Professional Documents
Culture Documents
Issues in Acquisition
Acquisition valuations are complex, because the valuation often involved issues like synergy and control, which go beyond just valuing a target firm. It is important on the right sequence, including When should you consider synergy? Where does the method of payment enter the process. Can synergy be valued, and if so, how? What is the value of control? How can you estimate the value?
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Step 1: Establish a motive for the acquisition Step 2: Choose a target Step 3: Value the target with the acquisition motive built in. Step 4: Decide on the mode of payment - cash or stock, and if cash, arrange for financing - debt
or equity.
Step 5: Choose the accounting method for the merger/acquisition - purchase or pooling.
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Process Overview
Define Purpose Understand size & characteristics of Client Assessment of People and Markets Gather Additional Data Recast Financial Statements Ratio Analysis / Industry Comparison
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Preparing to sell
Strategic and financial considerations Assembling the transaction team Types of sale processes Pre-marketing Marketing efforts Documents Process
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Strategic/Financial consideration
Strategic
Financial
Auction Process
Deal structuring considerations Due diligence (buy and sell side) Buy side evaluation Bidding process Negotiation The Definitive Agreement Closing the deal
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Components of Value
Statutory Net Worth Embedded Value = SNW+ Value of Inforce Business Actuarial Value = EV + Value of New Business Buyers Value = Actuarial Value + Strategic Value Integration Costs
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Actuarial Appraisal
DCF analysis, where: Distributable Cash flow = After-tax Earnings Increase in Required Capital = Premium + Investment Income Benefits Expenses Commissions Increase in Statutory Reserves Taxes Increase in Required Capital
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Tax Issues
Understanding the impact of federal and state tax issues on M&A transactions
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Integration
Successful outcome of acquisition hinges on integration! Comparatively little typically spent on integration vs. acquisition Goal is to capture the value drivers used to justify the acquisition to the board
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Making it work
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Making it work
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Value of machine?
(one time in year 3) 100/(1.08)3 = 79.4 (every year) 100/0.08 = 1250
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Liquidation Value
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Relative Value
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Market Comparable
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Summary Method
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Basic ratio analysis DuPont Model (ROE in three parts) Return on assets Asset turnover Leverage Financial Statement Quality Risk of manipulation Risk of bankruptcy
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Are prior financials reasonable starting point? Prepare forecasted financial statements Utilize excel (including circular arguments) Develop reasoning skills
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Theory of valuation Numerous techniques but ALL begin with the idea of discounted cash flows
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Calculate discount rates Theory and practice very different in this area Finance theory focuses on capital asset pricing model In practice, frequently use build-up method
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PER
Price/earning ratio
Interpretation of the PER Level future equity earnings of the firm. Expected return on the investments made by the firm, ROE.
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Estimates post-acquisition earnings for target for one period, and assumes this level will be maintained. No explicit recognition of the time pattern of earnings growth. Does not explicitly consider the investor-perceived risk of the target firms earnings. Problems in selection of benchmark PER Despite limitations, model provides valuation based on capital market consensus view of value of earnings. Widely used by the investment community.
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EVM / EBITDA
Enterprise value multiple (EVM) Enterprise value /earnings before interest and tax (EV/EBIT) Its cash flow variant Enterprise value/ earnings before interest, tax, depreciation and amortization (EV/EBITDA) EBIT = pre-tax return to both shareholders and debt holders Since most firms funded by equity and debt, sum of equity and debt values = value of the firm or enterprise.
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Adding back non-cash expenses depreciation and amortization, EBITDA = operating cash flow. EVM widely used by investment analysts Asset based valuation Tobins q = Firm value = Replacement cost of assets + Value of growth options
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Purposes of valuation
Business Sale Business Purchase Bank Financing Estate Planning Estate Taxes Gifting
Divorce Partner Buy In/Out ESOP(Employee Stock Ownership Plan) Inter-Generation Other
Always dealing with two sides someone wants a higher valuation, someone wants a lower valuation.
One side is frequently the IRS.
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Market Evaluation
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Example - Hightech AG
Valuation of Hightech AG Company founded 2002 Service company Screening for Biotech companies First revenues from screening services Requires investment of: EUR 100000 Financing stage: First Stage Valuation according to DCF method
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Example - Hightech AG
Data of Hightech AG
Good, experienced management Medium market size, little expansion possibilities / ambition Product innovation small, me-too, inexpensive production
Example - Hightech AG
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Example - Hightech AG
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Example - Hightech AG
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Example - Hightech AG
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Example - Hightech AG
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Example - Hightech AG
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