Corporate Valuation

1. Corporate Valuation “Price is what you pay. Value is what you get.” – Warren Buffett

2. When Thinking About Valuation… • Key valuation questions are: • What is the company worth? • What would another party pay? • Remember that valuation involves not just the “science” of valuation math but also the “art” of using assumptions in the process • Valuation includes an understanding of what drives value for a company and how that value can be impacted by various factors

3. A Company’s Value May Differ For Different Parties • An asset’s (firm’s) value may be different for different buyers and under different scenarios • Value to seller vs value to buyer vs value to competitor • Going concern value vs liquidation value • Synergies from investment • Tax implications • Value of control vs minority interest – influence cash flows vs passive dividend stream • Strategic value – unlock opportunities beyond the asset itself Source: Goldman Sachs

4. Why do We Perform Valuation? • Initial public offerings / secondary public offerings • Debt offerings • Equity Research • Mergers & acquisitions • Buy-side & sell-side advice • Divestitures & restructurings • Recapitalizations • Leveraged buyouts

5. We Can Calculate Two Levels of Valuation • Enterprise value • Also known as firm value or aggregate value • Equals common equity + debt + preferred stock + non-controlling interest • Equity value • Also know as market capitalization • Value of shareholders’ interests

6. Valuation May Be Based On Accounting Data • Sales • EBIT • Earnings before interest and taxes • Measures performance before effects of financing and taxes • Operating income typically approximates EBIT • Net income • Earnings per share

7. Valuation May Also Be Based On Financial Data • EBITDA • Earnings before interest, taxes, depreciation and amortization • Proxy for operating cash flow • Does not equal actual cash flow • Free cash flow • EBIT * (1 – Tax Rate) + depreciation and amortization – change in net working capital – capital expenditures

8. How Do We Calculate the Value of a Company? • Public company comparables • Acquisition comparables • Discounted cash flows (Intrinsic Value) • The above methods enable us to calculate an Imputed Valuation Range • We might also see valuations based on: • Merger consequences (debt capacity, credit rating impact, EPS impact, pro forma ownership) • Leveraged buyout analysis (what can a financial sponsor afford to pay after borrowing 4.0-5.0x EBITDA)

9. Public Company Comparables Allow For A Relative Value • Comparison of similar companies • Relative valuations based on key metrics • Metrics may include Sales, EBIT, EBITDA, etc. • Method is very easy to use and defend! • If Company A trades at 12.5x projected EPS and Company B is in same industry and projects EPS of $4.00, at what price should Company B’s stock be valued? • $4.00 x 12.5 = $50.00

10. We Can Acquire Comparable Data From Many Sources • Data sources: • Capital IQ • FactSet • Value Line • Bloomberg • Thomson I/B/E/S • Thomson First Call • Zacks • Standard & Poor’s Industry Surveys • Proxy statements, 10-K’s, 10-Q’s, IPO prospectuses

11. We Use Various Metrics To Calculate Value • Price / EPS (known as PE multiple) • Market Value / Net Income • Market Value / Book Value • PE / Growth Rate (known as PEG ratio) • Enterprise Value / Sales • Enterprise Value / EBITDA • Enterprise Value / EBIT

12. One Example Of Comparable Data Comes From Bloomberg Source: Bloomberg

13. Acquisition Comparables Allow Us To Value Based On Recent Transactions • Compares similar transactions using actual transactions • Use recent data to best reflect current environment • Main drivers of multiples are risk profile and growth prospects • If Company A was recently acquired for 7.0x projected EBITDA and Company B is in same industry and projects EBITDA of $50,000,000, what is the enterprise value of Company B? • $50,000,000 x 7.0 = $350,000,000

14. We Can Also Acquire Acquisition Comparables From Various Sources • Data sources: • Thomson Financial Securities Data • Capital IQ • Dealogic • Mergerstat / FactSet • Industry newsletters • M&A publications • Note: compile data based on industrial classification using GICS, ICB, NAICS or SIC code screens

15. Many Acquisitions Use One of The Following Multiples • LTM (trailing 12 months) Sales • LTM EBITDA • Premium To Prior Stock Price

16. A Third Method For Valuation Is Discounted Cash Flow • Calculates an intrinsic value for a company • Based on unlevered free cash flows • Independent of capital structure • Looks at cash flows available to all providers of capital • Highly sensitive to changes in the following: • Free cash flow projections • Estimated terminal (horizon) value • Discount rate applied to free cash flows • Value of company equals the sum of : • Present value of forecasted unlevered free cash flows • Present value of projected terminal value of company

17. Discounted Cash Flow Valuation Focuses On An Unlevered Scenario • Free cash flow projections • Typically forecasted for 5-10 years; not taken further into future due to impracticality of being accurate in later years • All cash flows are calculated as if the company was not levered (i.e. capital structure is 100% common equity) • Unlevered free cash flow = Tax-effected EBIT + depreciation and amortization +/- change in working capital

18. Discounted Cash Flow Valuation Includes A Horizon Value • Terminal value projection • Represents the value of the company beyond the actual projection period • Two methods to calculate: • Growth perpetuity – calculate value of perpetual, growing cash flow beginning in year succeeding projection period • Exit multiple – apply multiple to EPS, cash flow, etc. in year succeeding projection period • Terminal value typically stated as a range based on range of discount rates as well as range of growth rates or exit multiples

19. Projected Nominal Cash Flows Are Discounted To Arrive At A Present Value • Discount rate • Used to calculate present value of future cash flows and terminal value • Rate represents the blended required return for equity and debt investors • The return required by investors is based on the risk of the investments • Weighted average cost of capital (WACC) represents the blended required return • Typically stated as a range of values

20. Using The Three Methodologies We Can Impute A Valuation Range • Given results of public company comparables, acquisition comparables and DCF analysis, what is the company worth? • Other considerations: • Stock’s historical trading range • Exclude outlier results • Multiples are industry-dependent • Valuations are typically presented as a range of values based on our assumptions for growth rates and discount rates

21. Illustrative Valuation SummaryEnterprise Value ($ in millions) Methodology Benchmark Parameters Public Company Comparables 18-24x 2014 P/E 230 272 6-10x LTM EBITDA Acquisition Comparables 289 216 Discounted Cash Flow Analysis 8.0-10.0% Discount Rate 6-10x EBITDA Exit 251 308 Source: Goldman Sachs

22. Our Valuation Task • Be scientific • Use existing rules and analytics in areas of accounting, finance and financial statement analysis to build and use a solid model • Be artful and use good judgment • Assumptions are subjective in nature; be prepared to defend all assumption as appropriate for the analysis • Understand client’s industry and operating environment • Recognize that timing may effect valuation/assumptions

23. Our Valuation Task • Focus on key drivers for projections • Annual sales growth • Margin trends • Gross margin • Operating income margin • Develop an appropriate discount rate for use in the DCF model • How will terminal value be determined: • Growth rate to infinity • Exit multiple