Valuation Models Training by JobSearchDigest.com and IBtraining.com

1. and
present
An Overview of
Valuation Models

2. About JobSearchDigest.com
 Every day our team researches all the online job
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 We capture every Hedge Fund, Private Equity,
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 Daily email updates give you a competitive
advantage in your job search
www.JobSearchDigest.com
Copyright 2009

3. About The Investment Banking Institute
 Core financial, technical and modeling skills.
 Similar to the top firms.
 4 Weeks of training
– 28 hours of live, in-class instruction,
– Taught by current and former investment bankers.
 Wide range of topics.
 Classes monthly in major cities across the US,
Canada and Europe.
 Visit www.ibtraining.com for additional details.
Copyright 2009

4. Table of Contents
I. Valuation Overview
II. Comparable Public Companies
III. Precedent Transactions
IV. Discounted Cash Flow (DCF) Analysis
V. Conclusions
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5. Valuation
 Trying to answer: “What is the aggregate
value of a company?”
 Total Enterprise Value (TEV)
 Remember, common stock, preferred stock,
debt and minority interest are ALL providers
of capital
 Right-side of the balance sheet
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6. Valuation (cont.)
Commonly Used Valuation Methodologies
 Comparable Company Analysis - “What is the
value of my company based on valuation multiples
of other similar public companies?”
 Precedent Transactions Analysis - “What might my
company sell for relative to other similar
companies that have already been sold?”
 Discounted Cash Flow (DCF) Analysis - “What is
the present value of my company’s projected
future cash flows?”
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7. I. Valuation Overview
II. Comparable Public Companies
III. Precedent Transactions
IV. Discounted Cash Flow (DCF) Analysis
V. Conclusions
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8. Comparable Public Companies
The first step is to pick the comp universe
Similar companies: Sources include:
 Industries  Equity research reports
 Business Models  “Competitors” section
 Profitability from 10-K
 Size  SIC codes
 Growth  Internet
 Geography  Senior bankers

9. Multiples Analysis
 Relative valuation based on applying
multiples
 A valuation multiple is a ratio between a value
and an operating metric
– example: P/E ratio; price = value, earnings = operating
metric
– P/E = 25.5x, Earnings = $30 million; MVE = ?
 There are 2 types of trading multiples
 Operating (debt-free): TEV / Revenue, TEV/EBIT
or TEV/EBITDA
 Equity: Price/Earnings
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10. “Spreading” Comps
 An Excel-based “apples to apples” comparison
 Same time frames
 Eliminate unusual or non-recurring items
 Analyze forward-looking numbers
 Also allows calculation of TEV for all of our
comps, and then to calculate valuation
multiples
 All components of TEV must be at fair market value
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11. Selecting Multiples and Ranges
 Sample Comparable Companies Valuation Multiples:
Share
Price % off 52- Market Enterprise TEV / Revenue TEV / EBITDA Price / Earnings
Com pany Nam e 12/19/08 w eek High Cap Value Cash Debt LTM FYE+1 LTM FYE+1 LTM FYE+1
Kraft Foods $26.67 23.7% 39,345 59,201 737 20,593 1.39x 1.35x 9.4x 9.1x 13.8x 14.0x
ConAgra Foods 15.98 35.7% 7,144 10,237 296 3,389 0.85x 0.81x 8.1x 6.9x 13.8x 11.0x
H.J. Heinz Co. 37.25 29.7% 11,742 16,547 928 5,733 1.58x 1.63x 8.9x 9.1x 12.8x 12.9x
General Mills 59.00 18.1% 19,975 27,496 640 7,918 1.91x 1.89x 11.2x 10.0x 16.7x 15.1x
Kellogg Co. 42.63 27.1% 16,284 21,149 684 5,549 1.67x 1.62x 8.8x 9.0x 13.7x 14.2x
Median 27.1% 16,284 21,149 684 5,733 1.58x 1.62x 8.9x 9.1x 13.8x 14.0x
Mean 26.9% 18,898 26,926 657 8,636 1.48x 1.46x 9.3x 8.8x 14.2x 13.4x
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12. Pop Quiz
 Which of the following
represent equity multiples?
a. TEV/Revenues
b. TEV/EBITDA
c. TEV/EBIT
d. Price/Earnings
e. All of the above
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13. Pop Quiz
 Which of the following
represent equity multiples?
a. TEV/Revenues
b. TEV/EBITDA
c. TEV/EBIT
d. Price/Earnings
e. All of the above
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14. I. Valuation Overview
II. Comparable Public Companies
III. Precedent Transactions
IV. Discounted Cash Flow (DCF) Analysis
V. Conclusions
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15. Precedent Transactions
 Another form of relative value is precedent
transactions
 Many argue the most accurate
 What has been recently paid for comparable
businesses?
 Also a multiples-based valuation
 Yield an acquisition or control premium
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16. Precedent Transactions (cont.)
What have others recently paid?
Comparable Transactions: Sources include:
 Target company  SDC or other M&A
characteristics databases
 Transaction parameters  SEC filings
 Time frame  Equity research reports
 Press releases
 Industry news

17. Precedent Transactions (cont.)
 Sample Precedent Transactions Summary Data:
Announce Target LTM Transaction Implied TEV / Control
Date Acquiror Target Revenue EBITDA EBITDA Marg Value Revenue EBITDA Premium
06/07/00 Unilever, plc BestFoods, Inc. $8,660 $1,614 18.6% $22,995 2.66x 14.2x 15.9%
06/25/00 Philip Morris Nabisco Holdings Corp. $8,482 $1,326 15.6% $19,017 2.24x 14.3x 6.5%
07/17/00 General Mills Pillsbury $6,078 $802 13.2% $10,500 1.73x 13.1x n/a
04/12/07 Nestle SA Gerber $1,600 $340 21.3% $5,500 3.44x 16.2x n/a
07/03/07 Kraft Foods Groupe Danone (Biscuit Div) $2,700 $525 19.4% $7,200 2.67x 13.7x n/a
04/28/08 Mars Wm. Wrigley Jr. Co. $5,389 $1,181 21.9% $23,641 4.39x 20.0x 28.1%
12/02/00 PepsiCo. Quaker Oats Co. $4,903 $877 17.9% $14,204 2.90x 16.2x 12.1%
12/02/00 Kellogg Co. Keebler Foods Co. $2,697 $395 14.6% $4,469 1.66x 11.3x 6.7%
Median 18.3% 2.66x 14.3x 12.1%
Mean 17.8% 2.71x 14.9x 13.9%
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18. Pop Quiz
 Difference between Comparable Companies
(CC) analysis and Precedent Transactions
analysis?
 a. None. Both result in a controlling interest
valuation
 b. CC analysis results in a FMV and Precedent in
liquidation
 c. CC results in minority interest and Precedent
controlling interest
 d. CC results in controlling interest and Precedent
in minority interest
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19. Pop Quiz
 Difference between Comparable Companies
(CC) analysis and Precedent Transactions
analysis?
 a. None. Both result in a controlling interest
valuation
 b. CC analysis results in a FMV and Precedent in
liquidation
 c. CC results in minority interest and Precedent
controlling interest
 d. CC results in controlling interest and Precedent
in minority interest
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20. I. Valuation Overview
II. Comparable Public Companies
III. Precedent Transactions
IV. Discounted Cash Flow (DCF) Analysis
V. Conclusions
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21. Discounted Cash Flow Overview
 The DCF calculation represents a company’s
“intrinsic” value using projected cash flows
Forecasting Free Estimate Cost of Estimating Calculating
Cash Flows Capital Terminal Value Results
• Identify • Perform a WACC • Estimate • Bring to present
components of analysis Terminal Value value
FCF • Develop target using EBITDA • Perform sensitivity
• Project financials capital structure multiple or analysis
using growth rate
• Estimate cost of • Interpret results
assumptions equity • Discount to
• Decide # of years present value
to forecast
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22. DCF Example
 Calculation of PV of Period (Years 1-5) Cash Flows:
Fiscal Year Ending ($MMs) 12/31/08 12/31/09 12/31/10 12/31/11 12/31/12
Revenue $1,440 $44,156 $46,363 $48,682 $51,116
EBIT $181 $5,624 $5,100 $5,355 $5,623
Less: Taxes 63 1,968 1,785 1,874 1,968
Debt-Free Earnings $118 $3,656 $3,315 $3,481 $3,655
Less: Capital Expenditures (45) (1,379) (1,391) (1,460) (1,533)
Less: Working Capital Requirements (22) (36) (221) (232) (243)
Add: Depreciation and Amortization 33 1,014 1,159 1,217 1,278
Total Net Investment ($33) ($402) ($453) ($475) ($499)
Net Debt-Free Cash Flows: $85 $3,254 $2,862 $3,006 $3,156
Discount Period 0.03 1.03 2.03 3.03 4.04
Discount Factor @ 6.0% 1.00 0.94 0.89 0.84 0.79
PV of Net Debt-Free Cash Flows: $85 $3,064 $2,543 $2,519 $2,494
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23. DCF Example
 Calculation of PV of Terminal Value:
Terminal Value Assumptions
Terminal Year EBITDA $6,901
EBITDA Multiple 9.00
Terminal Value $62,105
Discount Period 4.04
Discount Factor @ 6.0% 0.7905
PV of Terminal Value $49,091
 TEV = Sum of Period Cash Flows ($10,704) + PV of Terminal
Value ($49,091) or $59,796 million
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24. Pop Quiz
 When performing a Discounted Cash Flow
analysis, what type of value should be
the result?
 a. Market Value of Equity, on a minority
interest basis.
 b. Total Enterprise Value, on a minority
interest basis.
 c. Total Enterprise Value, on a controlling
interest basis.
 d. None of the above.
Copyright 2009

25. Pop Quiz
 When performing a Discounted Cash Flow
analysis, what type of value should be
the result?
 a. Market Value of Equity, on a minority
interest basis.
 b. Total Enterprise Value, on a minority
interest basis.
 c. Total Enterprise Value, on a controlling
interest basis.
 d. None of the above.
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26. I. Valuation Overview
II. Comparable Public Companies
III. Precedent Transactions
IV. Discounted Cash Flow (DCF) Analysis
V. Conclusions
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27. Conclusions
Pros Cons
Highly efficient market Size discrepancy
Comparable Easy to find Liquidity difference
Public information Hard to find “good”
Companies comps in niche market
Arguably, the most Poor disclosure on
accurate method private and small deals
Precedent
Hard to find “good”
Transactions comps in niche or slow
M&A market
Represents intrinsic Highly sensitive to
value discount rate and
Discounted terminal multiple
Cash Flow (DCF) “Hockey Stick”
tendencies

28. Q&A

29. Q&A
Q: How to select which methodology
to use?
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30. Q&A
Q: How have recent market events
affected valuation?
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31. Q&A
Q: How is valuation affected in a
distressed situation?
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32. Q&A
Q: How to value private vs. public
companies?
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33. Q&A
Q: What is the best way to value
early stage companies?
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34. Q&A
Q: Accounting for risk in today’s
market?
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35. and
Thank You.

36. About Investment Banking Institute
 The Investment Banking Institute (IBI), with offices in 14 cities
throughout North America and Europe, conducts corporate as
well as individual training for candidates ranging from
Managing Directors to MBAs to College Undergrads and other
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moreover, our bankers/instructors possess a combined 129
years of I-banking and/or PE experience
Copyright 2009

37. About Investment Banking Institute
 IBI is affiliated with the CFA Institute, NASBA (the national
association of the state boards of accountancy –overseeing
CPAs), and the CFP Board
 IBI has trained analysts and associates for hundreds of
organizations (a partial list can be viewed on our website), the
in-class training we provide our individual students is the same
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future date to ensure your skills are sharp when you need them
to be
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class whenever needed
Copyright 2009

38. Investment Banking Institute Student Testimonial
I am so thankful for the class I took at the Investment Banking Institute. It was both
an enriching knowledge vault and a confidence booster!
Your walkthrough of the DCF calculations was an excellent refresher. While I still
remember bits and pieces of how DCF works from my on-campus interviews back in
college and work at JP Morgan, your presentation helped to consolidate everything
in my mind. I also appreciate how you tied things back to an estimate of the
company's stock price at the end -- I actually once got an interview question on that
exact topic! The details and examples of the LBO modeling were extremely helpful,
and the encouragement you gave students throughout the class was equally
invaluable.
A huge thank-you for your insight into current market conditions, and on how the
subprime crisis actually unfolded. Although I manage to gain exposure to
macroeconomic and market valuation issues at work every day at JP Morgan, it was
your engaging, concise teaching method and holistic approach to the course that
put everything in perspective for me.
I will definitely recommend your course to my future classmates at Harvard Business
School as I am sure they will benefit tremendously from it.
Thank you very much.
Anthony, Boston
Copyright 2009

39. Investment Banking Institute
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Copyright 2009