A9r68c4valuation Project Workbook

CONFIDENTIAL
VALUATION PROJECT WORKBOOK

SUMMER ANALYST PROGRAM 2007
PRELIMINARY | SUBJECT TO FURTHER REVIEW AND EVALUATION

THESE MATERIALS MAY NOT BE USED OR RELIED UPON FOR ANY PURPOSE OTHER THAN AS SPECIFICALLY CONTEMPLATED BY A WRITTEN AGREEMENT WITH CREDIT SUISSE.
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\\nnyc14p20005\training\_summer analysts\Scheduled Credit Suisse Presentations\Valuation Project Overview (TRAINING LEADERS)\2007 Summer Analyst Valuation Book.ppt /1
Table of Contents
1 Overview of Valuation Project Sample Project Weekly Assignments and Resources A Public Information Book (PIB) B Company Profile C Equity Comps / M&A Comps D DCF and WACC Analysis E Merger Consequences Analysis
D R A F T
2 3
If you have any questions regarding materials in this book, or the valuation project in general, dont hesitate to call us: Anna Golynskaya Training Leader anna.golynskaya@credit-suisse.com (212) 538-5442 Miriam Roshan Training Leader (212) 325-1822 miriam.roshan@credit-suisse.com Phil Kohn Training Leader phil.kohn@credit-suisse.com (212) 538-0558 Jeff Volling Training Leader (212) 325-5529 jeffrey.volling@credit-suisse.com 1
CONFIDENTIAL
1. Overview of Valuation Project
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Overview of Valuation Project
D R A F T
Welcome to Credit Suisse! In addition to meeting a ton of new people and having fun for the next 10 weeks, we figured it would be helpful for you to return to college your senior year having learned something about what Investment Bankers do
Several analysts, associates, and Vice Presidents from across the division have worked hard to put the
following materials together as your one-stop shop for banking how tos
In addition to your group staffing assignments over the next two months, you will also be asked to
complete a group valuation project to be submitted by Week 9 of your program. The submission will include the following:
A company profile Equity comps and M&A comps DCF valuation Merger consequences analysis
At the end of the summer, August 2 nd, your team will be asked to present, in a short session, your
analyses and conclusions to a team of bankers

This project will be completed gradually over the course of the summer and we will be holding 4
sessions (1 every week) to cover each of the topics or analysis we will be asking you to do
You will be required to turn in you work for the topic covered each week at the following weeks session
(i.e., you will go over profiles in first session and turn them in at the second session)
We plan to return your assignment within one week so you can see if you are on the right track and
where you may need to improve
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Project Schedule and Key Dates

Date Session Details

Next Steps

D R A F T
Session 1
June 29 10 am & 2 pm
Finding public information and creating a PIB Creating a company profile Equity Comps and Acquisition Comp Analysis
Create Knight Ridder PIB Create Knight Ridder profile Find Knight Ridder trading comparables Find important average trading stats For given comparable acquisitions, find key multiples Create projected Knight Ridder income statement Determine WACC based on comps Project free cash flows and discount at WACC Evaluate transaction consequences including EPS accretion/dilution, pro forma credit stats, pro forma ownership Create premiums paid and synergies sensitivity tables Good Luck!!
Session 2
July 6 10 am & 2 pm
Session 3
July 13 10 am & 2 pm
Discounted Cash Flow
Session 4
July 27 10 am & 2 pm
Merger Consequences
PRESENTATION
August 6
Present final projects
Note: Due to the fact that the deal was announced on 3/13/06, for all valuations, please use all public information available as of then (latest filing would be the 12/25/05 10-K) and stock prices and research as of 3/10/06.
This schedule provides a set of guidelines to help you plan your final project.
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2. Sample Project
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USF Corporation Company Profile

Status: Website: Public (Nasdaq: USFC) www.usfc.com Headquarters: Chicago, IL Employees: 21,000
D R A F T
Company Overview
Management and Board of Directors

Name
Thomas E. Bergmann Steven Caddy Edward R. Fitzgerald Douglas R. Waggoner Paul J. Liska Morley Koffman Stephen W. Lilienthal Anthony J. Paoni Glenn R. Richter Neil A. Springer Michael L. Thompson
Provides comprehensive supply chain management services in four business segments: Less-than-truckload segment, carriers provide regional and interregional delivery throughout the United States Truckload segment offers premium regional and national truckload services Logistics segment provides dedicated fleet, cross-dock operations, supply chain management, contractual warehousing, domestic ocean freight forwarding and reverse logistics services Information Technology segment provides support activities including corporate sales and various financial management functions USF provide services to a wide variety of customers, with no single customer accounting for more than 3.3% of revenue
Position and Affiliation

Interim CEO, CFO President and CEO, USF Holland President and CEO, USF Reddaway President and CEO, USF Bestway Chairman of the Board Director Director Director Director Director Director
Source: Company filings and Capital IQ.
Source: Company filings and FactSet.
Recent News
1/28/2005: USF Corporation reported fourth quarter and full
Ownership
HOLDERS Citigroup Inc. Fidelity Management & Research Dimensional Fd Advisors, Inc. Barclays Bank Allianz Dresdner Asset Mgmt. Top 5 Institutions Other Institutions Total Institutions Insiders Other Total SHARES 2,595,871 2,410,515 1,831,607 1,567,377 1,234,140 9,639,510 15,892,218 25,531,728 473,040 196,072 26,200,840 % OF TOTAL 9.9% 9.2% 7.0% 6.0% 4.7% 36.8% 60.7% 97.4% 1.8% 0.7% 100.0%
year 2004 results, missed Wall Street earnings

12/13/2004: Announced opening of two new terminals serving
the Southern Minnesota and Decatur, Alabama areas

11/2/2004: Richard P. DiStasio stepped down as CEO, Paul
Liska was named interim CEO

10/22/2004: Reported third quarter 2004 results, missed Wall
Street earnings
9/9/2004: USF Holland announced the opening of eight (8)
Northeast terminals, service city includes: Baltimore, MD Albany, NY, Allentown, PA, Harrisburg, PA, Philadelphia, PA, Wilkes Barre, PA, Syracuse, NY, and Richmond, VA
Source: Company filings, and website.
Source: Company filings and ShareWorld.
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USF Corporation (Contd)

Stock Price Performance Market and Trading Data
2,000
D R A F T
$40 $37
Volume in Thousands
1,500
Stock Price (2/4/05) % of 52-Week High 52-Week High / Low Diluted Shares Equity Market Value (+) Debt () Cash & Equivalents Enterprise Value $38.80 /
$32.44 83.6% $27.51 28.2 916.0 250.1 150.8 $1,015.3
Stock Price
$34 1,000 $31 $28 $25 2/4/04 500
4/5/04 6/5/04 USF Corp. Volume
8/5/04
0 10/5/04 12/5/04 2/4/05 USF Corp. Stock Price
Financial Overview
($ in millions)
Enterprise Value to: 2004E Revenue 2005E Revenue

2006E $2,658.8 5.6% $150.1 5.6% $273.1 10.3% $78.8 3.0% $2.82 190.0
$2,516.9 / $2,658.8 / $169.2 / $253.7 /
0.4x 0.4x 6.0x 4.0x
Revenues % Growth EBIT % Margin EBITDA % Margin Net Income % Margin EPS Capex
2004A $2,394.6 4.5% $112.1 4.7% $169.2 7.1% $55.8 2.3% $0.85 145.0
December 31, 2005E $2,516.9 5.1% $130.0 5.2% $253.7 10.1% $66.5 2.6% $2.48 185.0
2004E EBITDA 2005E EBITDA EPS Estimates / P/E Ratio 2004E EPS 2005E EPS
$0.85 / $2.48 /
38.2x 13.1x
Source: Company filings and Wall Street equity research.
Source: Company filings and Wall Street equity research. Note: EPS projections based on I/B/E/S consensus.
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Comparable Company Analysis

($ in millions)
SHARE PRICE COMPANY 02/04/05 % OF 52-WEEK HIGH EQUITY VALUE ENTERPRISE VALUE ENTERPRISE VALUE AS A MULTIPLE OF SALES MULTIPLE OF EBITDA 2004E 2005E 2004E 2005E P/E 2004E 2005E LONG-TERM EPS GROWTH LTM OPERATING RATIO
D R A F T
Truck Load JB Hunt Transportation Swift Transportation Werner Enterprises Heartland Express
(1) (1)
$45.00 22.61 20.94 20.93
97.7% 99.4% 90.1% 90.2% 99.3% 97.8%
$3,682 1,671 1,679 1,570 1,460 312
$3,697 2,265 1,570 1,311 1,434 372 Mean Median
1.3x 0.8x 0.9x 2.9x 3.5x 0.6x 1.7x 1.1x 0.6x 0.6x 0.6x 1.2x 0.5x 0.5x 0.7x 0.6x 1.0x 1.5x 1.1x 0.5x 0.6x 2.6x 3.0x 0.4x 0.7x 1.3x 1.0x 0.4x
15.8% 12.6% 15.3% 13.8% 16.6% 12.0% 14.4% 14.6% 14.1% 15.5% 12.5% 17.5% 15.0% 10.5% 14.2% 14.5% 14.5% 20.0% 20.0% 17.4% 17.0% 14.6% 14.5% 25.0% NA 17.9% 17.2% 10.2%
92.9% 93.6% 91.6% 79.6% 80.7% 94.0% 88.7% 92.3% 92.3% 82.8% 92.8% 91.4% 95.6% 94.6% 91.6% 92.6% 94.9% 94.0% 94.6% 97.2% 94.1% 94.8% 81.1% 96.6% 93.9% 93.5% 94.6% 97.3%
(1) (1)
Knight Transportation
25.71 20.86
Covenant Transportation
Less Than Truckload CNF Inc

(1) (1) (1) (1)
$46.49 30.35 41.77 35.60 22.55

(1)
91.2% 78.5% 89.5% 97.5% 81.6% 97.8%
$2,457 850 1,069 885 354 2,769
$2,400 925 1,000 961 470 3,320 Mean Median
Overnite Corp
Arkansas Best Corp
Old Dominion Freight SCS Transportation
(1)
Yellow Roadway Corp
56.31
Logistics C.H. Robinson Worldwide UTi Worldwide Inc Sirva Inc EGL Inc (1) Landstar System Inc Pacer International Forward Air Corp Hub Group Quality Distribution Inc
$51.38 71.88 9.40 31.18 35.25 22.19 43.33 56.46 8.62
91.1% 98.5% 36.2% 89.1% 91.4% 91.0% 91.7% 96.6% 53.4%
$4,435 2,307 693 1,461 1,083 837 944 529 164
$4,201 2,297 1,165 1,475 1,113 1,007 840 529 436 Mean Median
USF Corp
(1)
$32.44
83.6%
$916
$1,015
Source: Public filings and Wall Street research reports. (1) Based on 4Q '04 earnings releases.
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Selected Precedent Transactions

($ in millions)
ENTERPRISE VALUE/ EBITDA 6.7x 4.0 5.7
(2)
EQUITY
ENTERPRISE VALUE $1231 78 510

(1)
D R A F T
DATE Jul-03 Nov-01 Nov-01
TARGET Roadway Corporation (US)
TARGET DESCRIPTION LTL carrier providing freight services on major city-to-city routes in North America
ACQUIROR Yellow Corporation Union Pacific Corp. Roadway Corp.
VALUE $966 83 558
TARGET UNIONIZED NA No Yes
Motor Cargo Industries Provides regional less-than truckload services in the western U.S. Arnold Industries Provides regional less-than-truckload services in northeastern states and also provides truckload and logistics services N/A
Aug-01 Aug-01 Nov-00
Arnold Industries (US)
Roadway Corporation Investor Group (Estes) FedEx Corp.
539 40 934
510 40 1,196
5.4 5.0 6.3
No No No
G.I. Trucking Company Provides regional less-than-truckload services in western and southwestern states American Freightways Corporation Operates as a scheduled common and contract carrier transporting primarily less than-truckload shipments of general commodities. Provides regional and interregional transportation of general commodity freight Provides les-than-truckload transportation of general commodity freight Provides transportation, logistics and related information services through its five subsidiaries Transporter of freight throughout United States; also provides truckload services and driver leasing services through its subsidiaries Carrier of intrastate and foreign commerce within Texas, Arizona, and New Mexico Provides less-than-truckload transportation of general commodity freight Provides regional carrier services in California and 9 other Western States LTL and TL carriage, furniture manufacturing and tire retreading
Jun-99 Jun-98 Oct-97
Jevic Transportation Inc. Preston Trucking Caliber System, Inc. Worldway Corp.
Yellow Corp. Management Group FedEx Corp.
158 NM 2,489
197 NA 2,681
5.9 NA 10.3
No Yes No
Jul-95
Arkansas Best Corp.
82
153
9.0
Yes
Nov-92 Nov-92 Jul-88 Jun-88
Central Freight Lines Inc. Preston Trucking Viking Freight Inc. Arkansas Best Corp.
Roadway Services Inc. Yellow Freight Systems Roadway Services Inc. Kelso & Co.
102 24 135 317
148 146 172 472 Median Average High Low
6.8 5.8 7.8 6.2 6.1x 6.5x 10.3x 4.0x
No Yes No Yes
Source: Securities Data Corporation, public filings and news reports. (1) Enterprise Value = Value of Common + Total Debt Cash. (2) EBITDA, EBIT and Net Income exclude extraordinary items and accounting changes.
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WACC Schedule
Industry Statistics
(in millions) Total Company Beta
(1)
Mkt Equity 1,069 2,457 885 850 354 2,769
Debt / Mkt Equity 1.4% 29.1% 9.2% 14.9% 34.7% 26.3% 19.3% 20.6%
Tax Rate
(2)
Levering Factor
(3)
Unlevered Beta
(4)
Debt 15 714 81 127 123 728
Assumptions
Target Marginal Tax Rate Risk Free Rate (5) Equity Risk Premium (6) Size Premia ("Sp") (7) 38.0% 4.330% 7.20% 1.59%
D R A F T
Arkansas Best Corp Cnf Inc Old Dominion Freight Overnite Corp Scs Transportation Inc Yellow Roadway Corp Mean Median
0.83 0.89 0.62 0.95 0.63 1.00 0.82 0.86
40.1% 41.0% 39.1% 40.0% 37.6% 39.1% 39.5% 39.6%
1.01 1.17 1.06 1.09 1.22 1.16 1.12 1.12
0.82 0.76 0.59 0.87 0.52 0.86 0.74 0.79
Schedule A (Sensitivity of Capital Structure)

Debt / Capital 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% Debt / Mkt Equity 0.0% 11.1% 25.0% 42.9% 66.7% 100.0% Average Unlev'd Beta 0.74 0.74 0.74 0.74 0.74 0.74 Levering Factor 1.00 1.07 1.16 1.27 1.41 1.62 Levered Beta (8) 0.74 0.79 0.85 0.93 1.04 1.19 Cost of Equity (9) 11% 12% 12% 13% 13% 15% 5.0% 11.2% 10.7% 10.3% 9.8% 9.3% 8.8% Weighted Average Cost of Capital (10) Pre-tax Cost of Debt 6.0% 7.0% 8.0% 11.2% 10.8% 10.4% 10.0% 9.5% 9.1% 11.2% 10.9% 10.5% 10.1% 9.8% 9.4% 11.2% 10.9% 10.6% 10.3% 10.0% 9.7% 9.0% 11.2% 11.0% 10.8% 10.5% 10.3% 10.0% 10.0% 11.2% 11.1% 10.9% 10.7% 10.5% 10.4%
Schedule B (Sensitivity of Unlevered Beta)

Debt / Capital 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% Debt / Mkt Equity 0.0% 11.1% 25.0% 42.9% 66.7% 100.0% Levering Factor 1.00 1.07 1.16 1.27 1.41 1.62 Unlevered Beta 0.65 0.70 0.75 0.80 0.85 0.90 5.0% 10.6% 10.5% 10.3% 10.2% 10.0% 9.8% Weighted Average Cost of Capital (10) Pre-tax Cost of Debt 6.0% 7.0% 8.0% 10.6% 10.5% 10.5% 10.4% 10.2% 10.1% 10.6% 10.6% 10.6% 10.5% 10.5% 10.4% 10.6% 10.7% 10.7% 10.7% 10.7% 10.7% 9.0% 10.6% 10.7% 10.8% 10.9% 11.0% 11.0% 10.0% 10.6% 10.8% 11.0% 11.1% 11.2% 11.3%
(1) Barra US equity Book predictions (2) Based on marginal tax rate (3) Levering Factor: 1 + [ ( 1 - Tax Rate ) * ( Debt / Equity ratio ) ] (4) Unlevered Beta: ( Beta / Levering Factor ) (5) Yield on Interpolated 20-Year US treasury Bonds which corresponds to Ibbotson's long-term equity risk premium (as of 2/04/05). Source: Bloomberg. (6) The average historic period between the return on stocks and L-T bonds (2004 Ibbotson Associates).
(7) Cost of equity premia based on equity market capitalization. low-cap ($797mm - $1,167mm) = 1.59%. Amounts per 2004 Ibbotson. (8) Levered Beta: (Beta * Levering Factor) (9) Cost of Equity: Rf + B * ( Rm - Rf ) + Sp, or the risk-free rate plus the beta * the equity risk premium (10) WACC: Rd = Return on Debt; Re = Return on Equity [ Rd * (1 - tax rate) * (D / (D + E) ) ] + [ Re * (E / (D + E) ) ]
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Discounted Cash Flow Analysis

($ in millions)
2005E
2006E $278.5 (121.6) $156.9 (59.6) $97.3 121.6 (110.5) (7.2) $101.1
2007E $307.2 (130.3) $176.9 (67.2) $109.7 130.3 (118.4) (7.7) $113.9
2008E $317.6 (134.2) $183.4 (69.7) $113.7 134.2 (122.0) (3.2) $122.7
2009E $328.2 (138.2) $190.0 (72.2) $117.8 138.2 (125.7) (3.2) $127.1
D R A F T
EBITDA Less: D&A EBIT Less: Tax Effect Unlevered Net Income Plus: D&A Less: Capex Plus: Changes in WC Unlevered Free Cash Flow
Source: Wall Street research projections and Credit Suisse estimates. ($ in millions, except per share data)
$250.7 (113.6) $137.1 (52.1) $85.0 113.6 (103.2) (13.7) $81.7
Discount Rate 9.0%
4.50x $417.5 960.0 $1,377.5 (99.3) $1,278.2 $44.42 36.9% 0.4% $406.1 917.1 $1,323.3 (99.3) $1,224.0 $42.64 31.4% 1.3% $395.2 876.6 $1,271.8 (99.3) $1,172.5 $40.95 26.2% 2.2%
Terminal Value EBITDA Multiple 5.00x 5.50x $417.5 1,066.7 $1,484.2 (99.3) $1,384.9 $47.92 47.7% 1.2% $406.1 1,019.1 $1,425.2 (99.3) $1,325.9 $45.98 41.8% 2.1% $395.2 974.0 $1,369.2 (99.3) $1,269.9 $44.15 36.1% 3.0% $417.5 1,173.3 $1,590.9 (99.3) $1,491.6 $51.42 58.5% 1.8% $406.1 1,121.0 $1,527.1 (99.3) $1,427.8 $49.33 52.1% 2.8% $395.2 1,071.4 $1,466.6 (99.3) $1,367.3 $47.34 45.9% 3.7%
6.00x $417.5 1,280.0 $1,697.5 (99.3) $1,598.2 $54.92 69.3% 2.4% $406.1 1,222.9 $1,629.0 (99.3) $1,529.7 $52.67 62.4% 3.3% $395.2 1,168.8 $1,564.0 (99.3) $1,464.7 $50.54 55.8% 4.3% Present Value of Free Cash Flows Present Value of Terminal Value Enterprise Value Less: Net Debt Equity Value Equity Value per Share (1) Implied Premium / (Discount) to Current Implied Perpetuity Growth Rate Present Value of Free Cash Flows Present Value of Terminal Value Enterprise Value Less: Net Debt Equity Value Equity Value per Share (1) Implied Premium / (Discount) to Current Implied Perpetuity Growth Rate Present Value of Free Cash Flows Present Value of Terminal Value Enterprise Value Less: Net Debt Equity Value Equity Value per Share (1) Implied Premium / (Discount) to Current Implied Perpetuity Growth Rate
10.0%
11.0%
(1) Based on share price of $32.44 as of 02/04/05.

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Potential Merger Assumptions

Key Assumptions
D R A F T
Projections
USF
Corporation and Yellow Roadway projections based on Wall Street equity research; estimated marginal tax rate of 38% acquiror net income based on Wall Street equity research
Prospective
Financing
50%
Stock 50% Cash Consideration assumed; financed by 100% bank debt at 3-Months LIBOR plus 100 basis points of $1,015 $1,410 mm, corresponding to 4.0x 5.6x 2005E EBITDA
Purchase Price FMV Adjustments Goodwill Timing Fees
Range Fair
market value adjustment estimated at 12% of book value; depreciated over 20 years not amortized to gain full 2005 earnings
Goodwill
Assumed M&A
Fees of 0.5% of transaction value Financing fees of 2.5% of debt raised

None
Synergies
assumed; pre-tax synergies required to achieve acquiror break-even EPS inferred
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Merger Consequences Analysis

Yellow Roadway Acquisition of USF Corporation
($ in millions)
D R A F T
Premium to Share Price Price Per Share Equity Value (1) Net Debt Enterprise Value Enterprise Value / 2005E EBITDA Enterprise Value / 2006E EBITDA Equity Value / 2005E Net Income Equity Value / 2006E Net Income 2005E Stand Alone Diluted EPS 2005E Pro Forma Diluted EPS 2005E Accretion / (Dilution) Acc / (Dil) $ Acc / (Dil) % Pre-Tax Breakeven Synergies Pro-Forma Debt / LTM EBITDA Debt-to-Capitalization (at closing) % Shares issued as currency ProForma Ownership%
(2)
$32.44 $918 99 1,017 4.1x 3.7x 13.3x 11.4x $5.25 5.59
5.0% $34.06 $966 99 1,065 4.2x 3.8x 14.0x 12.0x $5.25 5.53
10.0% $35.68 $1,014 99 1,114 4.4x 4.0x 14.7x 12.6x $5.25 5.48
50% Cash / 50% Stock Consideration 15.0% 20.0% 25.0% 30.0% $37.31 $1,062 99 1,162 4.6x 4.2x 15.4x 13.2x $5.25 5.43 $38.93 $1,111 99 1,210 4.8x 4.3x 16.1x 13.8x $5.25 5.38 $40.55 $1,160 99 1,259 5.0x 4.5x 16.9x 14.4x $5.25 5.33 $42.17 $1,210 99 1,309 5.2x 4.7x 17.6x 15.0x $5.25 5.28
35.0% $43.79 $1,259 99 1,358 5.4x 4.9x 18.3x 15.6x $5.25 5.24
40.0% $45.42 $1,309 99 1,408 5.6x 5.1x 19.0x 16.2x $5.25 5.19
$0.34 6.4% 1.6x 45.28% 14.2% 85.8%
$0.28 5.4% 1.7x 45.36% 14.9% 85.1%
$0.23 4.4% 1.7x 45.45% 15.5% 84.5%
$0.18 3.5% 1.7x 45.53% 16.1% 83.9%
$0.13 2.6% 1.8x 45.61% 16.7% 83.3%
$0.08 1.6% 1.8x 45.69% 17.3% 82.7%
$0.03 0.7% 1.8x 45.76% 17.9% 82.1%
($0.01) (0.3%) $1.3 1.9x 45.83% 18.5% 81.5%
($0.06) (1.2%) $6.1 1.9x 45.91% 19.1% 80.9%
Source: Wall Street Projections, Credit Suisse Estimates. (1) Net Debt numbers as of 12/31/04. (2) Based on LTM EBITDA of $697mm.
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3. Weekly Assignments and Resources

A. Public Information Book (PIB)
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Summer Assignment PIB

Assignment
D R A F T
Prior to the June 30th training session, please assemble a PIB on Knight Ridder Make sure that your PIB has all the sections outlined on the next page Insert numbered tabs between each section blue sheets between each item in the same tab, if
multiple items exist. For example, put a blue sheet between each research report
Have the Copy Center make a double-sided bound copy of your PIB
Key Takeaways
After completing this section, you should be familiar with most of the tools that are available to
access public information

Research reports are expensive!!! Purchase only those that are appropriate Be prepared to answer questions like:
1. Where do I go to get the latest SEC filing? 2. Where do I go to get an ownership run? 3. Have any major events occurred at the Company in the recent quarter?
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Public Information Book Resources

Sample Table of Contents Where to Get the Material
1. General Public Information
D R A F T

S&P Stock Report Bloomberg Data Price/Volume Web Site
Company Website
2. Prospectus
Usually follows a major event (M&A, Equity offering, Debt offering)
3. Annual Report 4. Form 10-K

Annual filing with the SEC, similar to an annual report Quarterly filing with the SEC Covers information about company shares and shareholders Include CS if available Look for longer, more recent research Back two six months is standard Tracks ownership structure of company
Company Website
5. Form 10-Q 6. Proxy Statement 7. Research Report CS Research & Analytics
8. News Run 9. Ownership Run
Company Website
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B. Company Profile
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Summer Assignment Company Profile
D R A F T
Assignment In the format shown on the sample pages, create a two page company profile for Knight Ridder Corporation Make sure you include: Company Overview Market Statistics (download from FactSet) Financial Overview Stock Price Performance Directors and Officers Products Current Ownership Helpful Hint: The financial overview summary sheet in your Abacus shell (see Tab C) is a good template from which to copy and paste market stats and financial overviews Key Takeaways At the end of this section, you should be able to answer the following: 1. What are Knight Ridder Corporations primary business segments? 2. How has Knight Ridder Corporation performed in the last year with respect to: Earnings? Stock price? Any relationship between the two? 3. Any important events occur at the Company over the past year?

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Agenda
Creating a general two page company profile
D R A F T
Keys to a successful acquisition ideas presentation
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Keys to a Successful Acquisition Ideas Presentation

Know Your Audience
D R A F T
Use a Systematic Approach Remember the Formula: Strategic Fit + Availability = A Good Idea Demonstrate Industry Knowledge Revisit Old Ideas Selectively Stimulate Discussion and Ask Questions Summarize Conclusions and Develop Follow-up Plan
A successful acquisition ideas presentation delivers a focused set of ideas with a point of view and a rationale.
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Considerations in Determining Fit
D R A F T
Strategic
Client specified
General
Organic growth prospects of
Financial
Leverage Accretion / dilution Market perception
Size Industry Technology Geographic scope (international vs. domestic) Markets Customers Distribution Manufacturing
target
Management talent Technology or other
proprietary assets
Product synergies
Operating synergies
Corporate cost savings S,G & A cost savings Other
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Signals of Availability / Lack Thereof

Signs of Availability Signs of Lack of Availability
Insiders control a meaningful percent of the stock and have no
D R A F T
Parent is a LBO sponsor Filed equity offering with large secondary component Previous failed attempt to sell (busted auction) or spin-off
evident need for liquidity

Family-owned with the next generation preparing or prepared
(busted IPO)
Takeover speculation Undervalued, depressed or declining stock price Shareholder activism Potential odd man out in rapidly consolidating industry or
to assume leadership
Majority owned by another company that has obvious reason
to hold onto the business

Strong and consistent stock performance The current parent is the most obvious best owner for the
business The current parent has identified the business as a core business and/or the equity market is in favor of current parent owning the business Consider the targets defensive posture vis-a-vis a hostile offer, but remember the valuation/rationale must be even more compelling to justify an unsolicited approach Note: It is also important to review the valuation multiples of the publicly-traded Parent Company which owns the target subsidiary. If sale proceeds (after tax) imply lower valuation multiples (EBITDA, EBITA and Net Income) than those at which the parent stock is selling, the transaction would be dilutive to overall value and thus would probably be a non-starter as a sale candidate today
segment
Changes in senior management or aging senior management
with no obvious successor

Dramatic revisions in corporate strategy Need to expand internationally or to retrench Need for capital Failure or inability to grow new products organically Parent reorganizing or realigning businesses, possibly in
preparation for a sale

Division with no logical strategic fit with the parent (corporate
orphan)
Division underperforming or less profitable than core business
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Acquisition Screening Information Sources

SIC code lists
D R A F T
Equity analyst research Competition sections of prospectuses and 10-Ks of comparable companies Research reports relating to the Client and its core industry group competitors Value Line for Client and its competitors S&P Tear Sheets (with word search) OneSource (U.S. Public, U.S. Private, and U.K. Public SIC Code Summary Analyses) Industry trade association lists Trade publications WorldScope database (Global Buyers List) FactSet comp builder SDC M&A summaries
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Creating a General Company Profile

Business section of 10K / Annual Report
D R A F T
Company Overview
Business Description The Boeing Company is an aerospace firm. The Company operates in principal areas that include commercial airplanes, military aircraft, missile systems, space and communications and customer and commercial financing. Business Segments
finance.yahoo.com business profile Research reports Company Web site VentureSource (private companies) Your PIB can be a great resource (See
The Commercial Airplanes segment is involved in development, production and marketing of commercial jet aircraft and providing related support services, principally to the commercial airline industry worldwide. The Military Aircraft and Missile Systems segment is involved in the research, development, production, modification and support of military aircraft including fighter, transport and attack aircraft, as well as helicopters and missiles. The Space and Communications segment is involved in the research, development, production, modification and support of space systems, missile defense systems, satellites and satellite launching vehicles, rocket engines and information and battle management systems. The Customer and Commercial Financing segment is primarily engaged in the financing of commercial and private aircraft and commercial equipment.
Tab A)
10K / Annual Report Research reports Company Web site PIB
10K / Annual Report Research reports finance.yahoo.com business profile Company Web site PIB
Competitors The Company competes with Lockheed Martin, Raytheon, BAE Systems, Northrop Grumman, Matra BAe Dynamics Alenia and The European Aeronautics Defense & Space Corporation.
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Therapeutic Focus 2003
D R A F T
Highlight product mix or any particular asset that might be of interest to your Audience
Company Web site Research reports 10K / Annual report
Note: Currently there is no similar pie graph in USF profile but it is a possibility for your Knight Ridder profile (or other profiles you will be expected to do in your respective groups).
Osteoporosis $1.0 BN Oncology $1.0 BN
Sexual Antibiotics Dysfunction $0.7 BN $0.2 BN Cardiology $0.5 BN
Diabetes/ Metabolic $2.1 BN
CNS $5.4 BN
Financial Overview
($ in millions)
You can find the historical information
from company filings

The projections will come from
research
PIB
Revenues % Growth EBIT % Margin EBITDA % Margin Net Income % Margin EPS Capex
2004A $2,394.6 4.5% $112.1 4.7% $169.2 7.1% $55.8 2.3% $0.85 145.0
December 31, 2005E $2,516.9 5.1% $130.0 5.2% $253.7 10.1% $66.5 2.6% $2.48 185.0
2006E $2,658.8 5.6% $150.1 5.6% $273.1 10.3% $78.8 3.0% $2.82 190.0
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Market and Trading Data
This should come from your equity
D R A F T
Stock Price (2/4/05) % of 52-Week High 52-Week High / Low Diluted Shares Equity Market Value (+) Debt () Cash & Equivalents Enterprise Value Enterprise Value to: 2004E Revenue 2005E Revenue 2004E EBITDA 2005E EBITDA EPS Estimates / P/E Ratio 2004E EPS 2005E EPS $0.85 / $2.48 / $2,516.9 / $2,658.8 / $169.2 / $253.7 / $38.80 /
$32.44 83.6% $27.51 28.2 916.0 250.1 150.8 $1,015.3
comp shell (See Tab C)

Keep in mind, you may update this
profile often (e.g. latest stock price or estimates) so keeping your comps flexible is key
0.4x 0.4x 6.0x 4.0x
38.2x 13.1x
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Stock Price Performance
D R A F T
$40 $37
2,000
Volume in Thousands
1,500
Stock Price
$34 1,000 $31 $28 $25 2/4/04 500
4/5/04 6/5/04 USF Corp. Volume
8/5/04
0 10/5/04 12/5/04 2/4/05 USF Corp. Stock Price
ActiveGraph made from Excel and FactSet Keep in mind, you may update this often Plot either standalone or against peer group. If showing peer group, use the companies in your equity comps (see Tab C) but exclude the company you are profiling
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Ownership
D R A F T
HOLDERS Citigroup Inc. Fidelity Management & Research Dimensional Fd Advisors, Inc. Barclays Bank Allianz Dresdner Asset Mgmt. Top 5 Institutions Other Institutions Total Institutions Insiders Other Total
SHARES 2,595,871 2,410,515 1,831,607 1,567,377 1,234,140 9,639,510 15,892,218 25,531,728 473,040 196,072 26,200,840
% OF TOTAL 9.9% 9.2% 7.0% 6.0% 4.7% 36.8% 60.7% 97.4% 1.8% 0.7% 100.0%
ShareWorld Proxy (for insider ownership) FactSet
Recent News
1/28/2005: USF Corporation reported fourth quarter and full
year 2004 results, missed Wall Street earnings

12/13/2004: Announced opening of two new terminals serving
Company news releases Factiva Equity research
the Southern Minnesota and Decatur, Alabama areas

11/2/2004: Richard P. DiStasio stepped down as CEO, Paul
Liska was named interim CEO

10/22/2004: Reported third quarter 2004 results, missed Wall
Street earnings
9/9/2004: USF Holland announced the opening of eight (8)
Northeast terminals, service city includes: Baltimore, MD Albany, NY, Allentown, PA, Harrisburg, PA, Philadelphia, PA, Wilkes Barre, PA, Syracuse, NY, and Richmond, VA
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D R A F T
Management and Board

Name
Thomas E. Bergmann Steven Caddy Edward R. Fitzgerald Douglas R. Waggoner Paul J. Liska Morley Koffman Stephen W. Lilienthal Anthony J. Paoni Glenn R. Richter Neil A. Springer Michael L. Thompson
Position and Affiliation

Interim CEO, CFO President and CEO, USF Holland President and CEO, USF Reddaway President and CEO, USF Bestway Chairman of the Board Director Director Director Director Director Director
Proxy finance.yahoo.com Company Web site Sometimes you will see profiles with a brief biography of the directors and officers
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C. Equity Comps
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Summer Assignment Equity Comps

For your assignment, you are to submit an Equity Comp output page for Knight Ridder AS OF THE
DATE OF THE ACQUISITION (3/10/06)
D R A F T
You must first find comparable companies. For this project, you need only Knight Ridder
Corporation and three comparable companies
Include McClatchy Company and New York Times Co as comps and find one comp on your
own
Input ABACUS shells for these comps using FactSet, the companies financials and Wall Street
research to find the following multiples:
2006E and 2007EV/revenue 2006E and 2007E EV/EBITDA 2006E and 2007E EV/EBIT 2006E and 2007E P/E 2006E and 2007E EBITDA margins
When necessary, make sure to calendarize the financials Make sure to check your output and see if something looks abnormal
If so, youve likely made a mistake
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Summer Assignment Equity Comps (Contd)
D R A F T
Helpful Hint #1: If youve inserted your data properly into the input pages, ABACUS will generate a formatted and linked output page for you: Go to ABACUS / New Summary Sheet / Forward Multiple Analysis Helpful Hint #2: The output page converts all currencies to US$. If you are using a foreign company, make sure you input the proper exchange rate in the appropriate section of the shell Key Takeaways
At the end of this section, you should be able to answer the following:
1. On what basis did you choose your one other comparable? 2. In retrospect, are they good comps? Why or why not? 3. How is Knight Ridder trading relative to its peer group? 4. Can you explain its relative valuation? Why does it trade at a premium or discount to its peers? Think of its relative earnings, margins, market share, size, etc.
5. What does this mean to a potential buyer?
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Agenda
What are Equity Comps and Why Do We Do Them?
D R A F T
Finding Comparable Companies Collecting the Data Using the Compco Model Common Pitfalls Interpreting the Results USF Corporation: sample equity comps
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What Are Equity Comps and Why Do We Do Them?

A big part of an investment bankers job is to value companies
D R A F T
More than anything else, clients want to know what their companies are
worth especially relative to their peers
One way to value companies is to infer (or compare) their value based on the public trading
values of other companies with similar characteristics

Because not all companies are the same size or have the same capital structure, we need to
establish universal metrics that can apply to all companies within a group
These metrics almost always take the form of a ratio or multiple, where the numerator is a
measure of trading value (Enterprise Value; Market Value) and the denominator is an operating statistic (EBITDA, Net Income)
The most common metrics are Enterprise Value / EBITDA and Market Value / Net Income (or
P/E)
The calculation and interpretation of these metrics is a Comparable Company Analysis, or
Compco Analysis Helpful Hint: The right terminology for this analysis is the Comparable Company Analysis, but since bankers like to complicate matters, this analysis is referred to differently by each group. Don t get confused if youre asked to do equity comps, compcos, comps, and a comparable company analysis all in one night: They all mean the same thing!
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OK, So What Are Enterprise and Equity Value?

Enterprise Value is the total dollar value of a business, represented by the sum of all of the
ownership interests in the business
D R A F T
Note: Enterprise Value is sometimes referred to as Adjusted Market Value, Firm Value or (in
early-stage biotech) Technology Value
In broad terms, there are two types of ownership interests in a business Debt and Equity
The public market value of a business equity is referred to as its equity value, market value
or market capitalization
We calculate a business Enterprise Value by summing the public market values of its debt and
equity
Caveat: Because the trading value of debt securities is less volatile than equity securities, we
typically use the book value of debt rather than the market value to save time
Enterprise Value is an important measure because it makes companies with different capital
structures more comparable
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OK, So What Are Enterprise and Equity Value?
D R A F T
Enterprise Value = Value of All Business Assets = Equity Value + Net Debt(1) Equity Value = Value of the Shareholders Equity = Current Stock Price x Shares Outstanding (2)
Assets
Liabilities and Shareholders Equity
Net Debt Enterprise Value

Enterprise Value
Equity Value
(1) (2)
Net Debt equals long-term debt + short-term debt + out of the money convertible debt + minority interest + preferred stock + capitalized leases cash and cash equivalents. The proper way to calculate Equity Value is to use the diluted number of shares outstanding, which includes all in the money and exercisable stock options.
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Fair Enough, But Help Me With This EBITDA Thing

EBITDA is an accounting measure of how much cash flow a business generates from its
operations
D R A F T
EBITDA excludes interest, taxes and depreciation and amortization because these items vary
from company to company for reasons which generally do not impact value making them harder to compare on a consistent basis
Interest is a function of capital structure Taxes are a function of incorporation and tax structure Depreciation is a function of depreciation policy / asset lives Amortization is a function of how acquisitive a company has been
EBITDA = Earnings before Interest, Taxes, Depreciation and Amortization
We place emphasis on Enterprise Value / EBITDA because this metric excludes most variables
which do not affect value (or can be easily changed) making companies more comparable for valuation purposes
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Lets Recap
The absolute value of a business is expressed by its Enterprise and Equity Value
D R A F T
Enterprise Value is the total value of all ownership interests in a business Equity Value is the value of the equity in a business
The relative value of a business is expressed by a multiple of its absolute value to its operating
results
GE is trading at 22x its 2006E projected EBITDA Translation: The ratio of GEs
Enterprise Value to its forecasted 2006E EBITDA is 22
Walmarts 2006E P/E multiple is 18x Translation: The ratio of Walmarts equity value to
its forecasted 2006 net income is 18
Enterprise Value / EBITDA is an important metric because it eliminates non-value impacting
variables which otherwise make companies less comparable Enterprise Value Multiples
Enterprise Value / Sales Enterprise Value / EBITDA Enterprise Value / EBIT Industry Specific Metrics (EV / Fiber Miles)
Equity Value Multiples

Equity Value / Net Income Price / Earnings Equity Value / Tangible Book Value Other Industry Specific Metrics
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Finding Comparable Companies

Look for companies with characteristics similar to those of the business being valued:
D R A F T
Operational
Industry Products Distribution Channels Markets Seasonality Cyclicality Strategy Customers Size
Financial
Growth Profile (Sales, EBITDA, Earnings) Margins (Gross Profit, EBIT, Net Income) Leverage
Sources to check to initially select comparables:

Your colleagues (before you start, make sure someone hasnt done it already!) Associates and Officers most of the time they will pick them for you Proxy Statements Equity research reports and analysts SIC code searches FactSet, OneSource, Library S&P Tearsheets Value Line Trade publications IPO or other prospectuses 10K Competition section
Note: This rule does not apply to your summer valuation project sorry guys!
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Collecting The Data What Do I Need?

Most recent financial statements LTM financials
D R A F T
10-K, 20-F or Annual Report (available 90 days after end of period) 10-Q quarterly or interim report (available 45 days after end of period) Earnings Releases (typically available 2-3 weeks after the end of the quarter)
Dont miss these they are the most updated information available Often have complete income statements and balance sheets
Other Press Releases

EPS Forecasts Be Consistent!
First Call I/B/E/S

Operating Projections
CS Equity Research Equity Research from other firm I/B/E/S

Stock Price Information
Current / 52 week high-low
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Why Do I Need It and Where Do I Get It?

Why Do I Need It? Where Do I Get It?
Thomson Research (from InfoCentral IBD
D R A F T
10-K / Annual Report
LTM Income Statement Information Options/Convertible Data

10-Q / Quarterly Report
Internal website)
FactSet on your PC OneSource on your PC SEC Edgar Archives (www.sec.gov) Disclosure workstations (in library) Sedar.com (for Canadian companies) Documents Library on EMA 28 at x5-4000
10-Ks, 10-Qs, 8-Ks
LTM Income Statement Information Balance Sheet Information Basic Shares Outstanding
8-Ks / Report of a Material Event
Pro Forma Information for Acquisitions or

Other Transactions
(use library as a last resort they will always take longer to pull docs than you will)
Earnings Announcements
Research analysts submit their EPS
FactSet (First Call, I/B/E/S) on your PC First Call website (InfoCentral) Detailed First Call reports (6th Floor) Bloomberg terminals (Nelson's)
EPS Forecasts
estimates to publicly available centralized databases (First Call, I/B/E/S)

The mean or consensus estimate
represents the Street view of a Companys expected performance

We use Street view to calculate P/E multiples
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Why Do I Need It and Where Do I Get It?

Why Do I Need It? Where Do I Get It?
CS Research & Analytics Call CS Research Analyst for updated model Research Bank Web (Info Central) for
D R A F T
Research analysts project what a Companys
income statement will look like in the future

We use these models to calculate projected
EBITDA
The research report you select is VERY
Operating Projections
non-CS research
Multex.com for non-CS research Research Bank workstations (older reports) Library request at x5-4000 (for older or hard
important and will influence your valuation multiples

You should always select a research report
which has an EPS forecast close to the consensus
to find research reports)
To calculate equity and enterprise value
FactSet on your PC Investment Banking Workstation on your PC Bloomberg terminals
Stock Price Information
To calculate equity and enterprise value
FactSet on your PC Investment Banking Workstation on your PC Bloomberg terminals
Other Information
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Data Collection Best Practices (How To Keep My Associate Happy and Get a Big Bonus)
Keep a Record
D R A F T
Print out hardcopies of all source documents (10-Ks, 10-Qs, EPS Projections, Analyst
Reports)
Leave a Trail / Be Organized
Highlight data and tab pages used from source documents and use folders for each
company
Use Comments function in Excel to footnote items that need explanation (i.e.,
approximations, assumptions, calculations and unusual items)
Be Complete
Supply your Associate with all source documents, a printout of the equity comps and an
electronic copy for all companies to be checked
Be Efficient
Work sequentially through companies, so that your Associate can start checking while you
continue working
Be a Thinker
Check your results. If something looks wrong, it probably is

Never assume FactSet downloads or other peoples comps are correct
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1. General Company Information / User

General Company Information
The ticker identifies the company you are
CHRW 12/31/04 3/31/05 10-Q 3/31/05 10-Q 12/31/05 0.0%
D R A F T
Primary Company Ticker Last Fiscal Year Ended Latest Balance Sheet as of Source of Latest Balance Sheet LTM Earnings as of Source of LTM Earnings First Projected Calendar Year End: Calendarization Factor Research Research Source Analyst Date of Research Recommendation Target Price
creating a comp file for and is used by Factset to select data to download
The financial statement dates identify which
historical and projected years you are generating multiples for. These dates drive the models column headings
Note: The dates do not drive which data

Morgan Stanley James Valentine 5/01/05
FactSet downloads; FactSet defaults to the most recently available data
User Information
Analysis Prepared by Preparer Phone Number Analysis Checked by Checker Phone Number kjackso3 62714 T_Bushey 65888
It is important to fill out the user information
so that other people using your model can call you with questions
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2. Diluted Share Calculation / Options and Convertible Debt Schedules

In general, Equity Value = Current Stock Price x Basic Shares Outstanding
D R A F T
However, most companies have securities which represent contingent shares meaning they
are not shares today, but can become shares if certain conditions are met and as a result, we need to make adjustments to basic shares outstanding
The most common of these securities are options / warrants
Options are a price right or option granted to management to purchase their companys stock
at a pre-specified or strike price
Management profits if the market price of the stock exceeds the strike price when they
exercise the options. Hence, Management is only likely to exercise his/her options under these circumstances
Options are reported in the 10-K. Companies typically disclose the number of options that are
outstanding and exercisable
Exercisable options are vested and can be used to purchase shares today. Exercisable
options, NOT outstanding, are relevant for equity comp purposes
The method we use for calculating the impact on basic shares outstanding of options is called
the Treasury Stock Method
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Calculating Diluted Shares Outstanding Using the Treasury Stock Method

Scenario:
D R A F T
197.3 million basic shares outstanding 8.2 million exercisable options with a weighted average strike price of $14.02 Current stock price is $17.74. 8.2 million options are in the money, meaning they are exercisable at a lower price than the current market price. This means the owner of these options has the right to buy stock from the Company at $14.02 and could sell it in todays market at $17.74. If the owner of the options did this, he would pay the Company $14.02 for each share, sell it in the market for $17.74 and pocket the $3.72 spread. The treasury stock method assumes the above transaction occurs and that the Company uses the $14.02 they receive to repurchase shares in the market at $17.74, thus: Basic Shares Outstanding Plus: Shares Issued to Options Holder Less: Shares Repurchased with Proceeds Diluted Shares Outstanding 197.3 8.2 205.5 (6.5) 199.0
Translation:
Treasury Method Calculations:
($14.02 x 8.2) / $17.74
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What About Convertible Debt and Preferred?

Investment Bankers have created hybrid securities which pay interest like straight debt, but
become common stock if certain conditions are met
D R A F T
Convertible Debt Convertible Preferred Other Equity-Linked Securities

Convertible securities are NOT evaluated using the Treasury Stock Method Most important thing to remember: Convertible Securities are treated as either debt or equity
for valuation purposes NOT both
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What About Convertible Debt and Preferred?
D R A F T
Example: A company has a convertible preferred security with a face value of $1,114 million that pays a dividend of 6.5% and has a conversion price of $18.00
Current Price < $18.00 Treated as Debt

Income Statement Effect
Current Price > $18.00 Treated as Equity

Income Statement Effect
None
Equity Value Effect
Debt: Interest backed out Preferred: Dividend backed out ($1,114 x 6.5%
= $72.4)
Equity Value Effect
None
Net Debt Effect
Should include full amount of convertibles

($1,114)
Additional shares outstanding from conversion

(add $1,114/$18 = 61.9 to shares outstanding)
Net Debt Effect
Debt does NOT include face value of converted

debt/preferred
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2. Treasury Method Diluted Share Calculation / Options and Convertible Debt Schedules
Treasury Method Fully Diluted Share Calculation
($ in millions, except per share data)
D R A F T
CLASS SHS. OUT. A 1,129.5 B 0.0 C 0.0 D 0.0 E 0.0 Total Primary Shares Outstanding 1,129.5 New Shares Issued Converted Debt shares (Schedule A) Converted Preferred Shares (Schedule B) Converted Options/Warrants (Schedule C) Shares Buy-Back from Options/Warrants exercise proceeds Fully Diluted Shares Outstanding
PRICE 74.36 0.00 0.00 0.00 0.00 74.36 0.0 0.0 0.0 59.6 (48.5) 1,140.6
Schedule A - Convertible Debt

MATURITY Debt Series 1 1/00/00 ANNUAL INTEREST 0.00% BOOK VALUE 0.0 TRADING VALUE 0.0 # SHARES CONV INTO 0.0 IMPLIED CONV PR 0.00 DEBT CONVTD 0.0 SHARES ISSUED 0.0
Schedule B - Convertible Preferred

MATURITY Preferred Series 1 1/00/00 ANNUAL INTEREST 0.00% BOOK VALUE 0.0 TRADING VALUE 0.0 # SHARES CONV INTO IMPLIED CONV PR 0.00 PREF CONVTD 0.0 SHARES ISSUED 0.0
Schedule C - Options/Warrants using Outstanding

PRICE Options/Warrants 1 Options/Warrants 2 Options/Warrants 3 Options/Warrants 4 # EXER 6.760 7.970 21.340 12.590 LOW 21.29 53.27 71.03 79.44 HIGH 21.29 56.14 71.93 77.90 # OUTS 6.760 21.370 31.510 23.170 LOW 21.29 56.14 71.93 77.90 PRICE HIGH 21.29 56.14 71.93 77.90 WEIGHTED AVERAGE PRICE 21.29 56.14 71.93 77.90 # EXERCISED 6.8 21.4 31.5 0.0
Note: Option Schedule Includes all series.
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3. Debt & Preferred Schedule

Debt & Preferred Schedule
($ in millions)
Debt can be listed on the balance sheet

VALUE BOOK 4,503.6 0.0 0.0 0.0 0.0 0.0 4,503.6 0.0 807.1 0.0 0.0 807.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 5,310.7 MARKET 4,503.6 0.0 0.0 0.0 0.0 0.0 4,503.6 0.0 807.1 0.0 0.0 807.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 5,310.7 5,310.7 0.0 0.0 0.0
DESCRIPTION
under a variety of names
D R A F T
NAME RATE SENIORITY Long-Term 0.0% Sen Long-Term 0.0% Sen Long-Term 0.0% Sub Long-Term 0.0% Sub Long-Term 0.0% Sen LT Debt Adj 0.0% Sen Total Long-Term Debt Out-of-the-Money Convertible Debt Sub Short-Term 0.0% Sen Short-Term 0.0% Sub ST Debt Adj 0.0% Sen Total Short-Term Debt Capital Leases 0.0% Sub Capital Leases 0.0% Sub Cap. L. Adj. 0.0% Sub Total Capital Leases Other 0.0% Sen Other Adj. 0.0% Sen Total Other Debt Out-of-the-Money Convertible Preferred Preferred 0.0% Preferred 0.0% Pref. Adj. 0.0% Total Preferred Total Debt & Preferred
Notes Commercial Paper (CP) Current Portion of LT debt Credit Facility Revolver Loans
The ABACUS model allows you to calculate
the net debt based on book or market values

If the Company issued additional debt or
convertible securities since its latest filing, input these securities in adjustment rows (additional equity securities would increase shares outstanding and book equity)
For Credit Stats identify Seniority of the
outstanding debt
Total Senior Debt 5,310.7 Total Subordinated Debt 0.0 Total Convertible Debt (assumes no conversion) 0.0 Total Convertible Preferred (assumes no conversion) 0.0
Note: 1=Senior Debt, 2=Subordinated Debt.
1 = Senior Debt 2 = Sub. Debt
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4. Historical / LTM Income Statement

Step 1
D R A F T
FactSet downloads the historicals automatically. Check downloaded FactSet information and
make changes as required

Fill in Last Fiscal Year column exactly as shown on financial statement (well get to adjustments
later)
You will find all the line items on the income statement, except Depreciation & Amortization, which
are on typically the cashflow statement

If the latest fiscal year end is the most recent quarter, you can ignore the other two columns
Step 2
Fill in the most current quarter and prior corresponding quarter to get to LTM Make sure you use cumulative amounts (i.e. if the fiscal year end is 12/31 and you are looking at
9/30 10-Q, use nine months ended data) Step 3

The model automatically calculates LTM for you. Make sure you set CS as the LTM source under
settings/options so the output picks up your hard work
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Great, But Whats LTM?

LTM = Last Twelve Months
D R A F T
Companies report financial results on a quarterly basis (every 3 months) LTM represents the sum of the last four quarters results LTM is important because it shows what the companys reported performance has been over
the last year (though not necessarily a calendar year)
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5. Income Statement Adjustments Unusual and Non-Recurring Items
D R A F T
Companies often report one-time gains or extraordinary charges in accordance with GAAP. As financial analysts, we do not view these charges as related to operations and thus exclude them.
Typical non-operating charges include gains/losses on sale of assets, inventory write-downs
and restructuring charges

It is important to remember that not all unusual or non-recurring items will be broken out on the
financial statements. This is the result of:
Accountants will not always allow companies to break-out certain charges on the financial
statements because they are not unusual in the strictest sense
Some companies may not want to highlight that they made their numbers as a result of an
extraordinary gain
Charges or gains not broken out in the financials can always be found in the MD&A thats why
you need to read it!
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6. Projected and Calendarized Income Statement

Projected income statement data comes from the research report you have selected
D R A F T
This data generates your projected EBITDA It is important to make sure your projected data is presented on the same basis as your
historical data
Completing the equity comp projected data is similar to the historical / LTM data
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A Note On Calendarizing Estimates
D R A F T
Some companies do not have December 31 fiscal year ends. As a result, the earnings of these companies are not comparable to the earnings of companies with a December 31 year end. Therefore:
EPS estimates must be adjusted to a December year end to make companies with different
fiscal year ends comparable on a P/E basis
First Call and I/B/E/S generally download a CYEPS (Calendar Year EPS)
This is intuitively clear when considering two companies one with a fiscal year ending
September 30, 2005 and the other with a fiscal year ending December 31, 2005
The 2005 earnings estimates associated with the September company have a higher
degree of certainty than the December company and thus should receive a higher multiple than an identical December company
Our objective is to eliminate this artificial valuation differential by calendarizing the estimates If you choose not to calendarize it, please set calendarization date equal to last fiscal year end
Helpful Hint: In the top right corner of your ABACUS shell, you have the option to calendarize manually (meaning you do all the work) or by formula (meaning FactSet generates the formula for you). In most cases, use the Formula option, but make sure you know how it is deriving its ratio.
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Calendarizing EPS Estimates

Example #1: Fiscal year ends September 30
D R A F T
What does this mean? It means that 9 months (or ) of the Companys fiscal 2004 results (Jan. 2004 Sept. 2004) are included in the 2004 calendar year with the remaining 3 months (or ) of the calendar year estimated in the fiscal 2005 results. Illustration:
CALENDAR YEAR ENDED DEC. 31, 2004A 2005E $1,002.5 162.5 1.03 $1,012.5 212.5 1.13
FISCAL YEAR ENDED SEPT. 30, 2004A 2005E 2006E Sales EBITDA EPS $1,000 150 1.00 $1,010
75% 25%
FACTOR 75.0%
$1,020 250 1.20
200 1.10
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The Sanity Check

How to avoid the dreaded, This doesnt look right response
D R A F T
Take 5 minutes to look at the output when youre done the team will wait Look for outliers in the data
Comparable companies usually have comparable multiples

If 9 out of 10 companies in your equity comps are trading between 8x and 10x EBITDA, and one is trading at 20x, you might have a problem Possible explanations: 1. Youve made a mistake, 2. This isnt a good comp, or 3. There is something unusual about this company In the unlikely event of Case 3, be sure you can explain the situation
Likewise, the relationship between Enterprise Value / EBITDA and P/E should be roughly the
same across companies Not always true, but be prepared to explain why its not
Check your multiples against research to be sure youre in the right ballpark If the business is showing momentum and estimated annual operating statistics are improving
over current year figures, your consecutive multiples should be declining (e.g., 16.5x 2005E P/E vs. 14.6x 2006E P/E)
If the multiples are increasing, make sure you understand why
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Great Equity Comp Mysteries

What do I do with Minority Interests?
D R A F T
Include with total capital for Enterprise Value calculation, exclude from debt for credit
statistics
Include with net income if it appears to be a normal part of business

What do I do with Equity Earnings when I am calculating Net Income?
Include if it is a normal part of the business

How do I know if a company has done something recently?
Somethings not right Common light bulbs dramatic change in stock price or shares outstanding, jump in sales
or margins
Look in News Runs, SDC, Documents Library

What if a company has done something recently?
Pro forma the event, e.g., for equity or debt offerings, use the prospectus Make sure your forecasts (EPS and operating) reflect the event Footnote!
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What do I do with all those weird extraordinary charges?
D R A F T
Is it really extraordinary? Most common are Environmental Charges, Restructuring, Gain/Losses on Sales, Changes in
Accounting
Get rid of it dont forget tax effects Dont forget to adjust historical EPS
Can I trust FactSet (FDS) codes?
In general, no (exception is security prices)

Do I do anything different with options in an M&A situation?
Assume all in-the-money options are exercisable (change of control provisions)
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What do I do if a company has had a stock split?
D R A F T
Look in the Stock Guide, footnotes to financial statements, Bloomberg Make sure historical and forecast EPS reflect the split Example:
BEFORE SPLIT
AFTER SPLIT: CORRECT
AFTER SPLIT: INCORRECT
Stock Price EPS P/E
$100 $10.00 10x

2:1 Stock Split
$50 $5.00 10x
$50 $10.00 5x
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Definitions
Equity Value (also referred to as Market Value)
D R A F T
The market value of a companys equity: (Number of fully diluted shares x current stock
price) - option/warrant proceeds
Number of fully diluted shares = What the market thinks is outstanding

= Primary shares + in the money exercisable options/warrants + shares from the conversion of in the money convertible debt/convertible preferred stock
What to do with option/warrant proceeds Subtract from market value

Enterprise Value (also referred to as Adjusted Market Value, or AMV)
The market value of the total enterprise Market value of equity + net debt Net Debt =
Long-term debt (including current portion) + short-term debt + out of the money convertible debt + minority interest + capitalized leases (cash + equivalents)
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Interpreting the Results A Few General Themes

A larger business is viewed as less risky than a smaller business. However, smaller
entrepreneurial companies may get a premium valuation if they are growing quickly
D R A F T
Higher projected earnings growth implies faster stock appreciation potential and will positively
impact valuation
Higher leverage implies less financial flexibility and will negatively impact valuation Higher profitability margins imply better expense controls and better ability to stay price
competitive and will positively impact valuation

The higher the economic cyclicality or seasonality of earnings, the riskier the stock Dividend payments positively impact valuation. Dividends are usually paid by mature
companies that need further incentives for investors. High growth companies do not need a dividend to get a high valuation
Higher trading multiples (e.g., price/earnings ratio) make the stock less attractive than a similar
company with lower statistics
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Your Enterprise Value Is Not Correct

You forgot Minority Interest
D R A F T
Should be included in total capital for enterprise value calculation Is not included in total capital when calculating credit stats
You missed a debt instrument on the balance sheet You missed a cash equivalent on the balance sheet The Company may have done a debt offering after the balance sheet date
You can find out in the subsequent events section of the 10-K or 10-Q, from a company
news run or Bloomberg
Make sure that you check what the proceeds were used for if they were used to pay down
other debt, then you should not change anything
Your Equity Value is not correct
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Your Equity Value Is Not Correct

The Company has done a stock split
D R A F T
The Company has issued or repurchased shares after the 10-K or 10-Q date The Company has additional classes of common stock outstanding You forgot to include the stock options You forgot to include convertible debt or convertible preferred stock
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Your LTM Data Is Incorrect

You forgot to pro forma for all the charges make sure to thoroughly read the MD&A and
financial notes
D R A F T
You forgot to use cumulative quarterly data (i.e. three months ended 9/30 vs. nine months
ended 9/30)
You forgot to adjust your income statement for acquisitions/divestitures You forgot to check for press releases and are not using the most up-to-date data You assume D&A is included in operating expenses but it isnt
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Your Projected Data Is Incorrect

Your research report is outdated make sure that the research report you are using has EPS
estimates in line with I/B/E/S or First Call
D R A F T
You did not calendarize You did calendarize but used the wrong ratios Your research report had a mistake you did not catch Your research report currency does not match the rest of your input currency
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($ in millions)
SHARE PRICE COMPANY 02/04/05 % OF 52-WEEK HIGH EQUITY VALUE ENTERPRISE VALUE ENTERPRISE VALUE AS A MULTIPLE OF SALES MULTIPLE OF EBITDA 2004E 2005E 2004E 2005E P/E 2004E 2005E LONG-TERM EPS GROWTH LTM OPERATING RATIO
D R A F T
Truck Load JB Hunt Transportation Swift Transportation Werner Enterprises Heartland Express
(1) (1)
$45.00 22.61 20.94 20.93
97.7% 99.4% 90.1% 90.2% 99.3% 97.8%
$3,682 1,671 1,679 1,570 1,460 312
$3,697 2,265 1,570 1,311 1,434 372 Mean Median
15.8% 12.6% 15.3% 13.8% 16.6% 12.0% 14.4% 14.6% 14.1% 15.5% 12.5% 17.5% 15.0% 10.5% 14.2% 14.5% 14.5% 20.0% 20.0% 17.4% 17.0% 14.6% 14.5% 25.0% NA 17.9% 17.2% 10.2%
92.9% 93.6% 91.6% 79.6% 80.7% 94.0% 88.7% 92.3% 92.3% 82.8% 92.8% 91.4% 95.6% 94.6% 91.6% 92.6% 94.9% 94.0% 94.6% 97.2% 94.1% 94.8% 81.1% 96.6% 93.9% 93.5% 94.6% 97.3%
(1) (1)
Knight Transportation
25.71 20.86
Covenant Transportation
Less Than Truckload CNF Inc

(1) (1) (1) (1)
$46.49 30.35 41.77 35.60 22.55

(1)
91.2% 78.5% 89.5% 97.5% 81.6% 97.8%
$2,457 850 1,069 885 354 2,769
$2,400 925 1,000 961 470 3,320 Mean Median
Overnite Corp
Arkansas Best Corp
Old Dominion Freight SCS Transportation
(1)
Yellow Roadway Corp
56.31
Logistics C.H. Robinson Worldwide UTi Worldwide Inc Sirva Inc EGL Inc (1) Landstar System Inc Pacer International Forward Air Corp Hub Group Quality Distribution Inc
$51.38 71.88 9.40 31.18 35.25 22.19 43.33 56.46 8.62
91.1% 98.5% 36.2% 89.1% 91.4% 91.0% 91.7% 96.6% 53.4%
$4,435 2,307 693 1,461 1,083 837 944 529 164
$4,201 2,297 1,165 1,475 1,113 1,007 840 529 436 Mean Median
USF Corp
(1)
$32.44
83.6%
$916
$1,015
Source: Public filings and Wall Street research reports. (1) Based on 4Q '04 earnings releases.
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D. M&A Comps
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Summer Assignment M&A Comps

Assignment
D R A F T
For the following two acquisitions, create a deal list similar to that on the sample page
Date Jan-05 Jun-00
Acquiror Lee Enterprises Gannett
Target Pulitzer Central Newspapers
Include target business description, as well as the the following statistics:
EV / LTM sales EV / LTM EBIT EV / LTM EBITDA

Key Takeaways
At the end of this section you should be able to answer the following:
1. At what multiples have similar transactions been closed in the past? 2. What valuation (approximately) does this imply for Knight Ridder? 3. Is this valuation different than what was implied from the equity comp analysis, can you explain the difference?
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Agenda
What are M&A Comps and Why Do We Do Them?
D R A F T
Finding Comparable Transactions Practical Guidelines M&A related SEC filings USF Corporation: Sample M&A comps
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Comparable Acquisitions Analysis

Comparable acquisitions analysis values a company by reference to other sale transactions of similar
D R A F T
businesses. Comparable acquisitions analysis is based on the same multiples as those used in comparable companies analysis
Enterprise Value / EBITDA Equity Value / Net Income Enterprise Value / Sales (usually less relevant) Enterprise Value / EBIT (usually less relevant)
The trick is to find the right comparable transactions and to ferret out the relevant information required As in comparable company analyses, look for acquisitions of companies with comparable operational and
financial characteristics
Recent transactions are a more accurate reflection of the values buyers are currently willing to pay than
are acquisitions completed in the distant past. This is because market fundamentals are subject to dramatic change over periods of time. In addition, cyclical businesses will trade at widely different valuations at the peak and ebb of a cycle
Multiples should be based on the latest public financial information available to the Acquiror at the time of the
acquisition Helpful Hint #1: Unlike Equity Comps, which value companies off of forward looking estimates, M&A Comps are historical looking Helpful Hint #2: Comparable acquisition multiples include consideration which is paid for "control" of the Target. Since this "control premium" is not reflected in the comparable company valuation, comparable acquisition multiples tend to be higher and more indicative of the value of a company in a sale context 71
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Finding Comparable Acquisitions

Sources to check for comparable acquisitions include:
D R A F T
Other comparable acquisitions schedules Previous presentations/valuation analyses SDC database (Securities Data Corporation) News runs Equity analysts Public tender offer documents and merger proxies Colleagues
Never rely on the multiples of a schedule with an unknown author or with an author who is not sure that the multiples are correct.
Look for recent acquisitions of companies with operational and financial characteristics similar to those of the business being valued.
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Calculation of Transaction Value
D R A F T
Total Transaction Value
Equity Value
Total Debt
Preferred Stock
Minority Interest
Cash and Equivalents
Equity Value
Fully Diluted Shares Outstanding
Purchase Price
Helpful Hint: The major difference between a Transaction Value and an Enterprise Value lies in the share count. In any Change of Control, all outstanding and in-the-money options, regardless of whether they are exercisable or not , get converted at the weighted average strike price. This differs from the Enterprise Value calculation, where only those options that are exercisable get converted
Total Transaction Value of an M&A deal is similar to Enterprise Value used in Comparable Companies Analysis.
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Calculation of Shares Outstanding
D R A F T
Fully Diluted Shares Outstanding
Basic Shares Outstanding
Option/ Warrant Shares
Basic Shares Outstanding are taken from the cover of the most recent 10-K or 10-Q. Option/Warrant Shares are calculated using the treasury method, which assumes that all in-the-money
options/warrants are exercised and the proceeds are used to repurchase shares at todays market price
For example:
Basic Shares 20 million shares
Option/Warrant Shares 500,000 in-the-money options $25 is the average strike price $35 is todays stock price
Helpful Hint: There are two independent concepts regarding option/warrants that tend to confuse people:
1. Outstanding versus Exercisable 2. In-the-money versus out-of-the-money (equity comp) context, only those options that are both exercisable and in-the-money convert
In an acquisition context, all outstanding and in-the-money options/warrants get converted. In a market value Options/warrants out-of-the-money never convert
To calculate equity value, we must always use fully diluted shares outstanding.
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Calculation of Shares Outstanding (Contd)

In-The-Money Option/Warrant Shares:
D R A F T
Step 1: 500,000 x $25 = $12.5 million Step 2: $12.5 million / $35 = 357,143 shares Step 3: 500,000 - 357,143 = 142,857
Finally . . . To Calculate Fully Diluted Shares Outstanding.
Fully Diluted = Shares Outstanding
20,000,000
142,857
20,142,857
Now You Can Solve For The Equity Value
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Determination of Purchase Price per Share

Cash consideration is straightforward
D R A F T
Common stock issued by an acquiror is valued using the acquirors stock price on the day prior
to announcement of the transaction

Other securities are valued at market
Existing publicly traded securities should be valued at market on the day prior to
announcement
New classes of securities should be valued at market value on the first day of trading
Calculating the purchase price per share is not always as simple as it may first appear
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Enterprise Value vs. Equity Value

General Overview
D R A F T
There are typically two stakeholders in any firm, the Debt Holders and the Equity Holders. The
concept of Enterprise Value contemplates that the earnings of the Company are allocated to both the Debt Holders (through interest payments) and the Equity Holders (through dividends and appreciation in stock price) When You Use Enterprise Value
Typically, you will use Enterprise Value in circumstances when the financial statistic being
utilized is flowing to the debt and equity holders. In general, this means that any financial statistic that is pre-interest expense will use an Enterprise Value concept to determine valuation When You Use Equity Value
Typically, you will use Equity Value in circumstances when the financial statistic being utilized is
flowing only to the equity holders. In general, this means that any financial statistic that is postinterest expense will use an Equity Value concept to determine valuation
Public market valuations tend to use earnings multiples (typically forward earnings multiples)
because the investment decision is being made based upon a capital structure that is already in place and cannot be influenced by the common stock holder
When do you use what?

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Stock Price Premiums
D R A F T
% Premium = Paid
Purchase Price ______________ -1 Historical Price
* 100
Often calculated from day prior to announcement of transaction Often news and rumors of a potential transaction often leak to the market and affect the stock
price prior to announcement. We also look at premiums over the stock price at other points in time relative to announcement including:
One Day One Week One Month
For public companies, we often look at the percent premium paid to shareholders.
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Practical Guidelines
1)
D R A F T
Obtain SDC run to get general information regarding announcement dates, target/acquirors, structure of transactions, etc. When doing an SDC run, you typically search by industry SIC codes to find M&A deals for certain industries. If a deal has just been announced, you'll need to get a news run done on the deal Make sure the announcement date is correct by checking Bloomberg Retrieve appropriate documents from SEC. You will need a merger document and 10-K and 10-Q. Make sure that the 10-K and 10-Q are for the target company financials for the LTM period before the announcement date. M&A comps are usually done on an LTM basis. At some point you may have to do an M&A comp on a forward basis, but this is uncommon Read a summary of the terms of the transaction in the merger doc. This is especially true for stock-for-stock transactions. Understand whether the transaction was a stock-for-stock, cash tender offer, asset sale, minority interest investment, etc. This will help you determine the purchase price later on Scan the notes of the 10-K and the 10-Q for any significant items not reflected in the statements. Sometimes the target has been involved in other significant mergers, divestitures, or other consequential events. If so, then read the appropriate 8-K or other document in order to pro forma the financials. Also, do a quick Bloomberg scan to see if anything has happened after the filing of the last financial statement and the announcement of the merger, which could also affect the valuation
2) 3)
4)
5)
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Practical Guidelines (Contd)

6) Once you have checked SDCs announcement date, enter this and the effective date. Generally, you can trust SDC on the effective date Get the business description from the Bloomberg or from the 10-K. Be brief but not vague The type of merger doc you get will tell you what the structure of the deal is. If youve got a stock deal, then you will have a merger proxy S-4. If you have a cash tender offer, then you will have a 14D-1. Attitude (friendly vs. hostile) can be obtained from SDC. For the type of consideration offered, read the summary of the terms of the merger. You may not always need to show this in your comps Calculate equity value using fully diluted shares outstanding and the offer price per share. This sounds straightforward, but it is often easy to get tripped up here. Things to consider:
D R A F T
7) 8)
9)
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a) For a stock-for-stock deal, the price per share is implied. Some terms to get familiar with:
D R A F T
The exchange ratio is simply the number of shares of the acquiror being offered for every share of the target. So if Target Corp. received one share of Acquisition Corp. stock for every five of its shares, then the exchange ratio would be 1/5, or 0.2. If you read the summary of the terms, you will either get a fixed ratio or a fixed price. In the case of a fixed price, the exchange ratio adjusts to fit the price. For example, if Acquisition Corp. knows it wants to pay $5 per share for Target Corp., then the number of shares it must offer to get to that $5 will depend on its own stock price. If its price were $2 per share, then it would have to offer 2.5 of its own shares, and 2.5 would be the exchange ratio. In other cases, the exchange ratio is fixed. So if Acquisition Corp. offered 2.5 of its shares for every Target share, then the implied value of the Target share is (2.5 x Acquisition Corp. share price). Therefore, the implied price will fluctuate over time. So you can see, either you hold the exchange ratio constant and vary the implied purchase price, or you have a fixed price and vary the exchange ratio For our purposes, what we care about is what the shares were valued at prior to the announcement. So if the Acquirors share price was $10 on the day prior to the announcement and the exchange ratio was 2, then the implied price per Target share would be $20. Often the merger proxy will state that the actual exchange ratio at the closing will depend on the average closing price of the twenty trading days prior to the three days before the Effective Date... Ignore it, unless for some reason this language is related to the announcement date somehow, because this is the actual price to be paid. Remember, our job is to determine how the transaction is valued as of the announcement, so just assume that such a price is whatever it was on the day prior to the announcement
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D R A F T
b) Check the capitalization of the company to see if they have any convertible securities (debt and preferred stock). Often such securities have takeover provisions which allow them to convert upon a merger, in which case you want to include their value in the equity purchase price (of course, you will have to back out their value later when calculating the enterprise value) c) Options. Generally, upon a change of control in a company, the options are bought out by the acquiror. We need to account for this in the equity purchase price, so there are columns which will calculate this value for you. You can get this info either from the 10-K, or if available, from the merger proxy (you generally wont find this info in a 14D-1). Since we will usually not have a detailed breakout of what each individual option is, it is sufficient to take the average exercise price. When doing so, you should never get to a negative purchase price for the options because when the exercise price is less than the offer price, the options are worthless (out of the money) 10) Calculate the enterprise value by entering the appropriate debt and cash figures. Remember, include marketable securities in the cash figure, and if you converted some pieces of debt or preferred in calculating them in the equity purchase price, do not include them here. Otherwise, that would be double counting 11) For LTM figures, make sure the numbers you input do not include unusual or nonrecurring items. Simply subtract them out from EBITDA and EBIT. For the net income line, make sure you take these out tax-affected. This means that for a net income calculation you would back out the unusual multiplied by (1-tax rate)
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D R A F T
12) There might have been significant events for which you did not pro forma the numbers. Did the target purchase another company prior to being acquired that is not reflected in the numbers? Did the target sell off assets or spin off a division? Use your judgment. Companies in high-growth industries can trade at high multiples (for example, technology deals can be done at 4x revenues, 1520x EBITDA). Slow, prodding industries should not have such multiples. Also, if it is a hostile deal, then you may have pretty high multiples since the acquiror has to pay a big premium to get the deal done
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M&A Related SEC Filings
D R A F T
SEC FORM/ SCHEDULE 14D-1
DOCUMENT NAME
DESCRIPTION
Tender Offer/Offer Filed by the acquiror when launching a tender offer to Purchase Has to be opened for a minimum of 20 days Must be amended for changes in deal/material events Some information disclosed in document: Price per share Number of shares sought Conditions to closing Source of financing Background and purpose of offer Financial data on acquiror Information on acquirors investment banker and fees Targets Recommendation to Tender Offer Filed by the target within 10 business days of the commencement of a tender offer Contains a recommendation from the targets Board of Directors about how to respond to the Tender Offer, along with reasons for such recommendation Also contains other disclosures Background of transaction Agreements involving management Fairness opinion for targets shareholders Information on targets investment banker and fees
14D-9
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M&A Related SEC Filings (Contd)

SEC FORM/ SCHEDULE DOCUMENT NAME DESCRIPTION Filed by any person or group which has acquired 5% of a public company within 10 days of such acquisition Required disclosures include: Identity and background of acquiror Amount and source of funds Purpose/intent of purchase Number of shares owned Must be amended for material charges Merger Proxy; Joint Filed by target and/or acquiror Proxy/Prospectus Comprehensive document used to solicit votes to approve transaction Serves as a registration statement if securities are to be issued as consideration (versus all cash) Selected disclosures include: Vote required for approval Terms of transaction Recommendation of board Fairness opinions for targets (and possibly acquirors) shareholders May describe analysis supporting fairness opinions Summary financial data, including pro formas May have full financial statements as an exhibit Form F-4 (versus S-4) is used by foreign acquirors
D R A F T
13D
Proxy/S-4 (if securities involved)
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M&A Related SEC Filings (Contd)
D R A F T
SEC FORM/ SCHEDULE
DOCUMENT NAME
DESCRIPTION Filed for material corporate events or disclosures; not only used for M&A deals In M&A context, filed to announce a material acquisition and/or sale of a division/subsidiary Filed by either seller or acquiror if the transaction is material to such party Typically gives the key terms of a transaction, with the sale/purchase contract filed as an exhibit Financial statements and/or pro forma financials are often filed as an amendment on Form 8 as companies are given time to include financials on the filing
8K
10K, 10Q
Annual, Quarterly Filings Ks and Qs
Contain required financial statements and MD&A filings May also contain M&A-related disclosures which could have been made on Form 8K
13E-3
Going Private Filing Used in connection with a significant affiliated party M&A transaction (i.e., LBO or Minority Buyout) Discloses fairness of transaction to such minority shareholders, usually determined by Special Committee Often contains filing of actual Board presentation by financial advisor to Special Committee
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Comparable Acquisition Analysis

($ in millions)
ENTERPRISE VALUE/ EBITDA 6.7x 4.0 5.7
(2)
EQUITY
ENTERPRISE VALUE $1231 78 510

(1)
D R A F T
DATE Jul-03 Nov-01 Nov-01
TARGET Roadway Corporation (US)
TARGET DESCRIPTION LTL carrier providing freight services on major city-to-city routes in North America
ACQUIROR Yellow Corporation Union Pacific Corp. Roadway Corp.
VALUE $966 83 558
TARGET UNIONIZED NA No Yes
Motor Cargo Industries Provides regional less-than truckload services in the western U.S. Arnold Industries Provides regional less-than-truckload services in northeastern states and also provides truckload and logistics services N/A
Aug-01 Aug-01 Nov-00
Arnold Industries (US)
Roadway Corporation Investor Group (Estes) FedEx Corp.
539 40 934
510 40 1,196
5.4 5.0 6.3
No No No
G.I. Trucking Company Provides regional less-than-truckload services in western and southwestern states American Freightways Corporation Operates as a scheduled common and contract carrier transporting primarily less than-truckload shipments of general commodities. Provides regional and interregional transportation of general commodity freight Provides les-than-truckload transportation of general commodity freight Provides transportation, logistics and related information services through its five subsidiaries Transporter of freight throughout United States; also provides truckload services and driver leasing services through its subsidiaries Carrier of intrastate and foreign commerce within Texas, Arizona, and New Mexico Provides less-than-truckload transportation of general commodity freight Provides regional carrier services in California and 9 other Western States LTL and TL carriage, furniture manufacturing and tire retreading
Jun-99 Jun-98 Oct-97
Jevic Transportation Inc. Preston Trucking Caliber System, Inc. Worldway Corp.
Yellow Corp. Management Group

ENTERPRISE VALUE AS MULTIPLE OF LTM EBIT ENTERPRISE VALUE DATE ACQUIRER/TARGET 12/21/2000 Litton Industries, Inc. / Northrop Grumman Corp TARGET BUSINESS DESCRIPTION Designs, builds, and overhauls surface ships for government and commercial uses; provides defense and commercial electronics technology, components, and materials. SALES EBITDA $5,082.3 0.9x 7.8x 10.9x 7/1/2000 Lockheed Martin - Sanders / BAE Supplies airborne electronic warfare and countermeasures for numerous military Systems aricraft. Also includes Fairchild Systems unit and Lockheed's Space & Electronics Communications Division. $1,440.0 $1,536.4 $3,750.0 $7,754.0 1.2x 1.5x 1.7x 1.9x 8.6x 9.8x NA 1/13/2000 Racal Electronics PLC / Thomson- Manufactures data and radio communications equipment, defense radar, avionics CSF (now Thales SA) and safety and health products. 1/13/2000 Hughes' Satellite Business / Boeing Satellites 19.1x 19.6x 17.4x 15.4x NA 1/1/1999 GEC-Marconi Electonic Systems / International avionics and defense electronics British Aerospace Holdings 4/21/1998 Tracor Inc / General Electric Company Plc Provides sophisticated electronic and information technology proudts, systems, and servies to the Department of Defense, other U.S government agencies, foreign governments, and commercial customers. Defense electronics $1,359.1 $9,500.0 1.1x 1.5x 10.1x 13.7x 13.3x 16.6x 1/16/1997 Hughes Electronics / Raytheon 12/17/1996 McDonnell Douglas Corp / Boeing Manufacturer and operator in the following industry segments: military aircraft; Co missiles, space, and electronic systems; commercial aircraft; and financial services. 1/8/1996 Loral Corporation / Lockheed Martin Supplies advanced electronic systems, components and services. 4/3/1995 E-Systems / Raytheon Manufactures electronic defense systems. $15,783.1 $8,351.7 $2,250.4 $7,165.7 1.2x 1.4x 1.1x 0.5x 9.3x 8.9x 11.1x 12.2x 13.3x 8.1x 10.1x 5.0x 8/30/1994 Lockheed Corporation / Martin Marietta Corporation Manufacturer of aeronautical systems, missiles and space systems, electronic systems and provider of technology services. High 1.9x 15.4x 9.9x 9.5x 5.0x 19.6x 14.2x 13.3x 8.1x Mean 1.3x Low 0.5x Median 1.2x
158 NM 2,489
197 NA 2,681
5.9 NA 10.3
No Yes No
FedEx Corp.
Jul-95
Arkansas Best Corp.
82
153
9.0
Yes
Nov-92 Nov-92 Jul-88 Jun-88
Central Freight Lines Inc. Preston Trucking Viking Freight Inc. Arkansas Best Corp.
Roadway Services Inc. Yellow Freight Systems Roadway Services Inc. Kelso & Co.
102 24 135 317
148 146 172 472 Median Average High Low
6.8 5.8 7.8 6.2 6.1x 6.5x 10.3x 4.0x
No Yes No Yes
Source: Securities Data Corporation, public filings and news reports. (1) Enterprise Value = Value of Common + Total Debt Cash. (2) EBITDA, EBIT and Net Income exclude extraordinary items and accounting changes.
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Summer Assignment DCF

Project Knight Ridders income statement for five years
D R A F T
Make note of what assumptions you use to grow the income statement
From these projections, calculate Knight Ridders annual free cash flows
Using your equity comps, find the terminal EBITDA multiple and calculate the terminal value
Using your comps, calculate the proper WACC that should be used to discount Knight Ridders
cash flows
Unlever the Beta for each comp and re-lever at Knight Ridders leverage
Discount the Free Cash Flows and terminal multiple at the WACC
Use the terminal multiple and WACC to calculate an implied perpetuity growth rate Calculate the equity value per share and compare to Knight Ridders current price
Create a sensitivity table showing the changes in enterprise value and equity value per share as
impacted by the WACC and terminal multiple Helpful Hint #1: ABACUS has a WACC summary sheet that unlevers and relevers the betas for you. This schedule can be very helpful, but make sure you understand how it works. You will have to input company betas, the risk-free rate, market risk premiums and tax rates manually
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Summer Assignment DCF (Contd)

Key Takeaways
D R A F T
1. What projected income statement assumptions did you use and why? 2. How do you calculate a WACC? Why is it important to unlever and then re-lever your beta? 3. What risk-free rate, equity risk premium and size premium did you use and where do these numbers come from? 4. Explain how you determined your Terminal Multiple 5. What value range does your DCF imply for Knight Ridder? 6. Given this valuation, is Knight Ridder currently under- or over-valued in the marketplace? 7. What does this mean for a potential buyer?
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Agenda
What is a DCF and why do we do it?
D R A F T
Projections Terminal Value Weighted Average Cost of Capital (WACC) Present Value Sample Discounted Cash Flow Analysis Sample WACC Schedule
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Comparable company and comparable acquisition analyses are often used as confirming
methodologies
D R A F T
Specific asset values are sometimes used if other methodologies are inapplicable
Applications of valuation analysis include:

Acquisitions: How much should we pay to buy the company / division? Divestitures: How much could we sell our company / division for? Defense: Is our company undervalued / vulnerable to a raider? Fairness Opinions: Is the price offered for our company / division fair from a financial point of
view?
Public Equity Offerings: For how much could we sell our company / division in the public
market?
New Business Presentations: Various applications
Discounted Cash Flow analysis is typically the primary valuation methodology used by CS in M&A and certain capital markets transactions.
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DCF Versus Other Valuation Methodologies
D R A F T
Discounted Cash Flow Analysis Methodology:

Present value of projected

Value based on market trading
Comparable Acquisition Analysis

Value based on multiples paid
unlevered free cash flows Inherent value Best captures business in transition Sensitivity analysis Synergies analysis Buy vs. build
Financial forecasts developed
multiples of comparable companies Implied value in public securities markets (IPO analysis); fullydistributed value Usually focus on forward looking EBITDA, earnings and cash flow
Market environment Quality of comparables Public data Consistent accounting treatment Less meaningful benchmark for
for comparable companies/assets in sale transactions Implied value in private market Focuses mainly on multiples of historical EBITDA, earnings and cash flow
Market environment Quality of comparables Availability of data Consistent accounting
Issues:
with management Discount rate Terminal value method
treatment
Less meaningful benchmark for
assets with unique cash flow patterns
assets with unique cash flow patterns
Of the three principal valuation methodologies used on Wall Street, DCF analysis frequently carries significant weight.
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Discounted Cash Flow Analysis Components

Valuation Steps Remarks
Define
D R A F T
Forecast of Unlevered FCFs
components of free cash flow (FCF) historical perspective Produce financial forecasts and sensitivity analysis Step back and interpret the results
Develop Exit
Calculate Terminal Value
multiples, perpetuity formula, other approaches
Cost
Calculate WACC
of equity of debt Theoretical optimal capital structure

Cost FCF
Discount FCFs
for periods 1 to n Terminal value

Adjustment
Enterprise Value
for non-operating items (e.g., extraordinary items, cash flow from unconsolidated subsidiaries, hidden assets, contingent liabilities, etc.) market value of financial debt, plus minority interests plus other non-working capital liabilities less excess cash and marketable securities (sometimes referred to as corporate adjustments)
Less net debt
Take
Equity Value
Interpret
results Compare findings with other valuation methods

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Valuation: Enterprise Value Versus Equity Value

Enterprise Value = market value of operating assets
D R A F T
Equity Value = market value of shareholders equity Equity Value = Enterprise Value Net Debt(1)
Net Assets
Liabilities and Shareholders Equity Net Debt
Enterprise Value
Enterprise Value Equity Value
(1)
Net Debt (Corporate Adjustments) is equal to total debt + minority interest + preferred stock + capitalized leases - excess cash and cash equivalents.
We use discounted cash flow analysis to calculate the enterprise value of the firm, which then allows us to calculate its equity value.
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DFC Analysis: The Process
D R A F T
Step 1
Projections
Project the operating results and free cash flows of a business over a particular forecast period. Estimate the terminal value of the business, often by using terminal multiples, at the end of the forecast period. Use the weighted average cost of capital to determine the appropriate discount rate range. Determine a range of values for the enterprise by discounting the projected free cash flows and terminal value to the present. Adjust your valuation for all assets and liabilities not accounted for in the cash flow projections.
Step 2
Terminal Value
Step 3
WACC
Step 4
Present Value
Step 5
Adjustments
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Step 1: Projections
DCF analysis is an attempt to look at the companys pure operating results, free and clear of financial leverage,
extraordinary items, discontinued operations, etc.
D R A F T
Many times, we are given financial projections from the management of a particular company; however, there
are situations in which we must develop our own forecast for a particular company or business It is extremely important to look at the historical performance of a company or business to understand how future cash flows relate to past performance
A companys unlevered free cash flows represent the cash generating ability of that particular company, without
regard to its present or prospective capital structure As a result, unlevered free cash flows are projected before subtracting interest and financing expenses or related tax shields
DCF projections should be based on:
Historical performance Company projections (when available) Equity research analyst estimates Industry data Common sense
The forecast horizon should be long enough so that the company reaches steady state by the end of the
forecast period Typically, forecasts of 5 - 10 years are used for DCF analyses of maturing or mature firms
The free cash flows from a business can be projected using information about the industry in which the business operates and information specific to the business.
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Step 1: Projections
Extract historical financials
D R A F T
Sales Operating cash flow Depreciation & amortization Deferred taxes Capital expenditures Working capital (receivables, inventories and prepaid expenses less current payables and other
current operating liabilities)

Analyze numbers How relevant are historical figures?
Major changes in business or industry Managements discussion of results

Are numbers clean?
Extraordinary items Acquisitions / divestitures

Is anything excluded?
Compare to cash flow statement

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Step 1: Projections Sales

Sales Buildup
D R A F T
Build a separate schedule for sales analysis which will feed through to consolidated statement Breakdown by market segment (different prevailing market dynamics), product type/class, etc. Assumptions on volumes and unit prices Base assumptions on:
Research reports Management or client forecasts (if available) Overall industry trends
Sales growth is usually an input; aggregate sales are derived from this input
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Step 1: Projections Operating Expenses, Depreciation Expenses and Taxes

Operating Expenses
D R A F T
Build a separate schedule for cost analysis:
Breakdown by main category of costs

Cost of goods sold, personnel costs, SG&A expenses Fixed vs. variable costs
Understand cost behavior/sensitivity to changes in sales level Understand key cost drivers (e.g., price of raw materials, inflation, etc.) Estimate as a percentage of sales
Depreciation Expense
Usually expressed as a percentage of sales, comparing to historical trend or hardcoded and set
relatively flat throughout the period Tax

Tax charge that the Company would pay if it had no debt
Assess tax rate based on previous marginal tax rate (composite local and corporate tax rates) as well as current and future tax regulation Reflect operating loss carry forwards, if any
(1)
Exclude land because it is not depreciable.
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Step 1: Projections Capital Expenditures

Capital expenditures (Capex) are the investments necessary to maintain the required capital
D R A F T
intensity, which includes expenditures on new as well as replacement property plant and equipment (PP&E)
Base assumptions on:
Company forecasts Industry levels Research reports Percentage of sales, percentage of PP&E
Build a CapEx schedule breaking down expenditures by type of asset (buildings, machinery and
equipment, other assets) and between new and replacement CapEx Show beginning and ending PP&E by type of asset
At the end of forecast period, the CapEx level should be in line (equal or slightly higher) with
depreciation (i.e., assume that capital intensity is maintained going forward)

For a given year, CapEx is equal to end of year net PP&E less beginning of year net PP&E plus
depreciation expense for the year
(1)
Net PP&E is equal to gross PP&E less accumulated depreciation.
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Step 1: Projections Working Capital

Working capital is defined as the sum of accounts receivable, inventories, pre-paid expenses
D R A F T
and other current assets, less the sum of accounts payable, accrued expenses and other current liabilities This definition can change slightly for companies in different industries
Exclude excess cash and marketable securities and short-term debt
We often use the term net working capital to distinguish the investment banking concept from the accountants definition of working capital
Build a working capital schedule breaking down the main components of working capital
Estimate balances for the components of working capital as a percentage of sales, cost of goods sold or other appropriate metrics (or using year-on-year growth rates) for each projection year Calculate the net increase/decrease in working capital for each year
When forecasting working capital, consider whether the companys changing mix of business
affects its need for working capital Any action to squeeze cash from working capital by operating more efficiently (e.g., reducing working capital as a percentage of sales, for instance via implementation of a just-in-time inventory system, a change in receivable/payable policy, etc.); whether there is a discernible trend in working capital, and if so, whether the improvement/deterioration will continue or stabilize?
Increases in net working capital are a use of cash and decreases in net working capital are a
source of cash Remember that increases in assets and decreases in liabilities are uses of cash and decreases in assets and increases in liabilities are sources of cash
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Step 1: Projections Deferred Taxes

Deferred Taxes
D R A F T
For valuation purposes, taxes should be stated on a cash basis Deferred tax assets and liabilities arise due to differences between financial (book) accounting
and tax accounting The most significant differences in book and tax accounting typically arise with regard to the depreciation of assets. In the U.S., assets often can be depreciated on an accelerated basis for tax purposes, lowering taxable income in the current period and thus lowering actual cash taxes paid. On a book basis, however, often times the same assets cannot be depreciated on such an accelerated basis, thus taxable income is higher, as are book taxes per the income tax provision. The increase in deferred tax liabilities accounts for the difference between book taxes and the actual taxes paid to the government
Increases in deferred tax liabilities (net of deferred tax assets) are a source of a cash and
should be added in calculating free cash flow (and alternatively, decreases in deferred tax liabilities are a use of cash and should be subtracted in calculating free cash flow)
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Step 1: Projections Reality Check
D R A F T
Confront sales growth assumptions with underlying market dynamics Be skeptical of projected sales growth curves that look show dramatic improvements versus recent actual performance. Does the increase in sales reflect a constant market share in an expanding market? If so, why is the market expanding? Does that assumption agree with industry projections? If it is an expanding market, why will the company be able to maintain a constant market share? Or does the increase reflect a rising market share in a stagnant market? If yes, why? Are some firms leaving the industry? Why? Check reasonableness of margins Avoid margin hockey sticks. Be clear on the actions and/or events needed to trigger improvements in margins (or reasons for decreases in margins). Are the margin levels consistent with the structure of competition in the industry? Any risk of new entrants/substitute products that will drive margins down? Capital Expenditures Watch out for step-up of production capacity required as sales increase. Is the CapEx level sufficient to support the forecasted increase in sales? Factor in the impact of industry trends on CapEx (e.g., increased environmental expenditures, technology changes, etc.) Working Capital Are inventory and other working capital forecasts consistent with the sales increase? What is the pattern of accounts receivable collection? How is it practically achieved? Assess bargaining power of customers (receivables terms) and suppliers (account payable terms). Are your assumptions in line with industry standards? Be Critical About Buyers and Sellers Projections Use due diligence/access to seller's management to gain in-depth understanding of company's assumptions and challenge them (if and when appropriate). Where possible, compare the company's past record of actual versus budgeted results Add value/ manage client's expectations (both on buy and sell sides) by thoroughly understanding the company's market dynamics and competitive positioning
As always, it is important to perform a Reality Check on the main components of FCF

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Step 1: Projections
Unlevered Free Cash Flow
D R A F T
Unlevered Free Cash Flow is the unlevered after-tax cash flow generated by the Company
(including the impact of any reinvestment)

Unlevered Free Cash Flow is available to all providers of the Companys capital, both creditors
and shareholders
Unlevered Free Cash Flow is best determined by considering sources and uses of cash:
METHOD 1 Net Income (+) After-Tax Interest Expense = Unlevered Net Income (+) Increase in net Deferred Tax Liability (+) Depreciation and Amortization (-) Increase in Net Working Capital (-) Capital Expenditures = Unlevered Free Cash Flow
(1)
METHOD 2 EBIT (-) Tax Effect

(2)
= Unlevered Net Income (+) Increase in net Deferred Tax Liability (+) Depreciation and Amortization (-) Increase in Net Working Capital (-) Capital Expenditures = Unlevered Free Cash Flow
Note: (1) (2)
Changes in other long term assets/liabilities may affect Unlevered Free Cash Flow. After-Tax Interest Expense is defined as interest expense less the applicable interest tax shield. In most cases, amortization expense is not tax-deductible.
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Step 2: Determination of Terminal Value

Firm value, based on free cash flows, can be separated into two components:
D R A F T
Company Value
PV of FCF during explicit forecast period
PV of FCF after explicit forecast period
Since DCF analysis is based on a limited forecast period, a terminal value must be used to capture the
value of the business at the end of the projection period

The terminal value is usually added to the free cash flow in the final year of the projections and then
discounted back to the valuation date, or it can be discounted separately to the valuation date
The terminal value typically constitutes a substantial portion of the total enterprise value. Critical
thinking about prospects of the business, and therefore the terminal value, results in a more meaningful, accurate and defensible DCF analysis
Note that the terminal year free cash flow has to be normalized to ensure that the company has
reached a steady state Normalized operating assumptions: sales and profitability assumptions for the final year should reflect a steady state year, not a peak or trough in the business cycle; and depreciation and capex should be within the same range
Terminal value is determined through either application of a valuation multiple (the terminal multiple)
or the perpetuity growth method
The terminal value captures the value of the business at the end of the projection period, which is based on the free cash flows of the business beyond the explicit forecast period.
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Step 2: Terminal Value Terminal Multiple Method

Terminal Value = Statistic x Multiple
D R A F T
Statistic: Operating statistic used (e.g., EBITDA in year 10) Multiple: Selected multiple (e.g., 10.0x)
Multiple is based on the most appropriate multiple for the companys industry (e.g., EBIT versus
EBITDA versus EBITDAR)

The multiple applied should reflect the long-term market valuation of the company/industry,
rather than a current multiple that may be distorted by industry or economic cycles
When applying the multiple it is important to distinguish between:
Comparable trading company multiples and comparable acquisitions multiples

It is almost always more appropriate to base terminal multiples on the figures derived via comparable companies analysis, rather than those from comparable transactions analysis
LTM and forward multiples

Always show a range of multiples
Terminal value based on assumed trading or acquisition multiple at the end of the projection period.
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Step 2: Terminal Value Perpetuity Growth Method

The Gordon Growth formula:
D R A F T
Terminal Valuen = Unlevered FCFn+1 (r - g)
Unlevered FCF n+1: Unlevered free cash flow in the first year after the explicit projection
period Note that we often estimate FCF n+1 by taking FCF n and growing it by the growth rate g, but this is not always appropriate
r: Discount rate (based on weighted average cost of capital) g: Perpetuity growth rate
The perpetuity growth rate used must be realistic
Reference point should be nominal GDP growth Expected long-term growth rate of the industry (e.g., utility industry growth rate versus cable
TV industry growth rate)
Always show a range of perpetuity growth rates
Terminal value based on business operating into perpetuity, growing free cash flow at some constant rate.
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Step 2: Terminal Value Cross Referencing

Check the reasonableness of the terminal value by linking the terminal multiple and perpetuity growth rate
D R A F T
Calculate the implied perpetuity growth rate for a range of terminal multiples or, conversely check how the perpetuity growth rate translates into terminal multiples. For example, the terminal multiple you used may imply too high a perpetuity growth rate for the industry, or vice versa
The formula below demonstrates how to reverse into the implied terminal multiple from the perpetuity growth
method Implied terminal multiple = PV TV x (1+r)n FV TV = Statistic Statistic PV TV: Present Value of Terminal Value FV TV: Future Value of Terminal Value r: Discount rate n: Number of years discounted Statistic: Operating statistic on which multiple applied (e.g., EBITDA in year 10)
The formula below demonstrates how to reverse into the implied perpetuity growth rate from the terminal
multiple method (assuming FCFn+1 = FCFn x (1+g) ) Implied perpetuity growth rate = (r x Statistic x Multiple) Unlevered FCFn (Statistic x Multiple) + Unlevered FCFn Multiple: Selected valuation multiple (e.g., 10.0x) Unlevered FCF n: Unlevered free cash flow in last year of the projection
Does the terminal value make sense?

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Step 3: WACC Discount Rate Overview

The Weighted Average Cost Capital (WACC) is the recommended discount rate to be used in the unlevered discounted cash flow valuation of an asset.
D R A F T
The WACC should be thought of as the opportunity cost of capital, the long-term return an
investor expects to earn in an alternative investment of equivalent risk

The WACC to be used in a DCF analysis is specific to the business or asset being valued. It
does not necessarily depend on the buyers or sellers overall cost of capital
WACC is used by firms as the hurdle rate for a project or division, as a performance benchmark
for return on capital calculations, to determine desirability of stock repurchases or issuance, or for valuation purposes
Mathematically, WACC is expressed as:
WACC
(1)
After-tax Cost of Debt Risk-Free Rate Unlevered Beta
x + x
Proportion of Debt in Capital Structure Levered Beta
Cost of Equity
Proportion of Equity in Capital Structure
Cost of = Equity (2) Levered = Beta (3)
Equity Market Risk Premium
1 + (1 - Tax Rate) x (Debt/Equity Ratio)
(1) (2) (3)
Assumes capital structure is only debt and equity. Other sources of capital, such as preferred stock, would need to be included if present. Based on the Capital Asset Pricing Model. Assumes companys debt is risk-free. In certain limited situations, an adjustment can be made to this formula to account for the riskiness of the companys debt.
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Step 3: WACC Target Capital Structure

The weights applied to the costs of equity and debt used in computing WACC for an asset represent the
theoretical optimal capital structure for that asset
D R A F T
Finance theory (Modigliani-Millers three propositions) suggests that in the absence of taxes and financial
distress/bankruptcy costs, changing leverage has no effect on WACC, and therefore no effect on firm value However, in a world with taxes and financial distress, increasing leverage is predicted to result in a decrease in the cost of capital, permitting the determination of a theoretically optimal capital structure Common applications of WACC do not directly factor in financial distress costs, thus they underestimate WACC at high levels of leverage Another shortcoming of WACC is that it assumes capital weights (i.e., leverage) are held constant through time
(%) Cost of Equity
Weighted Average Cost of Capital (WACC)
Cost of Debt
Debt as a % of Enterprise Value
Prior to calculating the cost of equity and debt for the company you are valuing, you need to define a target capital structure that reflects the debt to equity ratio that is expected to prevail over the life of the business.
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Calculate the current market value-based capital structure for the company
D R A F T
To estimate the market value of equity (market capitalization), multiply the stock price by the shares outstanding. Exercisable stock options that are in-the-money should be included in the equity value to the extent the current stock price exceeds the exercise price. If the company is not public, you can estimate the equity value by some alternative method. To estimate the market value of debt, look to see if the debt is publicly traded; if so multiply the trading price by the number of securities outstanding. If the debt is not traded, estimate the market value by comparing with similarly rated publicly traded debt. Book value of debt is sometimes used as an approximation if value of bonds is close to par (issue price) Typically convertibles that are out-of-the-money are treated as debt at book value. Convertibles that are in-the-money are converted into shares of common stock at the conversion price and treated as equity. Theoretically, convertibles consist of both equity and debt components, but rarely do Wall Street firms break them into separate parts for WACC analysis Include capital leases in the total debt calculation. Operating leases require case-specific judgment - they are frequently converted into capital leases by applying a multiple (typically 6x - 8x) to the annual operating lease payments For companies with captive finance subsidiaries, we typically exclude finance companyrelated debt You can use a combination of the following three approaches to estimate the appropriate target capital structure.
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Review the capital structures of comparable companies
D R A F T
Assess the average market capital structure prevailing in the companys sector
Review managements financing philosophy
When possible, discuss with management of the company that you are valuing their financing policy and their explicit or implicit target capital structure on a normalized basis. If you dont have access to management, look for any statements in the press, research reports, annual report, etc. that give hints on the companys medium to long-term financing objectives
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Step 3: WACC Cost of Equity

Typically, the Capital Asset Pricing Model (CAPM) is used to estimate the cost of equity; there
are other approaches that are occasionally used in valuation, including:
Expected Return (in percent)
D R A F T
Rate of return required by private equity investors in the market (i.e., LBO or venture capital
transactions)
Arbitrage Pricing Theory Fama-French three factor model

An investor may obtain a risk-free rate by investing in governmental bonds. By purchasing
equities, he or she assumes general market risk and therefore will expect a certain premium for doing so. CAPM quantifies the relationship between risk and return in a well functioning market
To implement the CAPM approach, you need to estimate three factors that determine the
Security Market Line: the risk-free rate, the market risk premium and the levered beta Security Market Line
20
15 Market Return 10 Risk-free Rate 5
Risk Premium
0 0.0 0.5 Beta

1.0
1.5
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Step 3: WACC The Risk-Free Rate

Finance theory recommends using a true risk-free rate that has the same term as the cash
flows projected
D R A F T
Since long term bond rates have intrinsic interest rate risk factored in, some theorists have
suggested making a liquidity adjustment to the long bond rate representing the term premium implicit in those rates However, this is rarely done in practice by Wall Street professionals
At CS, we typically use the 20-year treasury bond for the U.S. risk-free rate, as it matches the
risk-free rate used in the calculation of the equity risk premium Ibbotson uses the 20-year because there has only been a 30-year bond since 1977 and their data analysis goes back to 1926 There is no longer a 20-year bond issued by the U.S. Government, so you must look for a 30-year bond that has been outstanding for 10 years or use interpolated yields from Bloomberg (type ICUR20 and hit GO) or another source Treasury strips typically are not used but may be appropriate if the asset being valued provides a single payoff at the end of a specified term
To access current yields to maturity on U.S. Government bills, notes and bonds on Bloomberg,
type T and the Government key and hit GO
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Step 3: WACC The Equity Risk Premium

The equity risk premium (ERP) is the difference between the expected rate of return on the market portfolio and
the risk-free rate
D R A F T
Proper methodology for estimating the equity risk premium is the subject of much debate in academia
Equity premia ranging from as low as 3% to as high as 8% are used on Wall Street
CS IBD uses estimates for ERP from Ibbotson Associates; the current ERP figure is 7.1%
This figure is calculated by looking at stock market returns relative to returns on long-term government bonds from 1926 through 2005 Some argue that use of this period over-estimates the risk premium, and that data over a more recent period would suggest a lower premium Also, some argue that using historical data presents a conundrum - equity returns over the last 20 years have been significantly higher than returns on government bonds, however the performance of the equity markets may have been, in part, driven by a reduction in the equity risk premium Nevertheless, most (if not all) major Wall Street firms rely on the Ibbotson data for their cost of capital analyses
Where applicable, the WACC must be adjusted to reflect fact that betas for small companies do not account for
all of the risks faced by investors in those companies. The following size premia (Ibbotson, 2006) should be added to the cost of equity calculation where appropriate: Mid-Cap ($1,729 million to $7,187 million) = 1.02% Low-Cap ($587 million to $1,729 million) = 1.81% Micro-Cap (Below $586 million) = 3.95%
The equity risk premium is a critical element of WACC and DCF analysis that is often the subject of intense debate.
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Step 3: WACC Beta

CAPM holds that investors are only rewarded for bearing systematic risk and are not rewarded for bearing
D R A F T
unique or unsystematic risk. It is assumed that investors can eliminate unsystematic risk on their own through portfolio diversification
Beta represents a measure of the systematic risk that exists in an asset, and is central to CAPM
Beta
= COV[Rasset, Rmarket] / VAR[Rmarket], or equivalently = CORR[Rasset, Rmarket] x STDasset / STDmarket High volatility is not necessarily an indication of high beta
Historical betas of publicly traded equity securities can be calculated based on an analysis of the actual returns
on the security vs. the actual market returns over the same period Unfortunately, historical betas can be poor predictors of expected beta, which is what we need in our analysis BARRA, a financial research firm, computes predicted betas for most public companies
Use a portfolio or average of peer company betas where available because significant error can exist in
individual betas R-Squared (R2) measures the goodness of fit of the regression line, and describes the percentage of variation in the dependent variable that is explained by the independent variable. R2 may vary from 0 to 1 with 1 meaning that the independent variable explains 100% of the variation of the dependent variable, although R2 for individual equity betas seldom rise above 0.2
Observed betas reflect both the business and financial risk of the company. Betas are unlevered to measure
only the business risk of a company and then relevered to the target capital structure of the company that is being valued to reflect both business and financial risk Increasing leverage will, according to theory, increase the beta of a firms equity and hence its cost of equity L U = L = U [ 1 + D (1-T) ] D E (1-T) 1+ E 117
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Step 3: WACC Cost of Debt

The cost of debt is measured as the expected return on the companys long-term debt securities
D R A F T
The cost of debt is dependent on both the general interest rate environment in the economy and the credit quality of the business or asset being valued
The cost of debt is measured on an after-tax basis because interest payments are tax deductible in the U.S.
The tax rate to be used is the companys marginal tax rate, typically 40% in the U.S.
The cost of debt can be measured in several ways:
If the company has public debt outstanding, take the weighted average of current yields to maturity or yields to worst on all issues in the target capital structure The yield to maturity (or for callable bonds, the yield to worst) embodies the markets expectations of future returns on debt and should be used instead of the coupon rate Average cost of debt (not marginal) may be more appropriate when the entire enterprise is being valued Include short-term and medium-term debt (along with long-term debt) if it is expected to be part of the permanent capital structure going forward Talk to Debt Capital Markets (DCM) if debt securities are only thinly traded or if it is difficult to obtain a market price
Risk-free rate + current corporate spread over treasuries of selected comparable credits
Must either use the bond rating given to the company by Standard & Poors or Moodys, or estimate the companys bond rating by comparing the companys financial ratios (i.e., Debt / EBITDA, EBITDA / Interest) to those of its peers who have such ratings
Be wary of debt securities that have options attached (e.g., convertible bonds or callable bonds) that affect the
overall yield to maturity and thus may not reflect the true cost of straight debt securities
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Step 3: WACC Cost of Capital Build-up

Small Cap Stocks Foreign Stocks
Foreign Stock Premium
D R A F T
Corporate Bonds Long-Term Treasury Bonds

Long Horizon Premium Default Premium
Large Cap Stocks
Size Premium
Equity Risk Premium
Equity Risk Premium
Equity Risk Premium
Treasury Bills
Inflation
Long Horizon Premium
Inflation
Inflation
Inflation
Inflation
Inflation
Real Riskless Rate
Real Riskless Rate
Real Riskless Rate
Real Riskless Rate
Real Riskless Rate
Real Riskless Rate
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Step 3: CS U.S. WACC Methodology

In practice, we typically make the following assumptions at CS:
D R A F T
Target Capital Structure Risk Free Rate: Tax Rate: Equity Market Risk Premium: Beta:
Average of ratio of debt and equity market capitalization of selected comparable companies 20 year US Treasury coupon bond yield (Bloomberg: ICUR20) Estimated future marginal tax rate (usually 40%) Ibbotson equity market premium (currently 7.1%), calculated based on historical (arithmetic) return of
equity market relative to 20 year treasury bond

Take predicted levered betas of comparable companies (use Barra predic ted betas), unlever them
Cost of Debt:
according to capital structure, average the unlevered betas, and re -lever the average to the target capital structure of the company being valued Risk-free rate + current corporate spread over treasury for comparable credits
In general, WACC calculation is not a science; there are no exact answers, judgment and reality
checks are essential Typically, discount rate ranges centered around a best estimate for WACC are used in DCF valuations Small differences in WACC/discount rate can have huge impacts on value
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Step 4: Present Value

Time Value of Money
D R A F T
A dollar today is worth more than a dollar tomorrow. Discounting Discounting is the process of finding the present value of a future sum Very Simple Example Assumes the discount rate is 10%; uses end of period discounting for all cash flows
2003 Free Cash Flow Period Discount Factor Discount Factor Present Value
1
2004 $15 2
1 2 /1.10
2005 $20 3
1 3 /1.10
2006 $24 4
1 4 /1.10
2007 $89 5
1
$10 1
1 /1.10
/1.10
0.9091 $9
0.8264 $12
0.7513 $15
0.6830 $16
0.6209 $55
The total present value at December 31, 2002 is equal to the sum of the present values of the
individual cash flows ($108) Mid-year Discounting The above example assumes end of the period discounting, that is it assumes all of the cash flows come at the end of each period. A more accurate method may be mid-year discounting, which assumes that the cash flows come in the middle of each period (this is essentially equivalent to evenly spreading the cash flows throughout the period) When performing mid-year discounting, one must still discount the terminal value from the end of the forecast period
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Step 4: Present Value

Valuation
D R A F T
To calculate the value of a business using DCF analysis, the projected free cash flows over the
forecast period are discounted to the present over the appropriate range of discount rates
A range of terminal values for the business is added to the cash flows in the last year of
projections and discounted to a present value

The resulting values represent the total or enterprise value of the business, including both debt
and equity. To calculate the value of a companys equity, subtract the companys net debt from its enterprise value
In addition, the enterprise value should be adjusted by adding other unusual assets or
subtracting liabilities to reflect the companys fair equity value DCF pointers
Assumption Summaries: Write up summaries of the key assumptions underlying your cash flow
projections
Sensitivity Analysis: It is useful to vary some of the important assumptions (e.g., sales growth
rate, margins) to determine how sensitive your value range is to key determinants of future results
Calculator Check: Always check Excel numbers with a calculator
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Step 5: Corporate Adjustments

DCF analysis calculates the Enterprise Value (also known as Adjusted Market Value) of a
D R A F T
company The Equity Value of a company is equal to its Enterprise Value less Corporate Adjustments
Corporate Adjustments include the companys net debt plus other obligations, less other assets
not included in the DCF analysis or financial forecasts

Long
term debt (including current portion) Short term debt Minority interest Capitalized leases
Contingent
liabilities Excess Cash Value of other assets not in DCF
The Equity Value per diluted share is equal to the Equity Value divided by the number of net
fully-diluted shares outstanding Number of net fully diluted shares = Basic shares + net shares underlying in the money options / warrants + net shares from the conversion of in the money convertible debt and convertible preferred stock
Incremental common-equivalent shares are typically calculated using the treasury stock method
Note that this is a circular calculation the treasury stock calculation depends on an assumed share repurchase price, which is dependent upon the number of net fully-diluted shares outstanding Outstanding vs. exercisable options
(1) Note that out of the money options, while not converted per the treasury stock method, represent a cost that is not captured in the analysis (typically this error is a small one).
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Sample Discounted Cash Flow Valuation

($ in millions)
2005E EBITDA Less: D&A EBIT Less: Tax Effect Unlevered Net Income Plus: D&A Less: Capex Plus: Changes in WC Unlevered Free Cash Flow
Source: Wall Street research projections and Credit Suisse estimates. ($ in millions, except per share data)
2006E $278.5 (121.6) $156.9 (59.6) $97.3 121.6 (110.5) (7.2) $101.1
2007E $307.2 (130.3) $176.9 (67.2) $109.7 130.3 (118.4) (7.7) $113.9
2008E $317.6 (134.2) $183.4 (69.7) $113.7 134.2 (122.0) (3.2) $122.7
2009E $328.2 (138.2) $190.0 (72.2) $117.8 138.2 (125.7) (3.2) $127.1
D R A F T
$250.7 (113.6) $137.1 (52.1) $85.0 113.6 (103.2) (13.7) $81.7
Discount Rate 9.0%
4.50x $417.5 960.0 $1,377.5 (99.3) $1,278.2 $44.42 36.9% 0.4% $406.1 917.1 $1,323.3 (99.3) $1,224.0 $42.64 31.4% 1.3% $395.2 876.6 $1,271.8 (99.3) $1,172.5 $40.95 26.2% 2.2%
Terminal Value EBITDA Multiple 5.00x 5.50x $417.5 1,066.7 $1,484.2 (99.3) $1,384.9 $47.92 47.7% 1.2% $406.1 1,019.1 $1,425.2 (99.3) $1,325.9 $45.98 41.8% 2.1% $395.2 974.0 $1,369.2 (99.3) $1,269.9 $44.15 36.1% 3.0% $417.5 1,173.3 $1,590.9 (99.3) $1,491.6 $51.42 58.5% 1.8% $406.1 1,121.0 $1,527.1 (99.3) $1,427.8 $49.33 52.1% 2.8% $395.2 1,071.4 $1,466.6 (99.3) $1,367.3 $47.34 45.9% 3.7%
6.00x $417.5 1,280.0 $1,697.5 (99.3) $1,598.2 $54.92 69.3% 2.4% $406.1 1,222.9 $1,629.0 (99.3) $1,529.7 $52.67 62.4% 3.3% $395.2 1,168.8 $1,564.0 (99.3) $1,464.7 $50.54 55.8% 4.3% Present Value of Free Cash Flows Present Value of Terminal Value Enterprise Value Less: Net Debt Equity Value Equity Value per Share (1) Implied Premium / (Discount) to Current Implied Perpetuity Growth Rate Present Value of Free Cash Flows Present Value of Terminal Value Enterprise Value Less: Net Debt Equity Value Equity Value per Share (1) Implied Premium / (Discount) to Current Implied Perpetuity Growth Rate Present Value of Free Cash Flows Present Value of Terminal Value Enterprise Value Less: Net Debt Equity Value Equity Value per Share (1) Implied Premium / (Discount) to Current Implied Perpetuity Growth Rate
10.0%
11.0%
(1) Based on share price of $32.44 as of 02/04/05.

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WACC Schedule
Industry Statistics
(in millions) Total Company Beta
(1)
Mkt Equity 1,069 2,457 885 850 354 2,769
Debt / Mkt Equity 1.4% 29.1% 9.2% 14.9% 34.7% 26.3% 19.3% 20.6%
Tax Rate
(2)
Levering Factor
(3)
Unlevered Beta
(4)
Debt 15 714 81 127 123 728
Assumptions
Target Marginal Tax Rate Risk Free Rate (5) Equity Risk Premium (6) Size Premia ("Sp") (7) 38.0% 4.330% 7.20% 1.59%
D R A F T
Arkansas Best Corp Cnf Inc Old Dominion Freight Overnite Corp Scs Transportation Inc Yellow Roadway Corp Mean Median
0.83 0.89 0.62 0.95 0.63 1.00 0.82 0.86
40.1% 41.0% 39.1% 40.0% 37.6% 39.1% 39.5% 39.6%
1.01 1.17 1.06 1.09 1.22 1.16 1.12 1.12
0.82 0.76 0.59 0.87 0.52 0.86 0.74 0.79
Schedule A (Sensitivity of Capital Structure)

Debt / Capital 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% Debt / Mkt Equity 0.0% 11.1% 25.0% 42.9% 66.7% 100.0% Average Unlev'd Beta 0.74 0.74 0.74 0.74 0.74 0.74 Levering Factor 1.00 1.07 1.16 1.27 1.41 1.62 Levered Beta (8) 0.74 0.79 0.85 0.93 1.04 1.19 Cost of Equity (9) 11% 12% 12% 13% 13% 15% 5.0% 11.2% 10.7% 10.3% 9.8% 9.3% 8.8% Weighted Average Cost of Capital (10) Pre-tax Cost of Debt 6.0% 7.0% 8.0% 11.2% 10.8% 10.4% 10.0% 9.5% 9.1% 11.2% 10.9% 10.5% 10.1% 9.8% 9.4% 11.2% 10.9% 10.6% 10.3% 10.0% 9.7% 9.0% 11.2% 11.0% 10.8% 10.5% 10.3% 10.0% 10.0% 11.2% 11.1% 10.9% 10.7% 10.5% 10.4%
Schedule B (Sensitivity of Unlevered Beta)

Debt / Capital 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% Debt / Mkt Equity 0.0% 11.1% 25.0% 42.9% 66.7% 100.0% Levering Factor 1.00 1.07 1.16 1.27 1.41 1.62 Unlevered Beta 0.65 0.70 0.75 0.80 0.85 0.90 5.0% 10.6% 10.5% 10.3% 10.2% 10.0% 9.8% Weighted Average Cost of Capital (10) Pre-tax Cost of Debt 6.0% 7.0% 8.0% 10.6% 10.5% 10.5% 10.4% 10.2% 10.1% 10.6% 10.6% 10.6% 10.5% 10.5% 10.4% 10.6% 10.7% 10.7% 10.7% 10.7% 10.7% 9.0% 10.6% 10.7% 10.8% 10.9% 11.0% 11.0% 10.0% 10.6% 10.8% 11.0% 11.1% 11.2% 11.3%
(1) Barra US equity Book predictions (2) Based on marginal tax rate (3) Levering Factor: 1 + [ ( 1 - Tax Rate ) * ( Debt / Equity ratio ) ] (4) Unlevered Beta: ( Beta / Levering Factor ) (5) Yield on Interpolated 20-Year US treasury Bonds which corresponds to Ibbotson's long-term equity risk premium (as of 2/04/05). Source: Bloomberg. (6) The average historic period between the return on stocks and L-T bonds (2004 Ibbotson Associates).
(7) Cost of equity premia based on equity market capitalization. low-cap ($797mm - $1,167mm) = 1.59%. Amounts per 2004 Ibbotson. (8) Levered Beta: (Beta * Levering Factor) (9) Cost of Equity: Rf + B * ( Rm - Rf ) + Sp, or the risk-free rate plus the beta * the equity risk premium (10) WACC: Rd = Return on Debt; Re = Return on Equity [ Rd * (1 - tax rate) * (D / (D + E) ) ] + [ Re * (E / (D + E) ) ]
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F. Merger Consequences Analysis
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Summer Assignment Accretion / Dilution

Evaluate the transaction consequences of McClatchy buying Knight Ridder:
D R A F T
100% Cash, 0% Stock 50% Cash, 50% Stock 0% Cash, 100% Stock
What are the Income Statement consequences?
Accretion / Dilution impact

What are the Balance Sheet consequences?
Total Debt / Total Capitalization Total Debt / EBITDA EBITDA / Interest

Other consequences?
Ownership
Helpful Hint: We use all outstanding and exercisable shares due to change of control. If you properly filled in the option schedule on the input tab, this should be a quick manual fix.
Key Takeaways

1. 2. 3. 4.
Is an acquisition accretive or dilutive How do premiums paid, financing and level of synergies affect accretion / dilution How is accretion / dilution tied to the relative P/E multiples of the acquiror and target Can an accretive deal be achieved given the DCF and comp valuations?
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Agenda
1. Overview of Merger Consequences
D R A F T
2. Recent Developments in Merger Accounting 3. Earnings Per Share Defined 4. Introduction to Modeling an Acquisition USF Corporation: Sample Merger Consequences Yellow Roadway buys USF Corporation
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Mergers and Acquisitions: Whats the Difference?

Acquiring company purchases a part or all of the assets of the Target
D R A F T
Asset Acquisition
company
Target remains in existence post-transaction, as does Target
ownership structure
Requires that each asset and liability acquired be separately conveyed
contractually
More complicated and time consuming than transfer of stock

Acquiring company buys the stock of the Target company from
Stock Acquisition
stockholder(s)
Stockholders may be a parent company or individuals

Corporate shell of Target survives in Acquirors hands
Two or more corporations combine such that one of the combining
Statutory Merger
corporations remains in existence while the other participating corporation(s) disappear
Frequently follows a stock acquisition
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What are the Consequences of a Merger?

Income Statement Consequences Balance Sheet Consequences
Leverage & Coverage ratios
Social Consequences
Stock options / Golden
D R A F T
Corporate performance
yardstick impacting stock price
Earnings per share impact of

a transaction
Quality of earnings growth,

volatility, customer concentration, etc.
Debt/Total Cap Debt/EBITDA EBITDA/Interest
Parachutes
Management/Board
composition
Pro Forma Ownership
Antitrust Consequences
Does the combined firm have
Regulatory Consequences
Would a variety of regulators (e.
market power in any particular market?
Evaluate stand-alone and

pro forma market shares in all affected markets
g. FCC, FAA, state insurance commissioners) permit the merger to take place?
Market power concerns

similar to FTC
Must some business units

be sold?
Other regulatory concerns
Will the FTC block the

merger (e.g., Staples / Office Depot)
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Accounting Treatments
Old Purchase Accounting New Purchase Accounting
Excess of purchase price over FMV of identifiable
D R A F T
Excess of purchase price over fair market value
(FMV) of identifiable assets less liabilities is recorded as goodwill

Goodwill amortized by the straight line method
assets and liabilities is recorded as goodwill

Goodwill not systematically amortized. Instead,
over a period not exceeding 40 years
subject to an impairment test at least once per year and on an interim basis as warranted
No more systematic income statement hit

Because goodwill is not amortized but most other
intangible assets will be, FASB wants companies to separately identify more intangible assets rather than simply allocating such amounts to goodwill
The Financial Accounting Standards Board (FASB) has modified the existing purchase accounting rules and has eliminated the way we treat Goodwill.
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Earnings Per Share

Corporate Performance yardstick
D R A F T
Growth Stability
Stock price Executive compensation
Cornerstone in merger consequences 2 Earnings per share (EPS) measures:
Basic EPS Diluted EPS
Basic EPS Diluted EPS
Net
Income Shares Outstanding concept only
Accounting Factors
in impact of options and convertible securities, if dilutive
Option: right to buy a share from the Company at a predetermined price Convertible Security: Preferred Stock or Bond whose owner has right to surrender security for a certain number of common shares Treasury Method Securities If-Converted Method
Options
Convertible Shares
outstanding calculated via Treasury Method frequently used to calculate equity market value of a company
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Earnings Per Share The Treasury Method
D R A F T
Key Information Stock Price (P) Basic Shares (B) Options (N) Strike Price (K) Net Income (NI) = = = = = $10.00 20.00 3.00 $8.00 $50.0
Standalone EPS calculations - Use Options Exercisable from 10-K Acquisition Target - Options Outstanding from 10-K
Change of Control usually leads to accelerated vesting for all

options
1. Basic EPS
NI B
$50.0 20.00
$2.50
Single Option intrinsic value Intuition:
2. Diluted EPS
NI Diluted Shares
1. Company issues one share for each option = 3.00 shares 2. Company collects strike price of 3.00 X $8.00 = $24.00 3. Company uses $24.00 to repurchase shares at market price of $10.00 Shares repurchased: $24.00 = 2.40 $10.00 4. Incremental shares = Shares Issued - Shares Repurchased 3.00 - 2.40 = 0.60 Accounting Convention Diluted shares not ACTUALLY outstanding Allows for consistent treatment of options and computing EPS 133
Diluted Shares
Max (0, P K) x N P Max (0, 10.00 8.00) x 3.00 10.00 0.60
= = = =
20 + 20 +
20.60 shares $50.0 20.60 = $2.43
Diluted EPS
CONFIDENTIAL
Earnings Per Share Convertible Securities

Convertible Bonds and convertible preferred securities are bonds and preferred shares from an
D R A F T
economic perspective as well as in terms of their impact on financial statements until holder exercises his option to convert into common shares
Diluted EPS calculation follows a different logic the If-Converted method
Compare Diluted EPS on a converted and not converted basis, and choose the lower of the
two Convertible Preferred If converted test:
Add back preferred dividend to net income Add the number of common shares the
Convertible Bonds If converted test:

Add back after-tax interest to net income
[I x (1-t)]
Add the number of common shares the
convertible converts into to the basic share count

Compute EPS Is EPS lower than Basic EPS?
convertible converts into to the basic share count

Compute EPS Is EPS lower than Basic EPS?
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Accounting for Investment in Equity Securities

METHOD OF ACCOUNTING BALANCE SHEET INCOME STATEMENT
D R A F T
Cost Method (less than 20% in a nonmarketable security) Fair Value (less than 20% ownership in a marketable security)
Investment is shown at cost. Changes in value (from original cost) are reported only as realized Investment account is shown at fair value. Changes in fair value are reported as a separate component of shareholders equity until realized Investment account is shown at cost plus share of targets net income less share of targets dividends since acquisition Consolidate 100% of individual assets and liabilities of subsidiary. Minority interest in subsidiarys net assets is shown between liabilities and equity
Dividends received from target are shown as dividend income Dividends received from target are shown as dividend income. Losses are also realized upon recognition of permanent impairment Equity in targets net income is shown as investment income in period during which target earns income 100% revenues and expenses of subsidiary are combined with those of acquiror. Minority interest in subsidiarys net income is shown as a subtraction
Equity Method (generally when voting ownership percentage is at least 20 percent but not more than 50 percent) Consolidation Method (generally when voting ownership percentage is greater than 50 percent). Tax consolidation requires at least 80% voting and value ownership M&A Purchase Accounting Control If own less than 100%, recognize minority interest
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Purchase Accounting Framework
D R A F T
Acquiror
Target
Income Statement Balance Sheet
Adjustments
1. Synergies 2. Transaction expenses 3. Capital Structure
NewCo
Pro Forma Income Statement Pro Forma Balance Sheet Pro Forma Cashflow Statement
Income Statement Balance Sheet Cashflow Statement
Cashflow Statement
Acquisition Debt Common shares

issued
Refinancing
existing debt
Other
4. Goodwill & Depreciation 5. Date acquisition closes
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Purchase Accounting
Determine buyer
D R A F T
Group that receives the most voting shares of post merger company is presumed to be the
accounting acquirer; regardless of the legal acquiror
If no definitive share count, other factors are:

Board of Directors Management Relative size
Determine acquisition cost
Valuation of securities Earnings contingency Share price contingency

Closing date
Target financials combined with Acquiror financials as of the closing date

Allocation of Purchase Price
Allocate to identifiable assets acquired and liabilities assumed to reflect fair value at date of
acquisition
Include any newly identified intangible assets Excess of cost of acquired company over the FMV is recorded as goodwill
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Purchase Accounting Balance Sheet Impact

Accounting: Acquisition of stock (Carryover basis)
Goodwill
GOODWILL
D R A F T
Purchase Price $100MM 50% stock, 45% debt, 5% cash on hand Closing Date: December 31, 20XX $5MM in synergies Question to class: Why is there a deferred tax
Purchase Price Less: Book Value Excess Purchase Price Less: Asset Write-ups Goodwill
$100.0 5.0 95.0 30.0 $65.0
liability?
Asset step-up: $30MM Step-up amortization: 15 years
($ in millions)
ACQUIROR
TARGET
ACCOUNTING ADJUSTMENT
FINANCING ADJUSTMENT
PRO FORMA
Cash Other Assets Goodwill Total Assets Debt Other Liabilities Deferred Tax Liability Total Liabilities Equity Total Liabilities & Equity
$30.0 10.0 0.0 $40.0 0.0 5.0 0.0 $5.0 35.0 $40.0
$5.0 5.0 0.0 $10.0 0.0 5.0 0.0 $5.0 5.0 $10.0 (5.0) 65.0
$(5.0)
$30.0 20.0 92.0 $142.0
45.0
45.0 10.0 2.0 $57.0
50.0
85.0 $142.0
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Purchase Accounting Income Statement Impact

($ in millions)
ACQUIROR
TARGET
ACCOUNTING ADJUSTMENT
FINANCING ADJUSTMENT
PRO FORMA
D R A F T
Sales EBITDA Depreciation Amortization EBIT Net Interest Expense (Income) PBT Tax Net Income Tax % Diluted Shares EPS EPS Accretion / (Dilution) $ Stock Price
$150.0 30.0 5.0 0.0 25.0 (1.5) 26.5 10.6 15.9 40% 10.00 $1.59 $75.00
$100.0 21.0 1.0 0.0 20.0 (0.3) 20.3 8.1 12.2 40% 2.50 (2.50) 0.67 4.8 5.0 2.0 0.0
$250.0 56.0 6.3 0.0 49.7 3.0 46.7 18.7 28.0 40% 10.67 $2.62 $1.03
$40.00
Implied Cost of Funds

Cost of Cash Cost of Debt Total Interest Shares Issued = $50.0MM $75.00 = 0.67 5% x $5.0
10% x $45.0 $4.8
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The P/E Ratio Shortcut

If the P/E of your acquisition currency is higher than the P/E of the stock of the Target at the
price you propose to pay, the acquisition will likely be accretive, and vice-versa
D R A F T
Robust rule of thumb in the absence of goodwill amortization / impairment

KEY DATA ACQUIRER $10.00 $1.00 10.0x 1 10% 40.0% TARGET $5.00 $1.00 5.0x 1
Price Net Income P/E # of Shares Int. rate Tax Rate
Example 1 Acquirer pays for Target with Acquirer Stock

1. Target Purchase Price 2. Acquirer Shares Issued 3. Combined Net Income 4. New Share Count 5. Earnings per Share = = = = $5.00 x 1 share = $5.00 Purchase Price Acquirer Stock Price $1.00 + $1.00 = $2.00 1 + 0.5 = 1.5 $2.00 / 1.5 = $1.33 = $5.00 $10.00 = 0.50 shares
6. New EPS of $1.33 greater than Acquirer EPS of $1.00 transaction is accretive
Example 2 Acquirer pays for Target with Borrowed Money

P/E of Cash Pro forma EPS = = 1 Rate x (1 t) = 1 10% (1 40%) = 16.7x = $1.00 + $1.00 [$5.00 x 10% x (1-40%)] 1
Acquirer NI + Target NI After Tax Interest Cost Acquirer Shares
= $1.70
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The Incremental Method

Useful for
AcquirCo and TargetCo Debt is not
D R A F T
Preliminary Analysis Limited Information Multiple Companies / Permutations
refinanced
Transaction closes 12/01 No Synergies Purchase Price Book value = Excess
Purchase Price: $100MM; Book Value: $80MM

50% Stock / 50% Debt Financing 2002
Purchase Price
FMV adjustment: $10.0 Deferred Tax Liability = $4.0 Goodwill = $14.0 Tax deductible or non-deductible Asset vs. stock transaction New Debt x int. x (1 tax)
+ =
AcquirCo Net Income TargetCo Net Income Incremental D&A Goodwill Amortization After-Tax Interest Exp. PF Net Income Initial AcquirCo Diluted Shares Pro forma AcquirCo Diluted Shares Stand-alone EPS (Diluted) Pro forma EPS (Diluted) EPS Accretion (Dilution) $ EPS Accretion (Dilution) %
$50.0 20.0 0.5 } 0.0 } 3.0 66.5 10.00 15.00 $5.00 $4.43 $(0.57) (11.4%)
50.0 x 10% x (1 40%) = 3.0

Per Treasury Method Shares issued = Equity issued AcquirCo
Stock Price = $50.0 / 10.00 = 5.00

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Merger Consequences: Yellow Roadways Buys USF

For Knight Ridder project show:
D R A F T
3 Considerations (100% Cash, 50%/50% Cash Stock and 100% Stock) 3 Premiums (10%, 20% and 30%)
($ in millions)
Premium to Share Price Price Per Share Equity Value (1) Net Debt Enterprise Value Enterprise Value / 2005E EBITDA Enterprise Value / 2006E EBITDA Equity Value / 2005E Net Income Equity Value / 2006E Net Income 2005E Stand Alone Diluted EPS 2005E Pro Forma Diluted EPS 2005E Accretion / (Dilution) Acc / (Dil) $ Acc / (Dil) % Pre-Tax Breakeven Synergies Pro-Forma Debt / LTM EBITDA Debt-to-Capitalization (at closing) % Shares issued as currency ProForma Ownership%
(2)
$32.44 $918 99 1,017 4.1x 3.7x 13.3x 11.4x $5.25 5.59 $0.34 6.4% 1.6x 45.28% 14.2% 85.8%
5.0% $34.06 $966 99 1,065 4.2x 3.8x 14.0x 12.0x $5.25 5.53 $0.28 5.4% 1.7x 45.36% 14.9% 85.1%
10.0% $35.68 $1,014 99 1,114 4.4x 4.0x 14.7x 12.6x $5.25 5.48 $0.23 4.4% 1.7x 45.45% 15.5% 84.5%
50% Cash / 50% Stock Consideration 15.0% 20.0% 25.0% 30.0% $37.31 $1,062 99 1,162 4.6x 4.2x 15.4x 13.2x $5.25 5.43 $0.18 3.5% 1.7x 45.53% 16.1% 83.9% $38.93 $1,111 99 1,210 4.8x 4.3x 16.1x 13.8x $5.25 5.38 $0.13 2.6% 1.8x 45.61% 16.7% 83.3% $40.55 $1,160 99 1,259 5.0x 4.5x 16.9x 14.4x $5.25 5.33 $0.08 1.6% 1.8x 45.69% 17.3% 82.7% $42.17 $1,210 99 1,309 5.2x 4.7x 17.6x 15.0x $5.25 5.28 $0.03 0.7% 1.8x 45.76% 17.9% 82.1%
35.0% $43.79 $1,259 99 1,358 5.4x 4.9x 18.3x 15.6x $5.25 5.24 ($0.01) (0.3%) $1.3 1.9x 45.83% 18.5% 81.5%
40.0% $45.42 $1,309 99 1,408 5.6x 5.1x 19.0x 16.2x $5.25 5.19 ($0.06) (1.2%) $6.1 1.9x 45.91% 19.1% 80.9%
Source: Wall Street Projections, Credit Suisse Estimates. (1) Net Debt numbers as of 12/31/04. (2) Based on LTM EBITDA of $697mm.
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D R A F T
These materials have been provided to you by Credit Suisse ("CS") in connection with an actual or potential mandate or engagement and may not be used or relied upon for any purpose other than as specifically contemplated by a written agreement with CS. In addition, these materials may not be disclosed, in whole or in part, or summarized or otherwise referred to except as agreed in writing by CS. The information used in preparing these materials was obtained from or through you or your representatives or from public sources. CS assumes no responsibility for independent verification of such information and has relied on such information being complete and accurate in all material respects. To the extent such information includes estimates and forecasts of future financial performance (including estimates of potential cost savings and synergies) prepared by or reviewed or discussed with the managements of your company and/or other potential transaction participants or obtained from public sources, we have assumed that such estimates and forecasts have been reasonably prepared on bases reflecting the best currently available estimates and judgments of such managements (or, with respect to estimates and forecasts obtained from public sources, represent reasonable estimates). These materials were designed for use by specific persons familiar with the business and the affairs of your company and CS assumes no obligation to update or otherwise revise these materials. Nothing contained herein should be construed as tax, accounting or legal advice. You (and each of your employees, representatives or other agents) may disclose to any and all persons, without limitation of any kind, the tax treatment and tax structure of the transactions contemplated by these materials and all materials of any kind (including opinions or other tax analyses) that are provided to you relating to such tax treatment and structure. For this purpose, the tax treatment of a transaction is the purported or claimed U.S. federal income tax treatment of the transaction and the tax structure of a transaction is any fact that may be relevant to understanding the purported or claimed U.S. federal income tax treatment of the transaction. CS has adopted policies and guidelines designed to preserve the independence of its research analysts. CSs policies prohibit employees from directly or indirectly offering a favorable research rating or specific price target, or offering to change a research rating or price target, as consideration for or an inducement to obtain business or other compensation. CSs policies prohibit research analysts from being compensated for their involvement in investment banking transactions.
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A9r68c4valuation Project Workbook

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CONFIDENTIAL

VALUATION PROJECT WORKBOOK

PRELIMINARY | SUBJECT TO FURTHER REVIEW AND EVALUATION

1. Overview of Valuation Project

Overview of Valuation Project

analyses and conclusions to a team of bankers

Project Schedule and Key Dates

Discounted Cash Flow

Present final projects

USF Corporation Company Profile

Management and Board of Directors

Position and Affiliation

Source: Company filings and Capital IQ.

Source: Company filings and FactSet.

year 2004 results, missed Wall Street earnings

the Southern Minnesota and Decatur, Alabama areas

Liska was named interim CEO

Source: Company filings and ShareWorld.

USF Corporation (Contd)

$32.44 83.6% $27.51 28.2 916.0 250.1 150.8 $1,015.3

$34 1,000 $31 $28 $25 2/4/04 500

4/5/04 6/5/04 USF Corp. Volume

0 10/5/04 12/5/04 2/4/05 USF Corp. Stock Price

Enterprise Value to: 2004E Revenue 2005E Revenue

$2,516.9 / $2,658.8 / $169.2 / $253.7 /

0.4x 0.4x 6.0x 4.0x

Source: Company filings and Wall Street equity research.

Comparable Company Analysis

$45.00 22.61 20.94 20.93

97.7% 99.4% 90.1% 90.2% 99.3% 97.8%

$3,682 1,671 1,679 1,570 1,460 312

$3,697 2,265 1,570 1,311 1,434 372 Mean Median

Less Than Truckload CNF Inc

$46.49 30.35 41.77 35.60 22.55

91.2% 78.5% 89.5% 97.5% 81.6% 97.8%

$2,457 850 1,069 885 354 2,769

$2,400 925 1,000 961 470 3,320 Mean Median

Arkansas Best Corp

Old Dominion Freight SCS Transportation

Yellow Roadway Corp

$51.38 71.88 9.40 31.18 35.25 22.19 43.33 56.46 8.62

91.1% 98.5% 36.2% 89.1% 91.4% 91.0% 91.7% 96.6% 53.4%

$4,435 2,307 693 1,461 1,083 837 944 529 164

Selected Precedent Transactions

ENTERPRISE VALUE $1231 78 510

DATE Jul-03 Nov-01 Nov-01

TARGET Roadway Corporation (US)

ACQUIROR Yellow Corporation Union Pacific Corp. Roadway Corp.

VALUE $966 83 558

TARGET UNIONIZED NA No Yes

Aug-01 Aug-01 Nov-00

Arnold Industries (US)

Roadway Corporation Investor Group (Estes) FedEx Corp.

5.4 5.0 6.3

Jun-99 Jun-98 Oct-97

Yellow Corp. Management Group FedEx Corp.

Arkansas Best Corp.

Nov-92 Nov-92 Jul-88 Jun-88

102 24 135 317

148 146 172 472 Median Average High Low

6.8 5.8 7.8 6.2 6.1x 6.5x 10.3x 4.0x

Mkt Equity 1,069 2,457 885 850 354 2,769

Debt 15 714 81 127 123 728