MA Valuation

2. Agenda Valuation Methodologies Valuations in M&A Control Premiums/ Minority Discounts Case studies

3. Valuation Methodologies

4. Valuation Methodologies- Business/ Shares Valuation Applicability of a particular methodology guided by various factors

5. Generally Not Suitable for Fair Valuation of “Going Concerns” Asset Based Methodologies- Net Assets/ Replacement Value

6. Is NAV completely not relevant? Remains a good benchmarking indicator Always critical to benchmark valuation based on other methods with NAV for heavy cyclical industries Steel – EV per tonne of capacity Power – EV per mega watt capacity Hotel – EV per key Real estate – land value is the key driver Banking – P/BV ratio Textiles – per spindle value Cement – EV per tonne of capacity In competitive industries with ease of entry May be the only methodology, when business is making (temporary) losses

7. Discounted Cash Flow (DCF) Method Determines the net present value of underlying cash flows of the business. Not Impacted by accounting principles, as based on cash flows and not book profits Incorporates all factors relevant to business e.g. Tangible and intangible assets Current & future competitive position Financial and business risks Business Value = NPV (FCFs) = NPV (NOPLAT – Incremental WC – Incremental Capex)

8. DCF : Strengths and Limitations Theoretically correct Forward looking Incorporates risk and time value of money Focuses on cash returns

9. Comparable Multiples Method Methodology involves: assessment of maintainable earnings application of an appropriate earnings multiple- of comparable companies Comparable Companies Global vs. Indian comparisons Identifying Directly Comparables: Research on Companies is the key Accounting for size differentials Choice of multiples Transaction vs. Stock Market Multiples Sales vs. Profitability Multiples Historical vs. Forward Multiples

10. Comparable Multiple Method

11. Provides a good benchmark to test reasonableness Comparable Multiple Method

12. Valuation, Really a Call on Three factors…..

13. Valuations during different situations/ timings Valuation is a factor of how we see the future, which is typically dependant on recent past. When economic conditions are strong, we are bullish Valuation approach is comparative multiples. Asset values are ignored. However, one should remember cycles and undertake ‘Medium Case’ business plans. One should think of ‘Margin of Safety’ and Risk. When economic conditions are weak, we are bearish Multiples collapse and valuations dip below asset values Emphasis is on near term survival. Valuations should be benchmarked with asset values, though incorporating discounts if required. Even in these times, realistic DCF values can be a good approach.

14. Valuations in M&A

15. What is Fair Value?

16. M&A valuations can depart from fair values .. Buyers/ Sellers leverage: Competitive Positioning Distress Sale Vs. Desperate Buy Same target can have different value in the hand of different acquirers.

17. Valuation of Strategic Premium Value Gain in own company if target is acquired Increased sales/margins Reduction in Costs Access to a technology Cross selling opportunities

18. Swap Ratio Valuation In case of a merger valuation, the emphasis is on arriving at the relative values of the shares of the merging companies to facilitate determination of the swap ratio Hence, the purpose is not to arrive at absolute values of the shares of the companies The key issue to be addressed is that of fairness to all shareholders This is particularly important where the shareholding pattern and shareholders vary between the two companies There are established legal precedence for merger valuation methodologies Valuer’s role is to incorporate case specific factors and use appropriate methodologies so as to determine a fair ratio Usually, best to give weightages to valuation by all methods Market price method and Earnings methods dominate.

19. To sum up Value, like beauty, lies in the eyes of the beholder And like beauty, our perception of value changes Depending upon situations, valuation can be ‘Exactly Wrong’ or “Roughly correct” (if you are lucky)

20. Minority Interests/ Control Premiums

21. The Three Levels of Value

22. Summary : Typical Ranges

23. Thank You