Investment Banking - Valuation
2 companies have the exact same financial profile and are bought by the same
acquirer, but the EBITDA multiple for one transaction is 2x the multiple of the
other transaction - how could this happen?
(And what is the EBITDA multiple?) - ANS - EBITDA multiple = EV / EBITDA
high EBITDA multiple = company overvalued
- highest EBITDA multiple = in biotech, lowest in food services
- includes debt --> P/E multiple doesnt --> so better for M&A deals
1) Competition: One transaction process = more competitive, more companies
bidding on the target company
2) *Discount Acquisition Price: One company had recent bad news, depressed
stock price → so acquired at discount*
3) *in industries with different median multiples*
\Advantages and Disadvantages: Comparable Companies - ANS - Pros
- *trading values = good indicators for company value* (and reflect industry
trends, business risk, market growth)
- good for investments where majority company control does NOT change hands
(non-controlling, minority investments)
Cons
- no 2 companies are exact same, so valuations SHOULD be diff
- hard to find decent comparable set
\Advantages and Disadvantages: DCF - ANS - Pros
- most sound method bc value individual cash streams directly
- not heavily influenced by short-term market conditions, non-econ factors
Cons
- v sensitive assumptions (esp. Growth rate, profit margin, discount rate) → can
lead to inconsistent valuations
- *requires forecasting future performance*; most of value derived from "terminal
value" that's projected in v simple way
\Advantages and Disadvantages: Precedented Transactions - ANS - Pros
- best method for control-takeover transactions
- *uses readily available public info*; easy to perform
Cons
, - relies on v specific valuation multiples that use control premiums and synergy
assumptions → NOT public knowledge, transaction-specific
- easily influenced by temporary market conditions → ie) environments more/less
favorable for debt or equity issuance
\Can you use private companies as part of your valuation? - ANS - In a PT - makes
no sense to include them for public company comparables or as part of Cost of
Equity / WACC calculation in DCF because they're not public → so have no values
for market cap or Beta
\Control Premium - ANS - buyers are sometimes willing to pay higher than market
prices to acquire a company, if that means they'll get a controlling share in the
company
\Difference between EBIT and EBITDA? - ANS - EBIT = better for capital intensive
industries, where EBITDA means almost nothing
ie) oil, gas, mining, fisheries
EBIT multiples = higher than EBITDA multiples → better to compare across
industries
\Do you ALWAYS use the median multiple of a set of public company
comparables or precedent transactions? - ANS - Don't HAVE to, but most cases
advantageous to do so → want to use values from middle range
BUT skew if company is distressed or doing well
ie) if company is distressed, not performing well, competitive disadvantage →
use 25th percentile / lower range
\Examples of industry specific multiples - ANS - - Tech: EV / Unique Visitors, EV /
Pageviews
- Retail / Airlines: EV/EBITDAR (R = rent)
- Energy: P/MCFE (Million Cubic Foot Equivalent)
*in tech and energy --> looking at traffic/energy reserves as value drivers, not
revenue or profit
*remove rent in retail/airlines --> bc major expense, varies between companies
\Free Cash Flow (FCF) - ANS - - *cash company produces through operations*
- cash left over after company pays for its operating expenses and CAPEX
- used in DCF to project Enterprise Value
\Future Share Price Analysis - ANS - use P/E multiples of comparable companies
--> to project company's future share price, discount back to present value
- like combo of DCF and Comparable Companies
\How do you apply the 3 valuation methodologies to actually get a value for the
company you're looking at? - ANS - Take the MEDIAN multiple of a set of
2 companies have the exact same financial profile and are bought by the same
acquirer, but the EBITDA multiple for one transaction is 2x the multiple of the
other transaction - how could this happen?
(And what is the EBITDA multiple?) - ANS - EBITDA multiple = EV / EBITDA
high EBITDA multiple = company overvalued
- highest EBITDA multiple = in biotech, lowest in food services
- includes debt --> P/E multiple doesnt --> so better for M&A deals
1) Competition: One transaction process = more competitive, more companies
bidding on the target company
2) *Discount Acquisition Price: One company had recent bad news, depressed
stock price → so acquired at discount*
3) *in industries with different median multiples*
\Advantages and Disadvantages: Comparable Companies - ANS - Pros
- *trading values = good indicators for company value* (and reflect industry
trends, business risk, market growth)
- good for investments where majority company control does NOT change hands
(non-controlling, minority investments)
Cons
- no 2 companies are exact same, so valuations SHOULD be diff
- hard to find decent comparable set
\Advantages and Disadvantages: DCF - ANS - Pros
- most sound method bc value individual cash streams directly
- not heavily influenced by short-term market conditions, non-econ factors
Cons
- v sensitive assumptions (esp. Growth rate, profit margin, discount rate) → can
lead to inconsistent valuations
- *requires forecasting future performance*; most of value derived from "terminal
value" that's projected in v simple way
\Advantages and Disadvantages: Precedented Transactions - ANS - Pros
- best method for control-takeover transactions
- *uses readily available public info*; easy to perform
Cons
, - relies on v specific valuation multiples that use control premiums and synergy
assumptions → NOT public knowledge, transaction-specific
- easily influenced by temporary market conditions → ie) environments more/less
favorable for debt or equity issuance
\Can you use private companies as part of your valuation? - ANS - In a PT - makes
no sense to include them for public company comparables or as part of Cost of
Equity / WACC calculation in DCF because they're not public → so have no values
for market cap or Beta
\Control Premium - ANS - buyers are sometimes willing to pay higher than market
prices to acquire a company, if that means they'll get a controlling share in the
company
\Difference between EBIT and EBITDA? - ANS - EBIT = better for capital intensive
industries, where EBITDA means almost nothing
ie) oil, gas, mining, fisheries
EBIT multiples = higher than EBITDA multiples → better to compare across
industries
\Do you ALWAYS use the median multiple of a set of public company
comparables or precedent transactions? - ANS - Don't HAVE to, but most cases
advantageous to do so → want to use values from middle range
BUT skew if company is distressed or doing well
ie) if company is distressed, not performing well, competitive disadvantage →
use 25th percentile / lower range
\Examples of industry specific multiples - ANS - - Tech: EV / Unique Visitors, EV /
Pageviews
- Retail / Airlines: EV/EBITDAR (R = rent)
- Energy: P/MCFE (Million Cubic Foot Equivalent)
*in tech and energy --> looking at traffic/energy reserves as value drivers, not
revenue or profit
*remove rent in retail/airlines --> bc major expense, varies between companies
\Free Cash Flow (FCF) - ANS - - *cash company produces through operations*
- cash left over after company pays for its operating expenses and CAPEX
- used in DCF to project Enterprise Value
\Future Share Price Analysis - ANS - use P/E multiples of comparable companies
--> to project company's future share price, discount back to present value
- like combo of DCF and Comparable Companies
\How do you apply the 3 valuation methodologies to actually get a value for the
company you're looking at? - ANS - Take the MEDIAN multiple of a set of
