Ch.8 - Business valuation Flashcards
What are benefits and risks of organic growth?
Benefits:
- spreads costs
- no disruption
Risks:
- risk
- slower
- barriers
What are benefits and risks of growth by acquisition?
Benefits:
- synergies
- risk reduction
- reduced competition
- vertical protection
Risks:
- synergy is not automatic, must be pursued
- restructuring costs may be significant
- buying company may end up paying more than it gains
What are asset based approaches to business valuation and their problems?
Net realisable value = minimum price for the seller
Replacement cost = maximum price for the buyer
Problems:
- The value of intangibles is not included on the balance sheet and therefore will be missed (e.g. value of staff, client relationships, brand value, etc.)
What is dividend based valuation?
- normally used for valuing minority interest as the investor cannot control dividend policy and his income will therefore depend on dividends paid out
- using dividend valuation model
P0 = D1 / (Ke-g) - using dividend yield
P0 = Dividend / Yield
What are problems with dividend based valuation?
- estimating future dividends
- finding similar listed companies
- for private company valuation, price needs to be adjusted downwards to reflect the lack of marketability
What are earnings based valuations and their problems
- commonly used to value controlling interests as investor can control dividend policy
- PE multiple valuation
- EBITDA multiple valuation
Problems:
- if earnings have been erratic, latest figures may be misleading
- accounting policies can be used to manipulate earnings figures (EBITDA reduces the risk)
- finding appropriate similar listed companies
- private company valuation will need to be adjusted downwards to reflect the lack of marketability
What is PE multiple valuation?
Equity value = Earnings * PE ratio (of similar company)
- Earnings = profit after tax and preference shares, but before ordinary shares
What is EBITDA multiple valuation?
Enterprise value = EBITDA * EBITDA multiple (of similar company)
- Enterprise value = MV of equity + preference shares + minority interest + debts - cash and cash equivalents
What is cash flow based valuation?
- value is calculated by estimating post-tax operating CF of the target company to infinity and discounting at the investing companies WACC
- value will be calculated for both equity and debt together, therefore the MV of debt will need to be deducted
- if the value of CF is given after interest, the calculates NPV is the value of equity ONLY
- if the company holds any investments, then the value of these must be added separately
What are problems with cash flow based valuation?
- theoretically best approach, however it may be difficult to estimate the future CF and the relevant discount rate
What are the main features of divestment (aka sell off)?
Reasons:
- raising cash
- lack of fit
- dis-economies of scale
- cheaper than liquidation
Methods (sold to):
- existing management (MBO) - difficult to finance and often involves the use of junk bonds or mezzanine debt
- external management team (MBI)
- another established business (trade sale)
What is spin off restructuring?
- where shares in a subsidiary are given to the shareholders of the parent in proportion to their shareholdings
- thus group companies are split into two separately held entities (no cash changes hands)
Reasons:
- lack of fit
- dis-economies of scale
- forced division due to a competition commission ruling
What are possible reasons for share repurchase restructuring?
Reasons (in proportion to holding):
- to reduce level of equity and therefore increase gearing
- to get unused funds back into the hands of the shareholders
- to maintain EPC following divestment
Reasons (single shareholder):
- exit route for the investor
- to take listed company off the market and back into private ownership
What is debt for equity swap?
Where creditors give up their debt in return for an equity stake in the company.
- usually when company is in trouble unable to pay interest and/or repayment on its debt
- if forced to liquidation, creditors might get nothing at all
- shareholders often lose a significant amount of control as a result
