Online Midterm Flashcards
3 schools of ethical thought
1) consequences
2) duty or intentions
3) virtues
Ethical school: consequences
2
1) Utilitarianism for society
2) concerns for violation of rights of those not in majority
Utilitarianism for society, define
Greatest good for greatest number of people
For ethical school consequences you need to figure out who is…
Hurt/helped
How is the ethical school of thought: consequences evidenced?3
1) government policies
2) consumer behavior
3) investor behavior
Ethical school or thought: Duty or intentions, define
Act by rules you require to be applied universally
Duty or intentions: people should be treated as an end not a means
Treat people with mutual respect
Ethical school: duty or intentions views profits as a consequence of…
Good business practices (rather than goal of business)
Ethical school of thought: virtues define
Qualities/values of an actor
Warren Buffett on measuring virtues, what is his quote?
Everything you do can be reported on the front page of your local paper
Economist Milton Friedman in 1962 advocated a stockholder focus creates a clear objective…
Increase shareholder wealth
Economist Milton Friedman: increasing shareholder wealth limits…
Firm’s social responsibility
Milton Friedman: anything else expropriated wealth/…
Threatens existence
BoD
Board of directors
Milton Friedman: price function can be…
Impaired
Economist Milton Friedman: increase in shareholder wealth is a viewpoint consistent with…2
Board of directors responsibilities
In US and UK
Stakeholder viewpoint: Philosopher Edward Freeman in 1984 advocated in addition to stockholders consider…4
1) employees
2) customers
3) suppliers
4) the community
Stakeholder viewpoint Edward Freeman:
BoD, CEO and managers should be aware of…
Broader spectrum of parties (stakeholders)
Stakeholder viewpoint Edward Freeman:
Challenging and…
Slow decision making
Stakeholder Viewpoint Edward Freeman:
Why does dealing with stakeholders involve challenging and slow decision making?
Often not clear at all whose interests dominate
Types of M&A profitability 3
1) weak form
2) semistrong form
3) strong form
M&A profitability:
Weak form
Pafter>Pbefore. Where P= share price
Hard to attribute to transaction but widely used
M&A profitability:
Semistrong form
%RM&A Firm > %Rbenchmark where R = return on shares
Depends upon using good benchmark and size of sample
M&A profitability:
Strong Form
%Rfirm w M&A > %Rfirm wo M&A. Where R = return on shares
Good in theory but unobservable
4 types of research methods Bruner cites with regard to measuring M&A profitability. 4
1 event studies
2 accounting studies
3 surveys of executives
4 clinical studies
Research method to measure M&A profitability:
Event studies 4
1) abnormal return
2) forward looking price
3) assumptions about efficient stock market
4) direct measure
Abnormal return equation
Abnormal return =
raw return - benchmark on announcement day (S&P or CAPM)
Forward looking price = …
Forward looking price = PV of future cash flows
Research method to measure M&A profitability:
Accounting studies 2
1) estimated returns of financial reports
2) backward looking
Accounting studies are credible from…
Audited returns
Accounting studies pose problems when there are…
Differences in accounting
Accounting studies measure…
Indirectly
Research method to measure M&A profitability:
Surveys of executives 3
1) standardized questionnaires
2) insights not otherwise known
3) intimate familiarity
Potential flaws of surveys of executives…2
1) may be biased
Or
2) hazy recollection
Accounting studies: drivers of profitability 12 (no need to memorize, refer to next flash cards)
1 synergies are important
2 valuing a acquiring pays, glamour doesn’t
3 restructuring pays
4 acquiring market power doesn’t pay
5 using stock is costly, cash is neutral
6 returns vary with time
7 M&A regulation costly
8 Laws/property rights matter in cross border deals
9 M&A just to use cash usually destroys value
10 Tender offers create value for bidders
11 managers have a stake, more value created
12 Announcement of buyer program creates value
Accounting studies: drivers of profitability:
Synergies are…
Important
Accounting studies: drivers of profitability:
Value acquiring…
Glamour…
Value acquiring pays
Glamour doesn’t
Accounting studies: drivers of profitability:
Restructuring…
Pays
Accounting studies: drivers of profitability:
Acquiring market power…
Doesn’t pay
Accounting studies: drivers of profitability:
Using stock is…
Cash is…
Using stock is costly
Cash is neutral
Accounting studies: drivers of profitability:
Returns vary with…
Time
Accounting studies: drivers of profitability:
M&A regulation is…
Costly
Accounting studies: drivers of profitability:
Laws/property rights matter in…
Cross border deals
Accounting studies: drivers of profitability:
M&A just to use cash usually…
Destroys value
Accounting studies: drivers of profitability:
Tender offers, what do they do for the bidders?
Create value for bidders
Accounting studies: drivers of profitability:
When managers have stake…
More value is created
Accounting studies: drivers of profitability:
Announcements of a buyer program…
Creates value
How many waves were there in M&A history? From what time period?
5 waves from 1895 to 2000
What was the date of wave 1?
1895-1904
What was the date of wave 2?
1925-1929
What was the date of wave 3?
1965-1970
What was the date of wave 4a?
1981-1987
What was the date of wave 4b?
1992-2000
Wave 1 (1895-1904) how was this wave characterized?
Horizontal mergers for market power
Wave 1 (1895-1904) Horizontal mergers for market power consisted of overcapacity due to…
Technological innovation
Wave 1 1895-1904
Major companies 5
1 DuPont 2 Standard Oil 3 GE 4 Eastman Kodak 5 US Steel
Wave 2 1925-1929, how was this wave characterized…2
1 vertical mergers
2 for supply and distribution
Wave 2 was characterized by mergers for the purpose of…
Oligopoly
Wave 2 ended with what legislative act?
Clayton Act
Wave 2, primary industry where these mergers occurred?
Public utilities
What ended wave 2?
Stock market crash in 1929
Wave 3 1965-1970, this wave was characterized by…
The rise of the conglomerate
During wave 3 (1965-1970) regulation limited…
What did this cause?
Horizontal mergers
Therefore companies diversified
Wave 3 (1965-1970) concentrated among…
Oil companies/conglomerates
How was the economy/stock market characterized during wave 3 (1965-1970)?
Strong economy and bull market
Wave 3 (1965-1970) ended with what type of legislative enforcement?
Antitrust enforcement
Wave 4a 1981-1987 was characterized by…
Going private
Wave 4a saw the rise of…
The LBO/hostile takeovers
Wave 4a (1981-1987) what was occurring in the financial services industry?2
1 more leverage
2 capital markets innovation
Wave 4a (1981-1987) what economic and stock market activity was occurring during this period?
Falling interest rates/rising stock prices
Wave 4b (1992-2000) how was this wave characterized?
Emergence of strategic buyer
Wave 4b was characterized by synergy among…
Related business
Wave 4b (1992-2000) what 5 industries did this primarily occur?
1 healthcare 2 tech 3 defense 4 financial services 5 oil and gas
Wave 4b (1992-2000) what was the economic and stock market conditions of this period?
Low interest rates and high stock prices
Wave 4b (1992-2000) this period experienced a historic high level of M&A activity of…
15% of GNP
Wave 4b: the Internet bubble and venture capital boom ended in…
2000
What dates did wave 5 occur?
2003-2007
How was wave 5 (2003-2007) characterized?
Private equity wave
During wave 5 (2003-2007) private equity and some hedge funds trumped…
Strategic buyers
Wave 5 (2003-2007) SOX in 2002 motivated many companies to…
Go private
Wave 5 (2003-2007) what type of purchase returned during this period?
LBO returned
Wave 5 (2003-2007) what financial innovation, economic activity and stock market activity was occurring during this time?2
1 CDOs
2 real estate boom
3 high stock prices
Wave 5 (2003-2007) during this period, shareholder's... (Ex. Yahoo)
Rights started to prevail (Yahoo)
Wave 5 (2003-3007) how did this period end?
Collapse of capital markets
Wave 5 (2003-2007) in addition to various banks, what 5 major companies collapsed during this period?5
1 Lehman 2 Bear Sterns 3 AIG 4 Fannie 5 Freddie
What was the major topic Joseph Schumpeter talked about?
Creative Destruction in M&A
Joseph Schumpeter (creative destruction) said rationality is…
Not an explanation for cycles
Joseph Schumpeter (creative destruction) focuses on entrepreneur as…
Source for growth
Joseph Schumpeter (creative destruction) an entrepreneur seeks to…
Create turmoil and revolutionize
Joseph Schumpeter (creative destruction) an entrepreneur exploits…
Inventions or untried technology
Joseph Schumpeter (creative destruction) an entrepreneur explains…
Disequilibrating effect of periodic prosperities
Joseph Schumpeter (creative destruction) the focus of entrepreneur (general) consists of…
Getting things done
Schumpeter: 3 facts that describe the constant revolution of economic structure
1 destroying the old, creating the new
2 essential fact of capitalism
3 entrepreneurs at center of this
Schumpeter: M&A opportunists should listen for turbulence at levels of…
Firms and markets an exploit it
Schumpeter: M&A opportunists should regard M&A as an essential vehicle for…
Corporate change
The Sherman Antitrust Act of 1890 was intended to protect the public from avaricious business practices designed to…
Limit or eliminate competition in the market place
The Sherman Antitrust Act…
Breaks up Monopoly power
Drivers of Cross Border M&A: exploit…
Exploit market imperfections
Drivers of Cross Border M&A, exploit market imperfections 5
1 raw materials 2 labor costs 3 consumer demand 4 deregulation 5 trade liberalization
Drivers of Cross Border M&A: reduce…
What is better?
Taxes (lower = better)
Drivers of Cross border M&A: diversify
Give example.
What do you want to look for?
If US is in recession, may want to go elsewhere
Look for low correlation with US market
Cross Border M&A: Exploit capital…
Markets
Drivers of Cross Border M&A: exploit capital markets
Carry trade
Drivers of Cross border M&A: exploit capital markets,
Define carry trade3
Currency, interest rates and inflation differences
Driver of Cross border M&A: Exploit Capital Markets,
Foreign countries increase US M&A when…
Their economies are slow
Driver of Cross border M&A: Exploit Capital Markets,
The US invests in foreign countries when…
It’s growth is slow
Driver of Cross border M&A: Improve governance and…
Avoid regulation
Driver of Cross border M&A: Improve governance, avoid regulation.
Degrees of investor protection are…2
High in US and UK
Favorable regulatory environment
Strategic Analysis of Cross border M&A: key data 5
1 economic growth rate 2 niche resources/capabilities 3 inflation, interest rates, exchange rates 4 valuation of assets 5 risks
What is an example of risk in cross border M&A key data?
Sovereign debt
Cross Border M&A Strategic analysis:
Macroeconomic view 5
1 fiscal/monetary policy 2 exchange rate 3 intervention 4 trade 5 employment & welfare
Michael Porter 1990 (Cross Border M&A)
Factor conditions define
Inputs of production
Michael Porter 1990 (Cross Border M&A)
Factor conditions are inputs of production such as…3
1 labor
2 natural resources
3 infrastructure
Cross Border M&A: Microeconomic view 4
1 factor conditions
2 demand conditions
3 support industries
4 domestic rivalry and competitors
Cross Border M&A:
Demand conditions
Home market demand for goods and services (sophistication)
Cross Border M&A:
Support industries
Supplier and distribution
Cross Border M&A:
Domestic rivalry and competitors
Stifled or supported
Cross Border M&A Strategic analysis:
Institutions 5
1 banking 2 stock market/investment regulation 3 watchdogs 4 judiciary 5 education system
Cross Border M&A Strategic analysis:
Watchdogs 2
1 press
2 political parties
Cross Border M&A Strategic analysis:
Judiciary 3
1 independent
2 rule of law
3 respect for contracts
Cross Border M&A Strategic analysis:
Education system 2
1 literacy rates
2 generation of intellectual property
Cross Border M&A Strategic analysis:
Culture 5
1 work ethic 2 entrepreneurship 3 leadership 4 tolerance for risk 5 appetite for profit
Michael Porter 3 strategies
1 low cost leadership
2 differentiation
3 focus
Strategy: Mission, define2
What services or products do we provide to whom
and how?
Define M&A strategy2
How are we going to get there
and be who we want to be
Strategy: objectives define
Goals and aspirations
Typical strategic decisions:
How do we create…
More value for who?
Typical Strategic decisions:
What businesses do…
We want to be in
Typical Strategic decisions:
Where do we…
Want to grow?
What does the tool SWOT stand for?
Strengths
Weaknesses
Opportunities
Threats
Michael Porter’s 3 strategies for competitive advantage:
Cost leadership define
Achieved by having the lowest prices in the target market segment
Michael Porter:
cost leadership is achieved by winning market share by appealing to…
cost conscious (price sensitive customers)
Michael Porter:
Differentiate products, where the target customer segment is…
Not price sensitive
Michael Porter:
Differentiate products where the market is either…
Competitive or saturated
Saturated market
Product already widely distributed throughout the market
Michael Porter:
Differentiation is used when customers have…
Very specific needs
Michael Porter:
Focus (AKA Segmented strategy or niche strategy)
Company focuses on a few target markets
Target markets in focus strategy are distinct groups with…
Specialized needs
Michael Porter’s Five Forces: industry Analysis & Firm’s Strategic Position
1 Barriers to entry 2 Customer Power 3 Supplier Power 4 Threat of Substitutes 5 Rivalry Conduct
Michael Porter:
Barriers to entry 5
1 regulatory 2 brand 3 patents 4 high capital requirements 5 know how
Michael Porter:
Customer Power
Customers price takers or price makers
Michael Porter:
Supplier Power
Suppliers are price takers or price makers
Michael Porter:
Threats of Substitutes (what does this do)
Limits pricing power
Michael Porter:
Rivalry Conduct, it is dynamic among…
Players in the industry
Tools, growth share matrix effectively allows you to compare…2 (subsets of 3)
1 growth/share/size
2 divisions/competitors/products
Inorganic growth
Growth by acquisition
Organic growth
Internal growth
Organic vs. inorganic growth is a classic example of…
Make vs. buy
3 paths to inorganic growth
1 benefit from relationship
2 need for ownership and control
3 manage risk
Motive for inorganic growth:
Maturing…
Product line
Motive for inorganic growth:
Regulatory or…
Antitrust limits
Motive for inorganic growth:
Horizontal or…
Vertical integration
Motive for inorganic growth:
Acquire…
Resources or capabilities
One other motive for inorganic growth?
Diversify
Horizontal integration
Consolidating peer firms
Vertical integration
Along the value change
3 motives for horizontal integration
1 increase market power
2 reduce competition
3 gain scale
2 types of vertical integration
1 upstream
2 downstream
Vertical Integration:
Upstream
1) whose acquired?
2) motive for acquiring?
1 distributors
2 retail for revenue growth
Vertical integration
Downstream
1) whose acquired
2) motive for acquisition
1) suppliers
2) reduced expense
Unique resources/capabilities 3
1 technology
2 know how
3 intellectual property
Motives for diversification:
Uncorrelated…
Cash flows
Motives for diversification:
Promote…
Knowledge transfer
Motives for diversification:
Reduce…
Costs
Motives for diversification:
Critical…
Mass
Motives for diversification:
Internal…
Capital markets
Critical mass
Minimum size or amount needed required to start/maintain a venture
4 motives for Inorganic growth
1 contractual relationships
2 strategic alliances
3 joint ventures
4 minority investment
Inorganic growth:
Contractual relationships examples (1st 3)3
1 licensing
2 co-marketing
3 co-development
Inorganic growth:
Contractual relationship examples (2nd 3)3
1 joint purchasing
2 franchising
3 long term supply
Inorganic growth:
Strategic Alliances 2
1 exchange or talent or resources
2 possible equity investments
Inorganic growth:
Strategic alliances are characterized as more than…
Contractual
Inorganic growth:
Joint ventures 2
1 separate entity
2 can be complex
Inorganic growth:
Minority investment
1 noncontrolling equity investment
2 cross shareholding
Restructuring:
Carve-out
Business unit to separate entity & IPO
Restructuring:
Spin-off
Like a carve-out but parent gives stock to shareholders
Restructuring:
Split-off or exchange
Shares are swapped
Restructuring:
Tracking stock
Separate claim on subsidiary business
Restructuring:
Recapitalization
Debt/equity mix change
Divestiture motives:
First 3
1 regain focus
2 correct mistakes
3 capture market value of assets
Divestiture motives:
Second 3
1 internal capital market
2 reduce leverage/taxes
3 gain financing
Diversification vs. focus, which pays?
Focus
Diversification is more likely to…
Divest
Productivity is higher in…
Diversified companies
Strategy: Some Lessons Learned:
Value creation…
Discipline is vital
Strategy: Some Lessons Learned:
Avoid…
Avoid Momentum logic
Strategy: Some Lessons Learned:
Concentrate of…
Sound investing
Strategy: Some Lessons Learned:
Value oriented…
Management
Strategy: Some Lessons Learned:
Guard against…
Stupidity
Economics of information
Focus on obtaining high quality private info on targets
Use personal networks to gain short cut to…
Targets
Building a network is like investing in options…
Payoff is uncertain
Contagion:
Diffusion of info is like…
The spread of rumors (unreliable)
The currency of the search is…
Information
Info generates insights which leads to…
Deals
Principals of a search:
Requires a network that generates info and usually involves…
An exchange (give and get)
Principals of a search:
Better to focus on process and relationships rather than…
Outcomes
A buyer seeks private…
Asymmetric info
Info that is private and clear is…
Costly
According to efficient market hypothesis, market info is…
Fully priced
Informational asymmetry leads to…
Profit arbitrage
Acquisition guidelines (apply well and make a lot of money)
First 3
1 fragmented industry
2 favorable growth potential
3 reasonable valuations
Acquisition guidelines (apply well and make a lot of money)
2nd 3
1 basic operations (no start ups)
2 recurring revenues
3 limited regulation
Screening variables
1st 3
1 industry, position (share/rank), locations
2 resources/strategic capabilities
3 size: sales or assets
Screening variables
2nd 3
1 profitability
2 risk exposure
3 asset type
Screening variables
Risk exposure
Reduces or adds risk
Screening variables
Asset type
Tangible or intangible
Screening variables
3rd 3
1 management quality
2 prospective control
3 organizational fit
Screening variables
Management quality, define w/example
1 personal goodwill
Ex. Dentist in practice is key to making business run
Screening variables
Prospective control
What’s the prospect of buying all the shares
Screening variables
Organizational fit2
1 complementary skill sets
2 can everyone get along
Recurring revenues
Contract revenues are gold
3 strategies of Michael Porter lead to…
Competitive advantage
Screening criteria from kestrel ventures:
Establish…
Market position
Screening criteria from kestrel ventures:
Potential of…
Growth
Screening criteria from kestrel ventures:
Strong…
Cash flow potential
Screening criteria from kestrel ventures:
Potential for…
Financing
Screening criteria from kestrel ventures:
Platform for…
Management
Social Networks in M&A:
Seeks to acquire info…
Held by others
Social Networks in M&A:
Best info is from…1
2 what is it not from?
An exchange
Not one way
Social Networks in M&A:
Degree of separation from those who know. 6 degrees
Average know 6 people away (1-11)
Social Networks in M&A:
Studies show 3 key people in network, these are referred to as…
Rich nodes
Social networks in M&A:
You don’t have to know everything, you just have to…
Be connected
There is strength in…
Weak ties
In networking, diversity and breadth matter more than…
Depth
Under Metcalf’s Law, the value of network is proportional to the number of…
Working nodes in it
Best info just comes from…
Showing up
Early info, researcher should position to be…
Upstream
3 types of navigators
1 connectors
2 river guides
3 gate keepers
Networking:
Use connectors to get…
Upstream
River guides
Industry experts
Gatekeepers
Broker/investment banker
11 steps of an acquisition in order
1 strategy/search 2 discovery/initial contact 3 confidentiality agreement 4 term sheet/letter of interest 5 due diligence 6 board vote 7 public disclosure 8 antitrust filings 9 shareholder vote 10 closing 11 postmerger integration
Discovery is not…
Not due diligence
Due Diligence Purpose:
Direct research conducted by…
Buyer about target
Due Diligence Purpose:
Provides support for…
Valuation
Due Diligence Purpose:
Arms…
Negotiators
Due Diligence Purpose:
Test accuracy of…
Reps and warranties
Due Diligence Purpose:
Form basis of…
Postmerger integration
Due Diligence Purpose:
Identification of…
Risks
Due Diligence Purpose:
Employs…
Audit techniques
Due diligence should focus on…
Developing knowledge
Due diligence checklist 6
1 Legal 2 IT 3 Operations 4 Accounting & Tax 5 HR 6 Other
Never sign a non-compete agreement unless…
You are paid for a living
For a non-compete agreement, bring it to an…
Employment attorney to negotiate
Never sign a non compete agreement if it is…
Too restrictive
Noncompete what do they do?
Prevent you from working for a competitor
Merger of equals (MOE)
Definition
No control premium in transaction
A merger of equals is bad for shareholders because…
No premium is paid
A merger of equals is like a…
50/50 joint venture
Merger of Equals (MOE) is an example of the impact of…
Social terms on deal price or terms
Social (no economic) issues 4
1 mgt and governance
2 BoD
3 CEO/senior mgt.
4 key staff
Social issues:
1st 3
1 mgt. team
2 retention pmts
3 severance pmts
Social issues:
2nd 3
1 leadership succession
2 organizational design
3 board composition
Social issues
3rd 3
1 Structure of transition
2 corporate name
3 headquarters location
Valuation method:
Intrinsic value
Use triangulation to estimate
Intrinsic value can’t be…
Can’t be observed in market
Intrinsic value is a measurement with…
Error
Intrinsic value uses…
Ranges of value
Valuation method:
Book value is based upon…
GAAP
Valuation method:
Book value is historical and…
Backward looking
Valuation method:
Book value can understate…
Intangibles
Valuation method:
Book value has very limited…
Application
Liquidation value:
Characterized by fetch…
At auction
Liquidation value:
Liquidation value is most…
Conservative
Liquidation value:
Is not a…
Not a going concern
Liquidation value:
Very specific to…
Appraiser
Liquidation value:
How fine to…
Break it up
Liquidation value:
Requires onsite…
Inspection
Liquidation value:
Bust up or…
Breakup value
Liquidation value:
Very limited…
Applications
Valuation method, Replacement cost:
Cost to replace…
Assets piecemeal
Valuation method, Replacement cost:
Current…
Conditions
Valuation method, Replacement cost:
Very…
Subjective
Valuation method, Replacement cost:
Some impossible to…
Replace
Valuation method, Replacement cost:
Limited in…
Application
Valuation: market value of firm is…
Market value of debt + market value of equity
Valuation method, Market value:
Equity = share price X…
Number of shares
Valuation method, Market value:
Debt equals the…
Present value of cash flows
Valuation method, Market value:
The value of debt is sometimes close to…
Book
Valuation method, Market value:
Reflects all that is known but does not reflect…
Asymmetric info
Valuation method, Market value:
Market value of firm is useful in…2
Reference and negotiations
Valuation method, Market value:
Marketable minority value needs adjustment for…
Control
Valuation method, comparable peer market value:
Uses classic…
Multiples
Valuation method, comparable peer market value:
Uses what kind of data?
Accounting data
Valuation method, comparable peer market value:
EBITDA as a proxy for cash flow is…
Weak
Valuation method, comparable peer market value:
Often data is…
Historical
Value of an enterprise =
Value of equity + value of debt
Valuation method, comparable peer market value:
There can sometimes be a lack of…
Lack of comparable firms
Valuation Method: Actual transaction value of Peer firms:
Based upon…
Actual prices
Valuation Method: Actual transaction value of Peer firms:
Hard to know if they are…
Comparable or current
Valuation Method: Actual transaction value of Peer firms:
May reflect a…
Control premium
Value Method: Discounted Cash Flow:
Firm’s enterprise value is the sum of…
Before any payments to…
PV of FCF
before any payments to debt or equity
Value Method: Discounted Cash Flow:
Arise from all the many…
CF projects under management by the firm
Value Method: Discounted Cash Flow:
Projects are assets which are…
Tangible or intangible
Value Method: Discounted Cash Flow:
Enterprise FCF =…
Net profit + Noncash charges - investments
Key concepts of DCF:
Return is…
It is not…
Net cash flow
Not accounting profit
Key concepts of DCF:
Cash flow has…
Time value
Key concepts of DCF:
Cash flows over different time period are not…
Directly comparable
Key concepts of DCF:
Future cash flows (both benefits and costs or FCF) are reduced to…
Present value comparable
DCF Assumptions:
Cash flows over time are…2
1 not comparable
2 must be adjusted
Key concepts of DCF:
People prefer…
Present consumption over future consumption
Key concepts of DCF:
People must be offered more in the future to…
Give up present consumption
Key concepts of DCF:
The offer is called the…
Real rate of return
Key concepts of DCF:
The greater the real rate of return and the further out into the future. The greater the difference between the value of…
CF today and CF in the future
Key concepts of DCF:
Cash flows therefore must be weighted and we call that process…
Discounting
What factors for choosing comparable companies out of a company list?
1 comparative ratios
2 similar business models
How do you calculate NOPAT?
NOPAT = EBIT - tax
Free Cash Flow Equation
FCF = NOPAT + depreciation + amortization - change in NWC - CAPEX
Cost of capital is like the cost of any other raw material used in production, cash is the most…
Fundamental of raw materials
The value of synergies is…
The value created when companies are merged together
Marketable minority value is…
The value of 1 share
Intangibles are often understated on the balance sheet because…
Associated with CF
Replacement cost is…
Not often used in valuation
Control value is equivalent to…
Marketable minority value
Use market data instead of historic data when calculating…
WACC
Control premium is a premium when…
Multiple shares are traded
Midpoint is the…
Average of peer ratios
Triangulate is developing views of…
Multiple ranges
What is the calculation for EBITDA?
EBIT + Depreciation + Amortization
What is the difference between EBITDA and FCF?3
FCF also subtracts out…3
1 taxes
2 change in NWC
3 CAPEX
Expected market return - risk free rate =…
Market risk premium
Enterprise value = value of debt + ..
Value of equity
Value of equity =
Value of enterprise - value of debt
Value of enterprise = value standalone + …
Valuesynergies
Inplace Synergies:
Payoffs are reasonably…2
Predictable
Measurable in cash
Real option synergies:
The right, but not the…
Obligation to pursue new strategies
5 kinds in-place synergies
1 revenue enhancement 2 cost reduction 3 asset reduction 4 tax reduction 5 financial synergies
Real option synergies 5
1 growth options 2 exit options 3 deferral options 4 alter operating scale 5 switch
DCF synergies should use…
Bottom up approach
Cost synergies analyze
NPV of cost savings
Synergies:
Revenue enhancement 2
1 offer new products
2 sell to other companies customer base
Synergies
Asset reduction, define, example
Sell assets that come to disuse
Ex. Company doesn’t need to headquarters
Synergy:
Switch
Switch strategies
DLOM
Discount for lack of marketability
Another way to phrase discount for lack of marketability (DLOM)
Discount for illiquidity
Long term debt includes…3
1 bonds
2 mortgages
3 other long term loans
Other long term loans that are considered debt…
1 student loans
2 car loans
3 credit card debt
