1. 1 Relative Valuation Method or Comparable Companies Analysis Objective: Attempt to Value a Firm based on how Comparable Firms (i.e., Trading Comps) are being Priced in the Market Ibanking 2013 RW Melicher

2. 2 Relative Valuation Basics Value is based on how similar firms are valued in the marketplace Identify comparable firms (need to control for differences in growth, risk, etc.) Calculate standardized measures (e.g., price to earnings, price to sales, etc.) for the comparable firms Apply the standardized measure to the target firm to determine its value

3. 3 Types of Comparable Firms (Comps) Trading Comps Public Firms [successful prior IPOs] Transaction Comps Prior M&A Observed Events Possible higher multiples because: (a) buyers generally have to pay control premiums, and (b) strategic buyers may be able to realize synergies

4. 4 Need to Standardize Values & Multiples Stock prices are not directly comparable Need to standardize values by relating market value to revenues, earnings, or book values Each multiple has a numerator and a denominator that must consistently reflect an equity value (market value of equity) or an enterprise value (equity plus debt net of cash)

5. Valuation Metrics Equity Value Stock Price x Fully Diluted Shares Outstanding [Note: basic shares outstanding + “in-the-money” options, warrants, & convertible securities] Enterprise Value Equity Value + Net Debt [Note: all debt holder claims (including preferred stock and noncontrolling interest) – cash and cash equivalents] 5

6. R&P: Comparable Companies Analysis Steps 1. Select the Universe of Comparable Companies 2. Locate the Necessary Financial Information 3. Spread Key Statistics, Ratios, and Trading Multiples 4. Benchmark the Comparable Companies 5. Determine Valuation 6

7. R&P: Business and Financial Profile Framework Business Profile Sector Products and Services Customers and End Markets Distribution Channels Geography Financial Profile Size Profitability Growth Profile Return on Investment Credit Profile 7

8. 8 Reasons Why Relative Valuations are Popular Fewer assumptions and less time needed relative to a DCF valuation Easier to understand and to present to clients relative to a DCF valuation Reflects current “mood” of the market

9. 9 Potential Problems with Relative Valuations May not adequately reflect differences in cash flows, growth, and/or risk Since relative valuations reflect market “mood,” they tend to overvalue in “hot” markets and undervalue in “cold” markets Lack of transparency in selecting comparable firms and specific multiples can lead to manipulations

10. 10 Trading Comps Valuation Process 1. Determine the Equity Value of Comp 2. Divide Equity Value by the Valuation Metric (e.g., Sales) to get Comp’s Equity Valuation Multiple 3. Multiply Target Firm’s Valuation Metric by Comp’s Multiple to Get Target Firm’s Equity Value [Note: This same process is used for determining enterprise values. Also, the valuation can be conducted on a per share, as well as, on an aggregate basis.]

11. 11 Market Values to Earnings and Book Value Relationships Price-to-Earnings (P/E) Ratio: (stock price)/(earnings per share) PEG Ratio: (price/earnings multiple)/(earnings growth rate forecast) Market-to-Book Value Ratio: (stock price x number of shares outstanding)/ (book value of firm’s common equity)

15. 15 Revenue Multiples Equity Value-to-Sales Multiple = Market Value of Equity divided by Revenues Enterprise Value-to-Sales Multiple = (Market Value of Equity + Market Value of Debt – Cash) divided by Revenues

16. 16 Earnings Multiples Price-Earnings (P/E) Multiple = Market Price per Share / Earnings Per Share (EPS) Price-Earnings to Growth (PEG) Multiple = Price-Earnings Multiple / Expected EPS Growth Rate Enterprise Value to EBITDA Multiple = (Market Value of Equity + Market Value of Debt – Cash) / EBITDA

17. 17 Book Value Multiples Equity Value-to-Book Value of Equity Multiple = Market Value of Equity / Book Value of Equity Enterprise Value-to-Book Value of Firm Multiple = (Market Value of Equity + Market Value of Debt – Cash) / (Book Value of Equity + Book Value of Debt – Cash)