Description
This is a PPT describes on Firm Valuation in M&A transaction
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There are several approaches to valuing a firm before an acquisition transaction, but we will focus on the following (the list below is incomplete):
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Current market value of the firm
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Trading multiples based on comparable firms
Transaction multiples of comparable acquisitions
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Discounted cash flow approach
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The valuation exercise can be quite complex, but it is important to remember a few guiding principles
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Throughout the exercise, it is important to always “think like an investor” meaning focus on whether an M&A transaction will create value or not The aim of valuation analysis is to assess the true or intrinsic value of the firm; this value is not observable and the valuation estimates obtained through the various approaches not only do not give us the intrinsic value but also include measurement errors
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The aim of valuation is to exploit profit-making opportunities form a difference between the current price and the intrinsic value of a firm The estimates obtained by the various approaches offer a range of values for the firm and will be very useful during negotiations Thus, it is important to scrutinize the estimators, the underlying assumptions, to perform sensitivity analysis and to eliminate estimates in which we don’t have confidence
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The current market value of a firm is the sum of the market value of its equity and the market value of its debt For debt, we should use market values, but book values will be close to market values unless there has been a change in the firm’s credit rating or the general level of interest rates Calculating the firm’s debt, we ignore deferred taxes and current liabilities
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The current market value is an important reference point because it gives us the market’s valuation of the firm
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Valuation through trading multiples is nothing other than the multiples valuation approach that we discussed earlier It is important to select the appropriate sample of peer firms that match the evaluated firm in terms of current line of business, outlook for the future, financial policy and size We can use equity or firm multiples Equity multiples such as P/E ratio, market-to-book ratio, can be used to obtain estimates of stock prices
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Firm multiples are
Firm value/EBIT ? Firm value/EBITDA ? Firm value/sales ? Firm value/book value of assets
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These can be used to estimate market values of the firm Transaction multiples are used as an additional benchmark because they include the premiums paid for target firms
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Similar equity and firm multiples are used in the case of transaction multiples The difference between trading and transaction multiples is that the latter will include the premiums paid for obtaining control of the acquired firms
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Obtain forecasts of Free Cash Flows to the Firm (FCFF) for an horizon of 5-10 years Estimate the terminal value of the firm under some reasonable growth assumption Estimate the firm’s cost of capital Use the above information to obtain the PV of future FCFF plus the firm’s terminal value
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To obtain estimates of the firm’s value of equity through the DCF approach we can
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Use DCF to estimate the firm’s value and subtract from that the value of the firm’s debt
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Use DCF to discount the FCFE at the firm’s cost of equity (we use the same steps as described above in the case of FCFF)
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FCFF is given by
FCFF = EBIT (1-tax rate) – (capital spending – depreciation) – change in noncash working capital
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The terminal value is given by
TV = (FCFF(1+g))/(WACC-g)
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FCFE is given by
FCFE = FCFF – debt payments + new debt issued
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To value this firm, we will use three approaches (example shown in class)
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DCF approach based on forecasts of earnings, capital expenditures and working capital needs for the next five years
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Trading multiples from peer firms
Information from transaction multiples
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doc_557759680.ppt
This is a PPT describes on Firm Valuation in M&A transaction
?
There are several approaches to valuing a firm before an acquisition transaction, but we will focus on the following (the list below is incomplete):
?
Current market value of the firm
?
Trading multiples based on comparable firms
Transaction multiples of comparable acquisitions
?
?
Discounted cash flow approach
?
The valuation exercise can be quite complex, but it is important to remember a few guiding principles
?
Throughout the exercise, it is important to always “think like an investor” meaning focus on whether an M&A transaction will create value or not The aim of valuation analysis is to assess the true or intrinsic value of the firm; this value is not observable and the valuation estimates obtained through the various approaches not only do not give us the intrinsic value but also include measurement errors
?
?
The aim of valuation is to exploit profit-making opportunities form a difference between the current price and the intrinsic value of a firm The estimates obtained by the various approaches offer a range of values for the firm and will be very useful during negotiations Thus, it is important to scrutinize the estimators, the underlying assumptions, to perform sensitivity analysis and to eliminate estimates in which we don’t have confidence
?
?
?
The current market value of a firm is the sum of the market value of its equity and the market value of its debt For debt, we should use market values, but book values will be close to market values unless there has been a change in the firm’s credit rating or the general level of interest rates Calculating the firm’s debt, we ignore deferred taxes and current liabilities
?
?
?
The current market value is an important reference point because it gives us the market’s valuation of the firm
?
Valuation through trading multiples is nothing other than the multiples valuation approach that we discussed earlier It is important to select the appropriate sample of peer firms that match the evaluated firm in terms of current line of business, outlook for the future, financial policy and size We can use equity or firm multiples Equity multiples such as P/E ratio, market-to-book ratio, can be used to obtain estimates of stock prices
?
?
?
?
Firm multiples are
Firm value/EBIT ? Firm value/EBITDA ? Firm value/sales ? Firm value/book value of assets
?
?
These can be used to estimate market values of the firm Transaction multiples are used as an additional benchmark because they include the premiums paid for target firms
?
?
Similar equity and firm multiples are used in the case of transaction multiples The difference between trading and transaction multiples is that the latter will include the premiums paid for obtaining control of the acquired firms
?
?
Obtain forecasts of Free Cash Flows to the Firm (FCFF) for an horizon of 5-10 years Estimate the terminal value of the firm under some reasonable growth assumption Estimate the firm’s cost of capital Use the above information to obtain the PV of future FCFF plus the firm’s terminal value
?
?
?
?
To obtain estimates of the firm’s value of equity through the DCF approach we can
?
Use DCF to estimate the firm’s value and subtract from that the value of the firm’s debt
?
Use DCF to discount the FCFE at the firm’s cost of equity (we use the same steps as described above in the case of FCFF)
?
FCFF is given by
FCFF = EBIT (1-tax rate) – (capital spending – depreciation) – change in noncash working capital
?
The terminal value is given by
TV = (FCFF(1+g))/(WACC-g)
?
FCFE is given by
FCFE = FCFF – debt payments + new debt issued
?
To value this firm, we will use three approaches (example shown in class)
?
DCF approach based on forecasts of earnings, capital expenditures and working capital needs for the next five years
?
Trading multiples from peer firms
Information from transaction multiples
?
doc_557759680.ppt