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valuation: evaluating the deal greg endicott silicon forest forum november 16, 2002

2. Overview of Presentation. Defining ValuationValuation MethodologiesEvaluating the Deal. 3. Who Performs Valuations. Business appraisersVenture capitalistsInvestment banksCompany executivesAnalystsInvestorsOthers such as financial intermediaries consultants, etc.. Defining Valuation. 4. Reasons For Valuation.

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valuation: evaluating the deal greg endicott silicon forest forum november 16, 2002

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    3. 3 Who Performs Valuations Business appraisers Venture capitalists Investment banks Company executives Analysts Investors Others such as financial intermediaries consultants, etc.

    4. 4 Reasons For Valuation

    5. 5 Definitions of Value

    6. 6 What is Being Valued Levels of Value

    7. 7 What Has Value?

    8. 8 Theoretical Valuation Methodologies These methodologies are based upon numerous assumptions, most notably, efficient markets and informed and rational investors.

    9. 9 Characteristics of Emerging Companies Short history with new, often innovative products / services Steep growth curve and high risk Months / years to first revenue or profit Securing adequate capital critical to success Complex ambiguous capital structures Rules of thumb are typically not available or relevant High risk / growth potential complicates the valuation process and can cause apparent market irrationality

    10. 10 Understand Company’s Stage of Development

    11. 11 Applied Valuation Methodologies

    12. 12 Qualitative Valuation Metrics (Internal) Management team The “story” or “value proposition” Underlying technology and state of development R&D pipeline Patents/licenses Strategic alliances Market leadership Sales and earnings capabilities (time to $) Sustainable competitive advantages Achievement of milestones

    13. 13 Qualitative Valuation Metrics (External) Size of the market and first mover advantage Competitive environment Product demand Barriers to entry Market mindset (.com, B2C, B2B, P2P, etc.) M&A market activity Public market activity (IPO)

    14. 14 Income Approach Capitalization of earnings is not usually relevant Discounted cash flow is needed Starting point is business plan projections (must be credible) Projections are often optimistic and may require a “haircut” Discount rate is based upon venture capital type rates of return and should be consistent with the projections Terminal value is critical Often use an exit multiple to estimate terminal value

    15. 15 Value and Risk Change Over Time

    16. 16 Market Approach

    17. 17 Cost Approach Not usually relevant for emerging companies but might be relevant in the following situations: Situations where there is not yet significant intangible value. Distressed companies Buy vs. build analysis

    18. 18 Applied Valuation Methodologies – Acquisition Analysis DCF Target specific Quantification of synergies Cash vs. stock deal Assets vs. Equity Accounting issues (EPS dilution, IPRD, etc.) Other structuring issues (earn outs, etc.) Transaction environment (pool of buyers, auction, etc.)

    19. 19 Investment Bank IPO Valuation Methodology Focus is on market guideline multiples DCF as a reality check Key valuation considerations Overall market conditions Sector definition and position How to value off-line business segments Focus on forward revenue/earnings Industry metrics Historical performance validates projections (momentum) Credibility Barriers to entry Size of market Business model/projections assumptions

    20. 20 Common Valuation Errors Ambiguous definition of what is being valued Poor understanding of the underlying business model, technology and/or market Internal Inconsistencies Improper use of comparable data (market approaches) Application of earnings multiples or rates of return to incorrect earnings streams Failure to properly consider the applicability of discounts Lack of consideration of appropriate milestones Discount Rate not consistent with level of risk in the projections Improper use of non-financial benchmarks

    21. 21 Evaluating the Deal Define what you are valuing and the purpose Consider the current market conditions Strategic vs. Financial Buyers Buyer/seller motivations & negotiating position – what do they think they are buying? What do they think has value? Recognize differences in valuation techniques Beware of “rules of thumb” and non-financial metrics Consider premiums/discounts depending on the methodology Understand the components of value - do a sanity check Consider the terms Arm yourself with good information and present your case as convincingly as possible

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