFF and FCFE)  Projecting debt amortization  Calculating terminal value of FCFE and FCFF  Estimating costs of capital to find PV  Making sense of the deal

27. Copyright ©2003 Ian H. Giddy Valuation 27 What Would it Cost to Buy Kodak? Source: biz.yahoo.com

28. Copyright ©2003 Ian H. Giddy Valuation 28 Cost of the Deal lbocapacity.xls

29. Copyright ©2003 Ian H. Giddy Valuation 29 Borrowing Capacity From table lbocapacity.xls

30. Copyright ©2003 Ian H. Giddy Valuation 30 Capital Structure lbocapacity.xls

31. Copyright ©2003 Ian H. Giddy Valuation 31 LBO Financing NEWCO Cost of purchasing the business Equity $25 Senior debt $457 What securities? What returns? What investors? Mezzanine

32. Copyright ©2003 Ian H. Giddy Valuation 32 Cash Flows and Debt Repayment

33. Copyright ©2003 Ian H. Giddy Valuation 33 Exit Company gets bloated or slack and stock price falls LBO offer made LBO completed Restructuring  Efficiencies  Divestitures  Financial ? years3-9 months5-7 years IPO or sale of company LBO financing lined up

34. Copyright ©2003 Ian H. Giddy Valuation 34 Restructuring

35. Equity Valuation: Application to Restructuring Prof. Ian Giddy New York University

36. Copyright ©2003 Ian H. Giddy Valuation 36 Corporate Financial Restructuring Why Restructure? Proactive Example: Sealed Air Distress Example: Loewen 1999 Defensive Example: Loewen 1996 n Management acts to preserve or enhance shareholder value n Management acts to protect company, stakeholders and management from change in control n Lenders and shareholders lose, but try to work out best way to minimize loss

37. Copyright ©2003 Ian H. Giddy Valuation 37 Restructuring  Restructuring: Any substantial change in a operational structure, business portfolio, financial structure, or ownership and control.  Designed to increase the value of the firm Restructuring OperationalFinancialBusiness Portfolio

38. Copyright ©2003 Ian H. Giddy Valuation 38 Average Impact of Restructuring on Company Performance Source: Bowman et al, “When Does Restructuring Improve Economic Performance?”

39. Copyright ©2003 Ian H. Giddy Valuation 39 Novartis: Financial Restructuring Fixed Assets Debt Equity AssetsLiabilities Fixed the cash and working capital Fixed the capital structure Cash Divested Non-core business

40. Copyright ©2003 Ian H. Giddy Valuation 40 Case Study: Flexics MANAGERS PHOTRONICS SELLER

41. Copyright ©2003 Ian H. Giddy Valuation 41 Corporate Restructuring: It’s All About Value  How can corporate and financial restructuring create value? Operating Cash Flows Debt Equity AssetsLiabilities Fix the business Or fix the financing

42. Copyright ©2003 Ian H. Giddy Valuation 42 Restructuring Checklist Figure out what the business is worth now Use valuation model – present value of free cash flows Fix the business mix – divestituresValue assets to be sold Fix the business – strategic partner or merger Value the merged firm with synergies Fix the financing – improve D/E structure Revalue firm under different leverage assumptions – lowest WACC Fix the kind of equityWhat can be done to make the equity more valuable to investors? Fix the kind of debt or hybrid financing What mix of debt is best suited to this business? Fix management or controlValue the changes new control would produce

43. Copyright ©2003 Ian H. Giddy Valuation 43 Summary

44. Valuation: Conclusions & Summary Prof. Ian Giddy New York University

45. Copyright ©2003 Ian H. Giddy Valuation 45 Valuation is a Key to Unlock Value  Value with and without restructuring  Consider means and obstacles  Who gets what?  Minimum is liquidation value Valuation Going ConcernLiquidationAfter Restructuring

46. Copyright ©2003 Ian H. Giddy Valuation 46 Summary: What’s It Worth?

47. Copyright ©2003 Ian H. Giddy Valuation 47 Conclusion?  Valuation techniques force the recognition of assumptions – cost of capital, risk, growth rates, and which numbers matter  Valuation is an essential management tool  Can these approaches be used to change the way your company evaluates its investment decisions? How?

48. Copyright ©2003 Ian H. Giddy Valuation 48 Further Reading  Books:  Damodaran on Valuation  DePamphilis: Mergers, Acquisitions, and Other Restructuring Activities  Web Site:  Damodaran Online: http://pages.stern.nyu.edu/ ~adamodar  Cheat sheets: www.barcharts.com

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52. Copyright ©2003 Ian H. Giddy Valuation 52 Contact Prof. Ian Giddy NYU Stern School of Business 44 West 4 th Street New York, NY 10012 Tel 212-998-0426; Fax 212-995-4233 ian.giddy@nyu.edu www.giddy.org