1. Corporate Valuation 2002 - 1 Institut for Regnskab, Tom Hansen 1 GETTING STARTED-agenda Introduction –Aim –Means –Literature –Report –What to do –Exam –Practicalities Lecture: Background Next week

2. Corporate Valuation 2002 - 1 Institut for Regnskab, Tom Hansen 2 Aim Create an understanding for Corporate Valuation (C.V) and the thinking lying behind Obtain an insight into C.V. in theory and practice Practice skills in C.V. Via 4 elements: –Literature –Lectures –Workshop/Reports/Negotiations –2 Guest speakers focusing on essentials

3. Corporate Valuation 2002 - 1 Institut for Regnskab, Tom Hansen 3 Means 1 COACHED WORKSHOP (Monday, 8.55-9.40) + 2 LECTURES (Monday, 9.50- 11.30) PER WEEK SATURDAY NOV 16TH WHOLE DAY (9.00 - 17.00)! GROUPS AND TEAMS REPORTS TO BE DELIVERED ACTIVE PARTICIPATION / DIALOG

4. Corporate Valuation 2002 - 1 Institut for Regnskab, Tom Hansen 4 Literature Copeland, Koller & Murrin: Valuation 3ed. Articles (see handout) - copy from SL

5. Corporate Valuation 2002 - 1 Institut for Regnskab, Tom Hansen 5 The report Purpose: To evaluate the value of one corporation from a buyer or seller perspective –Analyzing historical performance (accounts) –Business strategy analysis –Financial analysis (developments in stock market) –Prospective analysis (forecast/value) To negotiate the price of the corporation with other buyers/sellers (16. November) –Learnings from negotiations and the valuing process should be included in the final report (25. November)

6. Corporate Valuation 2002 - 1 Institut for Regnskab, Tom Hansen 6 Please do - THIS WEEK Form groups (3-4 persons per group, Danes and non-Danes together) and Teams (3 groups per team, and one company per team) Decide in the teams on which group is buyer and which is seller (1 against 2 / 2 against 1) Choose a company and inform me on Email –and get my acceptance 1.Mail group participants, group name and team name, contact-mail, company, buyer/seller to me (tom.hansen@postkasse.org) (at the latest on 13. September) 1.Prepare a work plan 2.To be formalized sep 16th

7. Corporate Valuation 2002 - 1 Institut for Regnskab, Tom Hansen 7 Please do - LATER Give a presentation during the workshops (exercises) Mid stage report (1 A4) –Monday, Oct 21, evening Draft report & price –Wednesday, Nov 13, evening Negotiation on Saturday Nov 16th Final report –incl. “negotiation process and outcome description” + “learning reflections” –Monday, Nov 25, evening

8. Corporate Valuation 2002 - 1 Institut for Regnskab, Tom Hansen 8 POSSIBLE TYPES OF COMPANIES QUOTED - NONQUOTED BIG - SMALL HIGH TECH- GOOD OLD LOW TECH BRANDED - MASS PRODUCTS B2B - B2C SUCCESFULL - CRISIS INTERNATIONAL-REGIONAL-LOCAL DANISH -FOREIGN SINGLE BUSINESS -MULTIBUSINESS

9. Corporate Valuation 2002 - 1 Institut for Regnskab, Tom Hansen 9 Exam Grades are given on the basis on: the group report, and workshop participation on November 16 There will be no “normal” examination.

10. Corporate Valuation 2002 - 1 Institut for Regnskab, Tom Hansen 10 PRACTICALITIES PHOTOCOPIES OF ARTICLES 1 cd (Excel Spreadsheet + User manual) –Charlotte Løchte, c102 (10.00-14.00) COOPERATE IN TEAMS ON COLLECTION OF BASIC INFORMATION MATERIAL BUT PLEASE DO NOT SPY !!!!!!! AND HAVE FUN ! Email: tom.hansen@postkasse.org

11. Corporate Valuation 2002 - 1 Institut for Regnskab, Tom Hansen 11 Background lecture Which value –market –owner / new owner –fair / correct Valuation converts a forecast into a price - using a method and some data How do you get the forecast and how do you convert it into a prize ? Each method has its own focus and (data) requirements/ assumptions Should it be based on dividends, earnings, cash flow, or what ? How historic should it be ? –Should the accounts be used ? –How long into the future ?

12. Corporate Valuation 2002 - 1 Institut for Regnskab, Tom Hansen 12 The valuation-method ”tree” ONE PERIOD: MULTIPLES (e.g. P/E, Times revenues, Times EBITDA, Times EBIT, #number of customers) NET ASSET VALUE (=booked equity) (all assets? At what value?) –going concern (immaterial / goodwill) –realization / liquidation MULTIPLE PERIODS: FLOWS –direct 1: dividends –indirect: free cash flow - debt NET ASSETS AND FLOWS –abnormal earnings + book value (Edward-Bell-Ohlson) PEER GROUP: (diff. in dividend, leverage, growth, risk?) –on earnings and equity

13. Corporate Valuation 2002 - 1 Institut for Regnskab, Tom Hansen 13 STEPS in the valuation Business Strategy analysis –industry structure –corporate strategy Accounts analysis –quality of earnings Financial analysis –performance assessment Prospective analysis –forecast –valuation

14. Corporate Valuation 2002 - 1 Institut for Regnskab, Tom Hansen 14 New Foundations 1 The nature of the firm has changed. –Away from asset intensive, vertically integrated firms, with top down control over employees. –Towards firms offering (almost) purely human capital (consultants and technology firms) - (where the (valuable) employees have the right and possibility of leaving). Because –Physical assets have become less unique and valuable (improvement in capital markets, drop in communication costs) –Increased worldwide competition have increased the demand for talented employees –Firms grips for human capital is weakened (easier access to finance, many independent suppliers). Many alternative employment opportunities.

15. Corporate Valuation 2002 - 1 Institut for Regnskab, Tom Hansen 15 New Foundations 2 This has consequences for the valuation of companies, because ”the growth options are up for grabs”. We need a new approach to valuing firms that is consistent with the new nature of firms. Basis is a theory of the firm (ex: complementarity, collection of growth options). –What is the unit-of-analysis (are the firm boundaries stable) ? –How is value generated ? –How is this value distributed between equity and the other stakeholders ?

16. Corporate Valuation 2002 - 1 Institut for Regnskab, Tom Hansen 16 Corporate Architect (PWC) Increase shareholder value by value based management Shaping strategy and management (fig.2.2) –Develop the concept (valuation of entities) –Use it in strategic decision making (investments & targets) –And in operating decisions making (planning & budgeting) –Institutionalize it in culture, perf.measurements, and incentives Linking the management processes in a ”finance value line” (fig.1.4)

17. Corporate Valuation 2002 - 1 Institut for Regnskab, Tom Hansen 17 Rationality 4 main decision making models rational bounded-rational political garbage can The profit max./SHV approach is declining in relevance down the models

18. Corporate Valuation 2002 - 1 Institut for Regnskab, Tom Hansen 18 Evode Group 1 Andrew Simon is chairman of Evode Group with 5 different divisions. After many years with profitable growth, the turnover in 1991 is 6% down from 1990 to £m. 279 and profit after tax is more than halved from £m. 15,2 to £m. 7,3. The stock price is down to p. 43 more or less equivalent to the intrinsic value of p. 46 calculated based on cash flows. Analysts forecast a 1992 profit of £m. 8,9. What should Andrew Simon do ?

19. Corporate Valuation 2002 - 1 Institut for Regnskab, Tom Hansen 19 Evode Group 2 A hostile takeover bid from Wassal of p. 80 turns up - calculated by its CEO Chris Miller based on Peer Group multiples, indicating a value of p. 112. Evodes stock price rises to p. 103 Andrew Simons fights back signaling profit improvements in 1992 to £m.10,2 - so Chris Miller quickly improves his bid to p. 95. What’s next ?

20. Corporate Valuation 2002 - 1 Institut for Regnskab, Tom Hansen 20 Evode Group 3 A "white knight" Laporte and its CEO Ken Minton takes up 6,1% of the shares at 100 p. announcing it will make a bid above p. 100 for the rest. The offer is p. 120 paid in "paper" and gets the deal. Its own shares falls 10% in total - although its assessment of the acquisition value of Evode is p. 240. Should anybody have acted otherwise ?

21. Corporate Valuation 2002 - 1 Institut for Regnskab, Tom Hansen 21 Next 3 hours Workshop (8.55-9.40) –Groups, teams and companies –Workplan presentation by each team - on Overhead please –Exercise: 2,7 – 2,9 – 2.10 –Dialog and coaching Lecture: What to Measure and Manage CKM: 1, 2, 3 + Articles