Description
Introduction to Valuation for Merger & Acquisition
PRESENTATION OVERVIEW
? ? ? ? ? ? ? ? ? ? ?
Recap Valuation Concept Valuation Purpose Steps in Valuation Sources of Information Valuation Methods Fair Value & Exchange Ratio Issues Valuation Report Guidelines- DCA & CCI Case Laws
2
3
RECAP
? Overview of Corporate Restructuring
? Mergers ? Demergers ? Other methods of Restructuring
4
MERGERS
? Combination of two or more companies into a
single company
? Shareholders of Transferor Company become
shareholders of Transferee Company.
? Different from „Acquisition? ? For e.g. Parke Davis into Pfizer, Ponds into HLL
5
ACQUISITIONS
? Purchase of a Company by other Company
? Acquirer more interested in assets (including
intangibles) / cash flows; less interested in mutual sharing of risk and benefits with target Company
? Consideration may be in cash or shares ? May be friendly or hostile ? For e.g. acquisition of Jaguar Land Rover by Tata
Motors, Corus by Tata Steel
6
OBJECTIVES
? Drop Down Effect of Global Restructuring
? Burroughs Wellcome (India) Ltd with GlaxoSmithkline
Pharmaceuticals Ltd
? Reduce the number of Companies in Group
? Philips Medical System India Private Ltd & Philips
Software Centre Private Ltd with Philips India Ltd
? Backwards & Forward Integration
? Kochi Refineries Ltd with Bharat Petroleum Corporation
Ltd
7
OBJECTIVES
? Expansion
? Tata Chemicals Ltd. & Hind Lever Chemicals Ltd
? Focus on Core Activities
? Demerger of cement business of Larsen &Toubro Ltd
into Ultra Tech CemCo Ltd (Aditya Birla Group Company)
? Curtail Competition
? Hindustan Lever Ltd., merged itself with TOMCO,
Doom Dooma Tea, Kwality, Dollops from Cadbury, Kissan from UB, Lakme
8
OBJECTIVES
? Bail Out „Takeovers
? Tata Finance Ltd. with Tata Motors Ltd
? Tax Benefits
9
TYPES OF MERGER
? Horizontal - Merger between business
competitors engaged in same industry. For e.g. TOMCO & HLL
? Vertical - Merger of two companies in related
lines of business. For e.g. Reliance Petro Ltd. & Reliance Industries Ltd
? Conglomerate - Merger of companies in different
industries. For e.g. ITC Bhadrachalam & ITC
10
VALUATION CONCEPT
? Dictionary Meaning of “Valuation”: determination of ? ? ? ? ? ? ?
What is Valuation?
the value of an asset or liability The value should be a fair value Valuation is largely influenced by Valuer?s judgment, knowledge of business, analysis, interpretation and the use of different methods Value of the product could be different from its price- Price is the result of the negotiation process between a willing Buyer and a willing Seller Value refers to the intrinsic worth of an asset. Valuation is not a science; more of an art Valuation varies with purpose 11 Valuation is Time sensitive
VALUATION CONCEPT (cont.)
? In case of Merger Valuation, attempt is not to
arrive at absolute values of the shares of the companies, but their relative values to facilitate determination of the exchange ratio
12
VALUATION PURPOSE
? Consideration for Acquisition/ Sale of Business or
for Purchase/Sale of equity stake ? Swap ratio for Merger/Demerger ? Corporate Restructuring ? Sale/Purchase of Intangible Assets including brands, patents, copyrights, trademarks, rights ? Family Separation ? Determining the Fair Value of shares for issuing ESOP as per the ESOP guidelines
13
VALUATION PURPOSE (cont.)
? Listing on the Stock Exchange
? Portfolio Value of Investments by Venture Funds
or Private Equity Funds ? Liquidation of a Company ? RBI/ SEBI Approval ? Disinvestment by Government ? Litigation ? Other Corporate Decisions
14
STEPS IN VALUATION
? Obtaining Information
? Reviewing the data collected and other
market data ? Conducting sensitivities on assumptions ? Selection and Application of Methods ? Assignment of Weights ? In case of Mergers, Determination of Exchange Ratio ? Reporting
15
SOURCES OF INFORMATION
? Historical data such as audited results
companies being valued ? Discussions with the management companies involved ? Future projections ? Market surveys, news paper reports ? Representation by the management ? Stock market quotations ? Data on comparable companies
of the
of the
16
VALUATION METHODS
Asset Based Approach Earnings Based Approach Market Based Approach
17
VALUATION METHODS
? ASSET BASED METHOD
? Book Value (NAV)
? EARNING BASED METHODS
? Replacement Value/ Realisable Value ? Past Earnings - Earnings Capitalisation Method or Yield ? ? ? ?
? MARKET APPROACH
? Market Price
Method Future Earnings - Discounted Cash Flow (DCF) Method EBITDA Multiple Method Sales Multiple Method Dividend Capitalisation
? Market Comparables
18
POINTS TO BE KEPT IN MIND
? Purpose of transaction ? History and nature of business. ? Economic outlook for the Company and the Industry in which ? ? ? ? ?
it operates. Transaction history Eg: Prior Sale of the firm?s equity Financial condition of the Company Intangibles such as goodwill, patents, etc… Market Value of other firms which are traded actively in the free & open market Decisions of Indian Courts in the past –
It is fair to use combination of three well known methods - asset value, yield value & market value {Hindustan Lever Employees ‘ Union Vs. HLL (1995) 83 Com. Case 30 AIR 1995 SC 470}
19
NET ASSET METHOD
? Based on historical cost or replacement value or
realisable value considered ? Important where value of company is derived substantially from value of its assets ? Asset backing is substantially under utilised and no prospects of improving profitability
20
NET ASSET METHOD (cont.)
The Value as per Net Assets Method is arrived as follows:
Net Assets Value = Total Assets (excluding Misc. Expenditure & Debit balance of Profit & Loss Account) - Total Liabilities OR
Net Assets Value = Share Capital + Reserves (excluding revaluation reserves) – Misc. Expenditure – Debit Balance of Profit & Loss Account
21
NET ASSET METHOD (cont.)
Situations where Net Assets Method may be used: ? Start up companies (capital intensive in nature) ? Investment Companies ? Companies with no sustainable track record of profits and no prospects of earning profits in future ? Manufacturing companies where fixed assets have greater relevance for earning revenues ? Companies with no reliable evidence of future profits due to violent fluctuations/disruption of business ? Where there is an intention to liquidate and to realize the assets and distribute the net proceeds
22
NET ASSET METHOD (cont.)
? Assets at historical cost or replacement cost on
valuation date considered
? Intangible Assets - {Brooke Bond Lipton India
Limited (1998) 15 SCL 81 (Cal)} ? Revaluation of Fixed Assets ? Deferred Tax Asset / Liabilities
? Outstanding liabilities deducted
23
NET ASSET METHOD (cont.)
? Following adjustments may be called for: ? Accounting Policies ? Contingent Liabilities ? Auditor?s Qualification ? Sales Tax Deferment Loan ? Investments & Surplus Assets ? Inventory & Debtors ? Contingent Assets ? Preference Shares ? Proposed Preferential Allotment, ESOP, Warrants, etc
24
NET ASSET METHOD (cont.)
STRENGTHS LIMITATIONS
Traditional method Investment companies Capital Intensive Companies Transparent and easy to compute
Service/knowledge based Brand driven companies Intangibles/human resources value not captured Errors/misstatements in financial statements Dependent on accounting policies followed by company Earnings Potential ignored 25
PECV- THREE PARAMETERS
? Earnings Capitalization method / Yield method -
determination of 3 parameters :
? firstly; the “future maintainable profits” ? secondly; the “appropriate tax rate” ? thirdly; the “Capitalization rate / Price Earning
Multiple”.
? Value determined by capitalizing future
Maintainable PAT by the capitalization rate and making adjustments for Non Operating Assets & Contingent Liabilities
26
PECV- THREE PARAMETERS
? Can be based on past performance or projections
? Non-recurring and extraordinary items to be
removed ? Profits of various years averaged ? Weightages may be assigned; generally current years profit assigned highest weight ? Maintainable profit after tax arrived at after applying effective tax rate
27
ADJUSTMENTS TO PECV
? Elimination of Material non-recurring items ? Elimination of abnormal or exceptional capital
profits/losses or receipt or expense ? Matters suggested by Notes to Accounts or by qualification in the Auditor?s Report ? Adjustment for any inconsistencies in accounting policies ? Adjustment on account of VRS ? Surplus Assets ? Contingent Liabilities ? Other Adjustments
28
PECV
STRENGTHS Traditional method Knowledge based companies Brand Driven companies Best used for a matured company Most widely - quoted valuation method in equity markets LIMITATIONS Investment/Property company Company in liquidation Ignores time value of money
Based on book earnings, cash generation not considered Dependent on accounting policies followed by company Lack of comparable firms No revenues/Negative earnings 29
DISCOUNTED CASH FLOW
TO BE COVERED IN A
SEPARATE SESSION
30
OTHER EARNING BASED METHODS
? EBITDA multiple: ? Is the ratio of the value of capital employed (Equity + Debt) to EBITDA ? Sales Multiple: ? Compares Enterprise value to Company?s Sales ? Dividend Capitalisation method: ? Dividend paying capacity based on average net income and on average cash flow is capitalised
31
MARKET PRICE
? Applicable only to a listed entity ? Thinly Traded/Dormant Scrip - Low floating stock ? Significant & Unusual Fluctuations in market price ? Evaluates the value on the basis of prices
quoted on the stock exchange ? Average of market prices- 6 months preferred ? Regulatory bodies have often considered market value as important basis– Preferential allotment, Buyback, Takeover Code
32
MARKET COMPARABLE
? Generally, applied in case of unlisted entities
? Estimates value by relating the same to underlying
elements of similar companies or for past years ? Based on market multiples of „comparable companies?
? Earnings/Revenue Multiples ? Book Value Multiples
? Industry Specific Multiples
? Multiples from Recent M&A Transactions
Generally used to cross verify values derived as per other methods
33
MARKET COMPARABLE
INDUSTRY Cement MULTIPLES Price per MT
Pharma
IT/Software
P/S
P/S or P/E
Engineering
FI’s
P/E
Price to BV
34
MARKET COMPARABLE
STRENGTHS
Easy to understand and quick to complete Involves few explicit assumptions Basic data for publicly traded entities readily available Easy to explain and present to others
LIMITATIONS
May not capture Intrinsic value Value gets affected by value of Peers Difficulty in identifying comparable companies Short term volatility in markets
35
FAIR VALUE
36
FAIR VALUE
? Though different values arrived under various
methods, necessary to arrive at a single value ? Assigning weights to values under the various methods ? Appropriate to assign higher weight to values determined under “income” approach and “market” approach vis-a-vis “underlying asset” approach
“Feel the deal”
37
EXCHANGE RATIO
? The Exchange Ratio is simply the number of
Transferee Co.?s shares that are to be issued to the shareholders of Transferor Co. as consideration for the merger/sale
? Depends upon the relative valuation of the
Transferor and Transferee Companies
38
EXCHANGE RATIO
Method
NAV Earnings Market
Rs. Per Share Co. A Co. B 10 18 20 35 25 31
Fair Value
Weight
1 2 2 5
Product Co. A Co. B 10 18 40 70 50 62 100 150 25 30
Ratio : For every 5 shares held in Company B 6 shares of Company A.
39
ISSUES
40
ISSUES
? Appointed Date
VALUATION DATE
? Current Date ? Prospective Date
41
JOINT VALUATION
In merger, need to work out relative value of the Companies. Absolute value may not have great relevance 42
ISSUES
Control Premium Illiquidity Discount
43
I S
S U
E S
Technical Valuers’ Report
DDR Findings
Projections
Surplus Assets Intangible Assets
44
OTHER ISSUES
? Investments/marketable securities
? Dividend on Preference shares ? Treatment of extraordinary items ? Unusual fluctuation in market prices ? Dilution of equity- ESOP, Convertible instruments,
warrants ? Tax Benefits e.g. section 80IA, Sales Tax Exemption, etc. ? Assigning weightages to the values arrived at per different methods
45
VALUATION REPORT
? Introduction
? Purpose of Valuation ? Key Financials ? Methodology of Valuation ? Basis of Valuation ? Valuation Workings ? Fair Value ? Limitations/Disclaimer
46
CONCLUSION
? Of late, valuations have been soft targets for
mergers of listed companies ? Valuer to keep in mind fairness to all stakeholders ? Instances of minority shareholders delaying the merger process ? Balance needs to be achieved through transparency, fairness and best Corporate Governance practices
47
DCA GUIDELINES
? Constitution of Expert Group for Valuation
Guidelines ? Recommendatory in Nature, not yet Compulsory. ? Registration of Valuers : Qualification , Code of Conduct ? Covers Companies based on its size or nature ? Joint valuers for merger of listed Companies ? Form of Valuation Report ? Penal Action for defaulters ? Peer Review
48
CCI GUIDELINES
? Pre 1992, pricing of capital issues controlled by the Controller of Capital Issues (CCI) – "Guidelines for Valuation of Equity Shares of Companies and the Business and net assets of Branches" issued by
Ministry of Finance ? Presently limited application – FEMA Regulations for transfer of shares by residents to persons resident outside India ? Based on an estimate of "fair value" and not on "prevailing market price“ ? Fair Value – Average of NAV, PECV & MP (for Listed 49 Co)
CASE LAWS
It is fair to use combination of three well known methods - asset value,
yield value & market value
?Hindustan Lever Employees „ Union Vs.
HLL (1995) 83 Com. Case 30 SC ?Hindustan Ciba Giegy 14 SCL 115
Valuation job must be entrusted to people who know the Company rather than giving to outsiders who will start from scratch ?Consolidated Coffee V/s Arun Kumar Agrawal (1999) 21 SCL 11 (Kar)
50
CASE LAWS
Exchange Ratio not disturbed by Courts unless objected and found grossly unfair ?Miheer H. Mafatlal Vs. Mafatlal Industries (1996) 87 Com Cases 792 ?Dinesh v. Lakhani Vs. Parke-Davis (India) Ltd.. (2003) 47 SCL 80 (Bom) Brands of a company are part of goodwill, cannot be separately valued ?Brooke Bond Lipton India Limited (1998) 15 SCL 81 (Cal)
51
ACTIVITY CHART FOR MERGER
? Preliminary discussions between the management
of two companies.
? Appointment of Valuers & Solicitors ? Obtain Draft Scheme of Amalgamation & Valuers
Report
? Approve the ratio in Board Meeting ? File draft scheme with Stock Exchanges & get
their approval. calling EGM.
? File application with high court, get direction for
52
ACTIVITY CHART FOR MERGER
? Send notices to Shareholders, Creditors, etc.
? Hold EGM ? File Chairman?s report with High Court
? Obtain liquidator?s report for Transferor Company
? Receive Court?s order sanctioning the scheme. ? File Court?s order with ROC
? Fixing of record date for allotment of shares.
Normally whole process takes about 7 to 8 months
53
Valuation is not an objective exercise Any preconceptions and biases that an analyst brings to the process will find their way into the value
54
SELF STUDY
•Books •Damodaran •Mckinsey •Website •Damordaran •Other Resources •Newspapers •Economic Times. Business Standard, etc •Online Lectures •Damodaran
55
56
ISSUES
? Value of surplus assets
? Replacement value - reliance on valuers report ? Investments/marketable securities ? Contingent liabilities ? Dividend on Preference shares ? Treatment of extraordinary items ? Unusual fluctuation in market prices ? Review of projections - Underlying assumptions ? Dilution of equity- ESOP, Convertible instruments,
warrants
57
ISSUES (Cont.)
? Findings of due diligence reviews
? Tax Benefits e.g. section 80IA, Sales Tax
Exemption, etc. ? Assigning weightages to the values arrived at per different methods ? Joint Report - Consensus for exchange ratio ? Discount for unlisted entity, premium for control ? In merger, need to work out relative value of the Companies. Absolute value may not have great relevance
58
doc_993709106.pptx
Introduction to Valuation for Merger & Acquisition
PRESENTATION OVERVIEW
? ? ? ? ? ? ? ? ? ? ?
Recap Valuation Concept Valuation Purpose Steps in Valuation Sources of Information Valuation Methods Fair Value & Exchange Ratio Issues Valuation Report Guidelines- DCA & CCI Case Laws
2
3
RECAP
? Overview of Corporate Restructuring
? Mergers ? Demergers ? Other methods of Restructuring
4
MERGERS
? Combination of two or more companies into a
single company
? Shareholders of Transferor Company become
shareholders of Transferee Company.
? Different from „Acquisition? ? For e.g. Parke Davis into Pfizer, Ponds into HLL
5
ACQUISITIONS
? Purchase of a Company by other Company
? Acquirer more interested in assets (including
intangibles) / cash flows; less interested in mutual sharing of risk and benefits with target Company
? Consideration may be in cash or shares ? May be friendly or hostile ? For e.g. acquisition of Jaguar Land Rover by Tata
Motors, Corus by Tata Steel
6
OBJECTIVES
? Drop Down Effect of Global Restructuring
? Burroughs Wellcome (India) Ltd with GlaxoSmithkline
Pharmaceuticals Ltd
? Reduce the number of Companies in Group
? Philips Medical System India Private Ltd & Philips
Software Centre Private Ltd with Philips India Ltd
? Backwards & Forward Integration
? Kochi Refineries Ltd with Bharat Petroleum Corporation
Ltd
7
OBJECTIVES
? Expansion
? Tata Chemicals Ltd. & Hind Lever Chemicals Ltd
? Focus on Core Activities
? Demerger of cement business of Larsen &Toubro Ltd
into Ultra Tech CemCo Ltd (Aditya Birla Group Company)
? Curtail Competition
? Hindustan Lever Ltd., merged itself with TOMCO,
Doom Dooma Tea, Kwality, Dollops from Cadbury, Kissan from UB, Lakme
8
OBJECTIVES
? Bail Out „Takeovers
? Tata Finance Ltd. with Tata Motors Ltd
? Tax Benefits
9
TYPES OF MERGER
? Horizontal - Merger between business
competitors engaged in same industry. For e.g. TOMCO & HLL
? Vertical - Merger of two companies in related
lines of business. For e.g. Reliance Petro Ltd. & Reliance Industries Ltd
? Conglomerate - Merger of companies in different
industries. For e.g. ITC Bhadrachalam & ITC
10
VALUATION CONCEPT
? Dictionary Meaning of “Valuation”: determination of ? ? ? ? ? ? ?
What is Valuation?
the value of an asset or liability The value should be a fair value Valuation is largely influenced by Valuer?s judgment, knowledge of business, analysis, interpretation and the use of different methods Value of the product could be different from its price- Price is the result of the negotiation process between a willing Buyer and a willing Seller Value refers to the intrinsic worth of an asset. Valuation is not a science; more of an art Valuation varies with purpose 11 Valuation is Time sensitive
VALUATION CONCEPT (cont.)
? In case of Merger Valuation, attempt is not to
arrive at absolute values of the shares of the companies, but their relative values to facilitate determination of the exchange ratio
12
VALUATION PURPOSE
? Consideration for Acquisition/ Sale of Business or
for Purchase/Sale of equity stake ? Swap ratio for Merger/Demerger ? Corporate Restructuring ? Sale/Purchase of Intangible Assets including brands, patents, copyrights, trademarks, rights ? Family Separation ? Determining the Fair Value of shares for issuing ESOP as per the ESOP guidelines
13
VALUATION PURPOSE (cont.)
? Listing on the Stock Exchange
? Portfolio Value of Investments by Venture Funds
or Private Equity Funds ? Liquidation of a Company ? RBI/ SEBI Approval ? Disinvestment by Government ? Litigation ? Other Corporate Decisions
14
STEPS IN VALUATION
? Obtaining Information
? Reviewing the data collected and other
market data ? Conducting sensitivities on assumptions ? Selection and Application of Methods ? Assignment of Weights ? In case of Mergers, Determination of Exchange Ratio ? Reporting
15
SOURCES OF INFORMATION
? Historical data such as audited results
companies being valued ? Discussions with the management companies involved ? Future projections ? Market surveys, news paper reports ? Representation by the management ? Stock market quotations ? Data on comparable companies
of the
of the
16
VALUATION METHODS
Asset Based Approach Earnings Based Approach Market Based Approach
17
VALUATION METHODS
? ASSET BASED METHOD
? Book Value (NAV)
? EARNING BASED METHODS
? Replacement Value/ Realisable Value ? Past Earnings - Earnings Capitalisation Method or Yield ? ? ? ?
? MARKET APPROACH
? Market Price
Method Future Earnings - Discounted Cash Flow (DCF) Method EBITDA Multiple Method Sales Multiple Method Dividend Capitalisation
? Market Comparables
18
POINTS TO BE KEPT IN MIND
? Purpose of transaction ? History and nature of business. ? Economic outlook for the Company and the Industry in which ? ? ? ? ?
it operates. Transaction history Eg: Prior Sale of the firm?s equity Financial condition of the Company Intangibles such as goodwill, patents, etc… Market Value of other firms which are traded actively in the free & open market Decisions of Indian Courts in the past –
It is fair to use combination of three well known methods - asset value, yield value & market value {Hindustan Lever Employees ‘ Union Vs. HLL (1995) 83 Com. Case 30 AIR 1995 SC 470}
19
NET ASSET METHOD
? Based on historical cost or replacement value or
realisable value considered ? Important where value of company is derived substantially from value of its assets ? Asset backing is substantially under utilised and no prospects of improving profitability
20
NET ASSET METHOD (cont.)
The Value as per Net Assets Method is arrived as follows:
Net Assets Value = Total Assets (excluding Misc. Expenditure & Debit balance of Profit & Loss Account) - Total Liabilities OR
Net Assets Value = Share Capital + Reserves (excluding revaluation reserves) – Misc. Expenditure – Debit Balance of Profit & Loss Account
21
NET ASSET METHOD (cont.)
Situations where Net Assets Method may be used: ? Start up companies (capital intensive in nature) ? Investment Companies ? Companies with no sustainable track record of profits and no prospects of earning profits in future ? Manufacturing companies where fixed assets have greater relevance for earning revenues ? Companies with no reliable evidence of future profits due to violent fluctuations/disruption of business ? Where there is an intention to liquidate and to realize the assets and distribute the net proceeds
22
NET ASSET METHOD (cont.)
? Assets at historical cost or replacement cost on
valuation date considered
? Intangible Assets - {Brooke Bond Lipton India
Limited (1998) 15 SCL 81 (Cal)} ? Revaluation of Fixed Assets ? Deferred Tax Asset / Liabilities
? Outstanding liabilities deducted
23
NET ASSET METHOD (cont.)
? Following adjustments may be called for: ? Accounting Policies ? Contingent Liabilities ? Auditor?s Qualification ? Sales Tax Deferment Loan ? Investments & Surplus Assets ? Inventory & Debtors ? Contingent Assets ? Preference Shares ? Proposed Preferential Allotment, ESOP, Warrants, etc
24
NET ASSET METHOD (cont.)
STRENGTHS LIMITATIONS
Traditional method Investment companies Capital Intensive Companies Transparent and easy to compute
Service/knowledge based Brand driven companies Intangibles/human resources value not captured Errors/misstatements in financial statements Dependent on accounting policies followed by company Earnings Potential ignored 25
PECV- THREE PARAMETERS
? Earnings Capitalization method / Yield method -
determination of 3 parameters :
? firstly; the “future maintainable profits” ? secondly; the “appropriate tax rate” ? thirdly; the “Capitalization rate / Price Earning
Multiple”.
? Value determined by capitalizing future
Maintainable PAT by the capitalization rate and making adjustments for Non Operating Assets & Contingent Liabilities
26
PECV- THREE PARAMETERS
? Can be based on past performance or projections
? Non-recurring and extraordinary items to be
removed ? Profits of various years averaged ? Weightages may be assigned; generally current years profit assigned highest weight ? Maintainable profit after tax arrived at after applying effective tax rate
27
ADJUSTMENTS TO PECV
? Elimination of Material non-recurring items ? Elimination of abnormal or exceptional capital
profits/losses or receipt or expense ? Matters suggested by Notes to Accounts or by qualification in the Auditor?s Report ? Adjustment for any inconsistencies in accounting policies ? Adjustment on account of VRS ? Surplus Assets ? Contingent Liabilities ? Other Adjustments
28
PECV
STRENGTHS Traditional method Knowledge based companies Brand Driven companies Best used for a matured company Most widely - quoted valuation method in equity markets LIMITATIONS Investment/Property company Company in liquidation Ignores time value of money
Based on book earnings, cash generation not considered Dependent on accounting policies followed by company Lack of comparable firms No revenues/Negative earnings 29
DISCOUNTED CASH FLOW
TO BE COVERED IN A
SEPARATE SESSION
30
OTHER EARNING BASED METHODS
? EBITDA multiple: ? Is the ratio of the value of capital employed (Equity + Debt) to EBITDA ? Sales Multiple: ? Compares Enterprise value to Company?s Sales ? Dividend Capitalisation method: ? Dividend paying capacity based on average net income and on average cash flow is capitalised
31
MARKET PRICE
? Applicable only to a listed entity ? Thinly Traded/Dormant Scrip - Low floating stock ? Significant & Unusual Fluctuations in market price ? Evaluates the value on the basis of prices
quoted on the stock exchange ? Average of market prices- 6 months preferred ? Regulatory bodies have often considered market value as important basis– Preferential allotment, Buyback, Takeover Code
32
MARKET COMPARABLE
? Generally, applied in case of unlisted entities
? Estimates value by relating the same to underlying
elements of similar companies or for past years ? Based on market multiples of „comparable companies?
? Earnings/Revenue Multiples ? Book Value Multiples
? Industry Specific Multiples
? Multiples from Recent M&A Transactions
Generally used to cross verify values derived as per other methods
33
MARKET COMPARABLE
INDUSTRY Cement MULTIPLES Price per MT
Pharma
IT/Software
P/S
P/S or P/E
Engineering
FI’s
P/E
Price to BV
34
MARKET COMPARABLE
STRENGTHS
Easy to understand and quick to complete Involves few explicit assumptions Basic data for publicly traded entities readily available Easy to explain and present to others
LIMITATIONS
May not capture Intrinsic value Value gets affected by value of Peers Difficulty in identifying comparable companies Short term volatility in markets
35
FAIR VALUE
36
FAIR VALUE
? Though different values arrived under various
methods, necessary to arrive at a single value ? Assigning weights to values under the various methods ? Appropriate to assign higher weight to values determined under “income” approach and “market” approach vis-a-vis “underlying asset” approach
“Feel the deal”
37
EXCHANGE RATIO
? The Exchange Ratio is simply the number of
Transferee Co.?s shares that are to be issued to the shareholders of Transferor Co. as consideration for the merger/sale
? Depends upon the relative valuation of the
Transferor and Transferee Companies
38
EXCHANGE RATIO
Method
NAV Earnings Market
Rs. Per Share Co. A Co. B 10 18 20 35 25 31
Fair Value
Weight
1 2 2 5
Product Co. A Co. B 10 18 40 70 50 62 100 150 25 30
Ratio : For every 5 shares held in Company B 6 shares of Company A.
39
ISSUES
40
ISSUES
? Appointed Date
VALUATION DATE
? Current Date ? Prospective Date
41
JOINT VALUATION
In merger, need to work out relative value of the Companies. Absolute value may not have great relevance 42
ISSUES
Control Premium Illiquidity Discount
43
I S
S U
E S
Technical Valuers’ Report
DDR Findings
Projections
Surplus Assets Intangible Assets
44
OTHER ISSUES
? Investments/marketable securities
? Dividend on Preference shares ? Treatment of extraordinary items ? Unusual fluctuation in market prices ? Dilution of equity- ESOP, Convertible instruments,
warrants ? Tax Benefits e.g. section 80IA, Sales Tax Exemption, etc. ? Assigning weightages to the values arrived at per different methods
45
VALUATION REPORT
? Introduction
? Purpose of Valuation ? Key Financials ? Methodology of Valuation ? Basis of Valuation ? Valuation Workings ? Fair Value ? Limitations/Disclaimer
46
CONCLUSION
? Of late, valuations have been soft targets for
mergers of listed companies ? Valuer to keep in mind fairness to all stakeholders ? Instances of minority shareholders delaying the merger process ? Balance needs to be achieved through transparency, fairness and best Corporate Governance practices
47
DCA GUIDELINES
? Constitution of Expert Group for Valuation
Guidelines ? Recommendatory in Nature, not yet Compulsory. ? Registration of Valuers : Qualification , Code of Conduct ? Covers Companies based on its size or nature ? Joint valuers for merger of listed Companies ? Form of Valuation Report ? Penal Action for defaulters ? Peer Review
48
CCI GUIDELINES
? Pre 1992, pricing of capital issues controlled by the Controller of Capital Issues (CCI) – "Guidelines for Valuation of Equity Shares of Companies and the Business and net assets of Branches" issued by
Ministry of Finance ? Presently limited application – FEMA Regulations for transfer of shares by residents to persons resident outside India ? Based on an estimate of "fair value" and not on "prevailing market price“ ? Fair Value – Average of NAV, PECV & MP (for Listed 49 Co)
CASE LAWS
It is fair to use combination of three well known methods - asset value,
yield value & market value
?Hindustan Lever Employees „ Union Vs.
HLL (1995) 83 Com. Case 30 SC ?Hindustan Ciba Giegy 14 SCL 115
Valuation job must be entrusted to people who know the Company rather than giving to outsiders who will start from scratch ?Consolidated Coffee V/s Arun Kumar Agrawal (1999) 21 SCL 11 (Kar)
50
CASE LAWS
Exchange Ratio not disturbed by Courts unless objected and found grossly unfair ?Miheer H. Mafatlal Vs. Mafatlal Industries (1996) 87 Com Cases 792 ?Dinesh v. Lakhani Vs. Parke-Davis (India) Ltd.. (2003) 47 SCL 80 (Bom) Brands of a company are part of goodwill, cannot be separately valued ?Brooke Bond Lipton India Limited (1998) 15 SCL 81 (Cal)
51
ACTIVITY CHART FOR MERGER
? Preliminary discussions between the management
of two companies.
? Appointment of Valuers & Solicitors ? Obtain Draft Scheme of Amalgamation & Valuers
Report
? Approve the ratio in Board Meeting ? File draft scheme with Stock Exchanges & get
their approval. calling EGM.
? File application with high court, get direction for
52
ACTIVITY CHART FOR MERGER
? Send notices to Shareholders, Creditors, etc.
? Hold EGM ? File Chairman?s report with High Court
? Obtain liquidator?s report for Transferor Company
? Receive Court?s order sanctioning the scheme. ? File Court?s order with ROC
? Fixing of record date for allotment of shares.
Normally whole process takes about 7 to 8 months
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Valuation is not an objective exercise Any preconceptions and biases that an analyst brings to the process will find their way into the value
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SELF STUDY
•Books •Damodaran •Mckinsey •Website •Damordaran •Other Resources •Newspapers •Economic Times. Business Standard, etc •Online Lectures •Damodaran
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ISSUES
? Value of surplus assets
? Replacement value - reliance on valuers report ? Investments/marketable securities ? Contingent liabilities ? Dividend on Preference shares ? Treatment of extraordinary items ? Unusual fluctuation in market prices ? Review of projections - Underlying assumptions ? Dilution of equity- ESOP, Convertible instruments,
warrants
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ISSUES (Cont.)
? Findings of due diligence reviews
? Tax Benefits e.g. section 80IA, Sales Tax
Exemption, etc. ? Assigning weightages to the values arrived at per different methods ? Joint Report - Consensus for exchange ratio ? Discount for unlisted entity, premium for control ? In merger, need to work out relative value of the Companies. Absolute value may not have great relevance
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