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Firm Valuation

This lecture explores the key aspects of firm valuation through trading and operating comparables. It discusses aggregate and market value, revenue metrics like EBITDA, EBIT, and net income, and their roles in assessing company performance. Key financial ratios such as P/E ratio and return on invested capital (ROIC) are analyzed, focusing on top-performing firms. Furthermore, the lecture covers sale process alternatives and the factors influencing decisions during sales, including shareholder considerations, marketing strategies, and senior management involvement for informed valuation assessments.

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Firm Valuation

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  1. Firm Valuation Lecture 7

  2. Trading and Operating Comparables • Aggregate Value • Market Value • Revenue • EBITDA • EBIT • Net Income • Total Debt • Book Value/Share • EPS • LTM Revenue, Net Income, EBITDA growth rates • P/E • TSR

  3. HD Lowe’s Market Cap $78.6B $46.6B Enterprise Value 84.7B 49.1B 1 yr TSR (9.5)% 4.3% 3 yr TSR 8.4% (6.3)% 2007 AV/EBITDA 7.0X 7.0X 2007E P/E Ratio 11.9 13.9 2008E P/E Ratio 10.7 12.2 Credit Rating Aa3/AA A1/A+ Profile of Home Depot & Lowe’s

  4. ROIC and P/E Multiples

  5. Purchase price per share $12 %Premium to Current price 20% Fully Diluted Shares Outstanding 100M Implied Equity Value $1.2B Plus Net Debt 0.4B Implied Aggregate Value $1.6B Current EBITDA $150M Implied AV/EBITDA 10.6X Aggregate Value Analysis

  6. Financial Outlook Analysis

  7. Characteristics of Top Performing Firms • Capital Efficiency • Working Capital Efficiency • Increasing Return on Invested Capital • Rising Incremental Relative P/E values • Bottomline Limited Capital Requirements and High NOPAT margins generate strong ROIC

  8. Sale Process Alternatives • One Party- Negotiated Sale Contact One Party • Controlled Limited Auction • Open Broad Auction • Publicly Announce Pursuing Strategic Alternatives

  9. Factors in the Decision • Shareholder • Marketing • Senior Management • Employees • Contract • Community

  10. Factors in the Decision • Marketing • Confidentiality • Number of potential Bidders • Timing • Information Flow

  11. Factors in the Decision • Senior Management • Willingness to stay on • Depth of the team • Contracts/Severance • Incentive-Stay Pay Agreements

  12. Factors in the Decision • Employees • Future Opportunity • Benefits • Job Security • Culture

  13. Factors in the Decision • Structure of the Deal • Representations and Warranties • Indemnifications • Closing Conditions

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