1. EMGT 386 Mergers, Acquisitions and Valuation Third Lecture

2. Tonight Discussion of case study –Formatting Review of purchase accounting homework Calculating abnormal returns Opening discussion of valuation

7. A current example: Applied Micro Circuits buys MMC Networks All-stock deal; 0.619 AMMC shares for each MMCN Value is $4.5 bbl, $117 per share of MMCN MMCN trading at $78 prior to tender AMMC at $188 prior to tender Synergies are in product overlaps

18. Valuation Theory, techniques, controversies

19. What is valuation? Valuation is the effort to give a present value to a financial entity that offers a flow of earnings or cash or some other kind of financial flow in the future. Sometime those future financial flows are known (e.g. bonds) and sometimes they must be estimated (e.g. corporate earnings). Formal valuation typically involves some kind of discounting of financial flows from the future.

20. Applications and reasons for valuation market valuationEvaluate prices in the stock market (to compare against market valuation) Basis for locating suitable targets for M&A activity Basis for setting target bids in tender offers Analysis of the integrity of the same when done by others.

21. Types of valuation Traditional (judicial) company comparisons Algebraic (formula-based) Proforma (spreadsheet- or proforma-based) Revenue based (new)

22. The Judicial Technique Take key ratios for comparative companies or industry or sector –Market/sales (1.2X) –Market/book (1.4X) –Price/earnings (25X)

23. The Judicial Technique (cont) Take sales, book value, and net income of company being analyzed and multiply times prior ratios: –Sales X 1.2 ($100 X 1.2 = $120) –Book Value X 1.4 ($80 X 1.4 = $112) –Net Income X 25 ($4.8 X 25 = $120) Average: (120+120+112)/3 = $117