BIWS 400 Questions - Valuation Questions &
Answers - Basic
Can you use private companies as part of your valuation? - ANS - Only in the
context of precedent transactions - it would make no sense to include them for
public company comparables or as part of the Cost of Equity / WACC calculation
in a DCF because they are not public and therefore have no values for market cap
or Beta.
\Do you ALWAYS use the median multiple of a set of public company
comparables
or precedent transactions? - ANS - There's no "rule" that you have to do this, but
in most cases you do because you want to use values from the middle range of
the set. But if the company you're valuing is distressed, is not performing well, or
is at a competitive disadvantage, you might use the
25th percentile or something in the lower range instead - and vice versa if it's
doing well.
\How do you apply the 3 valuation methodologies to actually get a value for the
company you're looking at? - ANS - Sometimes this simple fact gets lost in
discussion of Valuation methodologies. You take
the median multiple of a set of companies or transactions, and then multiply it by
the relevant metric from the company you're valuing.
Example: If the median EBITDA multiple from your set of Precedent Transactions
is 8x
and your company's EBITDA is $500 million, the implied Enterprise Value would
be $4
billion.
To get the "football field" valuation graph you often see, you look at the minimum,
maximum, 25th percentile and 75th percentile in each set as well and create a
range of values based on each methodology.
\How do you select Comparable Companies / Precedent Transactions? - ANS -
The 3 main ways to select companies and transactions:
1. Industry classification
2. Financial criteria (Revenue, EBITDA, etc.)
3. Geography
, For Precedent Transactions, you often limit the set based on date and only look at
transactions within the past 1-2 years.
The most important factor is industry - that is always used to screen for
companies/transactions, and the rest may or may not be used depending on how
specific you want to be.
Here are a few examples:
Comparable Company Screen: Oil & gas producers with market caps over $5
billion
Comparable Company Screen: Digital media companies with over $100 million in
revenue
Precedent Transaction Screen: Airline M&A transactions over the past 2 years
involving sellers with over $1 billion in revenue
Precedent Transaction Screen: Retail M&A transactions over the past year
\How do you take into account a company's competitive advantage in a
valuation? - ANS - 1. Look at the 75th percentile or higher for the multiples rather
than the Medians.
2. Add in a premium to some of the multiples.
3. Use more aggressive projections for the company.
In practice you rarely do all of the above - these are just possibilities.
\How do you value a private company? - ANS - You use the same methodologies
as with public companies: public company comparables, precedent transactions,
and DCF. But there are some differences:
• You might apply a 10-15% (or more) discount to the public company comparable
multiples because the private company you're valuing is not as "liquid" as the
public comps.
• You can't use a premiums analysis or future share price analysis because a
private company doesn't have a share price.
• Your valuation shows the Enterprise Value for the company as opposed to the
implied per-share price as with public companies.
• A DCF gets tricky because a private company doesn't have a market
capitalization or Beta - you would probably just estimate WACC based on the
public comps' WACC rather than trying to calculate it.
Answers - Basic
Can you use private companies as part of your valuation? - ANS - Only in the
context of precedent transactions - it would make no sense to include them for
public company comparables or as part of the Cost of Equity / WACC calculation
in a DCF because they are not public and therefore have no values for market cap
or Beta.
\Do you ALWAYS use the median multiple of a set of public company
comparables
or precedent transactions? - ANS - There's no "rule" that you have to do this, but
in most cases you do because you want to use values from the middle range of
the set. But if the company you're valuing is distressed, is not performing well, or
is at a competitive disadvantage, you might use the
25th percentile or something in the lower range instead - and vice versa if it's
doing well.
\How do you apply the 3 valuation methodologies to actually get a value for the
company you're looking at? - ANS - Sometimes this simple fact gets lost in
discussion of Valuation methodologies. You take
the median multiple of a set of companies or transactions, and then multiply it by
the relevant metric from the company you're valuing.
Example: If the median EBITDA multiple from your set of Precedent Transactions
is 8x
and your company's EBITDA is $500 million, the implied Enterprise Value would
be $4
billion.
To get the "football field" valuation graph you often see, you look at the minimum,
maximum, 25th percentile and 75th percentile in each set as well and create a
range of values based on each methodology.
\How do you select Comparable Companies / Precedent Transactions? - ANS -
The 3 main ways to select companies and transactions:
1. Industry classification
2. Financial criteria (Revenue, EBITDA, etc.)
3. Geography
, For Precedent Transactions, you often limit the set based on date and only look at
transactions within the past 1-2 years.
The most important factor is industry - that is always used to screen for
companies/transactions, and the rest may or may not be used depending on how
specific you want to be.
Here are a few examples:
Comparable Company Screen: Oil & gas producers with market caps over $5
billion
Comparable Company Screen: Digital media companies with over $100 million in
revenue
Precedent Transaction Screen: Airline M&A transactions over the past 2 years
involving sellers with over $1 billion in revenue
Precedent Transaction Screen: Retail M&A transactions over the past year
\How do you take into account a company's competitive advantage in a
valuation? - ANS - 1. Look at the 75th percentile or higher for the multiples rather
than the Medians.
2. Add in a premium to some of the multiples.
3. Use more aggressive projections for the company.
In practice you rarely do all of the above - these are just possibilities.
\How do you value a private company? - ANS - You use the same methodologies
as with public companies: public company comparables, precedent transactions,
and DCF. But there are some differences:
• You might apply a 10-15% (or more) discount to the public company comparable
multiples because the private company you're valuing is not as "liquid" as the
public comps.
• You can't use a premiums analysis or future share price analysis because a
private company doesn't have a share price.
• Your valuation shows the Enterprise Value for the company as opposed to the
implied per-share price as with public companies.
• A DCF gets tricky because a private company doesn't have a market
capitalization or Beta - you would probably just estimate WACC based on the
public comps' WACC rather than trying to calculate it.
