1. M&A TOOLKIT
Valuation:
Valuation Methodologies
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2. There are three main valuation methodologies
VALUATION METHODOLOGIES
Asset-based Add the value of the business up asset by asset, using
either historical cost (book value) or current market price
(replacement cost) as the price for each asset
Comparable Identify similar businesses to the target (Comparables) and
Multiples calculate their price ratios (Multiples); apply this to the
target. You can choose to compare:
• Trailing, current or forward ratios
• Transaction (M&A) or trading (listed) ratios
Discounted Forecast future cash flows, then discount to get Net Present
Cash Flow Value (NPV) of the business
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3. The different valuation methodologies have different pros and
cons
PROS AND CONS OF VALUATION METHODOLOGIES
Advantage Disadvantage
Asset-based •Audited at historic •Except for businesses in distress,
value, not subjective asset value is not usually related
to business value
Comparable •Quick and easy •Companies are never
Multiples •No knowledge of truly comparable
industry required
•No forecast required
Discounted •Provides insight into •GIGO - Only as good as
Cash Flow sensitivities and its assumptions
business economics
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4. Companies are rarely truly comparable
FINDING COMPARABLE COMPANIES
•Same industry?
•Same geographies?
•Same competitive position?
•Same future growth prospects? Objective: Identifying
•Same business model? companies with
•Same financial drivers? similar future cash
•Same risk profile? flow performance
•Same management quality?
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5. When you are using multiple based valuation, you need to select
the most appropriate multiple
APPROPRIATE USE OF DIFFERENT MULTIPLES
P/E •Very quick comparisons to listed companies
P/FCF •FCF usually less distorted than Earnings
•Measures perpetuity
P/Sales •Target not profitable
•Buying market share/scale
•Bringing a new margin
structure
P/Customer •Start-ups pre-commercialisation with similar
P/Page view business models
P/Book •Asset-stripping
•Buying financial businesses – Asset Managers, Banks,
Credit card companies etc
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6. When you are using multiple based valuation, you need to select
the most appropriate multiple
CHOOSING DIFFERENT MULTIPLES
Trailing Forward
Description Denominator is Denominator is
the last audited an average of
figures for the analyst estimates
previous for current
financial year financial year
Advantage Factual data Includes latest
data
Trading Current listed Enlarges universe to Usually
stocks include better generates lowest
comparables ratios
Transaction Recent Includes acquisition Usually
acquisition premium generates
deals highest ratios
If you are doing objective analysis, calculate ALL Multiples
If you are trying to persuade, select the ones that support your case best
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7. For a multi-business company, you may use a range of valuation
methodologies for the same company
COMPANY VALUATION
$m 20 120
15
35
50
Business 1 Business 2 Business 3 Real Estate Enterprise Value
DCF-based Valuation Multiple-based Asset-based
Valuation Valuation
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8. A REAL deal will use all valuation methods, and present a range
of valuations, not a “magic number”
COMPANY VALUATION
$/share Current
18.3
DCF Valuation
with synergies 24 32
"As Is" DCF
Valuation 16 23
Comparables
(Transactions)
19 26
Comparables
(Trading) 14 28
12 month
trading range 17 21
10 15 20 25 30 35
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