Insight of Valuation
“ In the business world, the rearview mirror is always clearer than the windshield ” Warren Buffett Corporate Valuations – Techniques & 20/12/2013 Application
Valuation (Part – A) What and Why 5 How 12 Valuation in Indian Regulatory Environment (Part – B) When and Who 23 Macro Valuation Issues in M&A (Part – C) Why Merger 58 Valuation for Merger 64 Case Study 70 Some Specific Tricky Issues (Part – D) Tricky Issues 74
Part – A Valuation Corporate Valuations – Techniques & 20/12/2013 Application
WHAT & WHY
Value & Valuation Value is* An Economic concept; An Estimate of likely prices to be concluded by the buyer and seller of a good or service that is available for purchase; Not a fact. “Economic Worth” of an Asset or Valuation is the process of determining the Company under certain assumptions and limiting conditions and subject to the data available on the valuation date . * Source -International Valuation Standard Council Corporate Valuations – Techniques & 20/12/2013 Application
Key Facts PRICE IS NOT THE SAME AS VALUE VALUE VARIES WITH PERSON, PURPOSE AND TIME TRANSACTION CONCLUDES AT NEGOTIATED PRICES VALUATION IS HYBRID OF ART & SCIENCE Corporate Valuations – Techniques & 20/12/2013 Application
Standard of Valuation S Thesis of Valuation T Economics of Valuation E M Methodologies of Valuation Corporate Valuations – Techniques & 20/12/2013 Application
Standard of Thesis of Valuation Economics of Methodologies of Valuation Valuation Valuation Standard of Value is the hypothetical conditions under which a business is valued. While selecting the Standard of Value following points is to be taken care of Subject matter of Valuation; Purpose of Valuation; Statute; Case Laws; Circumstances. Types of Standard of Value: FAIR MARKET VALUE INVESTMENT VALUE INTRINSIC VALUE FAIR VALUE Corporate Valuations – Techniques & 20/12/2013 Application
Standard of Thesis of Valuation Economics of Methodologies of Valuation Valuation Valuation Thesis of Value is Premise of value which relates to the assumptions upon which the valuation is based. Premise of Value Going Concern – Value as an ongoing operating business enterprise. Liquidation – Value when business is terminated . It could be ‘forced’ or ‘orderly’ . Value-in-use Value-in-exchange Corporate Valuations – Techniques & 20/12/2013 Application
Standard of Thesis of Valuation Economics of Methodologies of Valuation Valuation Valuation Valuation across business cycle follow the law of economics Turnover/Profits: Drops Proven Track Record: Substantial Operating History Declining ` Method of Valuation: Entirely Cos. from Existing Assets Cost of Capital: N.A. Turnover/Profits: Saturated Turnover / Profits Mature Proven Track Record: Widely Available Cos. Method of Valuation: More from Existing Assets Cost of Capital: May be High Turnover/Profits : Good Proven Track Record: Available Valuation Methodology: Business Model with Asset Base High Growth Cost of Capital: Reasonable Cos. Turnover/Profits: Increasing still Low Proven Track Record: Limited Growing Valuation Methodology: Substantially on Business Model Cos. Cost of Capital: Quite High Turnover/Profits: Negligible Time Start Up Proven Track Record: None Cos. Valuation Methodology: Entirely on Business Model Cost of Capital: Very High 20/12/2013 Corporate Valuations – Techniques & Application
HOW
Enterprise / Business Value Intangibles # Value of Business Enterprise Value Equity # Net Current Assets # Fixed Net Debt # Assets # Stakeholders Assets # Based on Market Values Corporate Valuations – Techniques & 20/12/2013 Application
Standard of Thesis of Valuation Economics of Methodologies of Valuation Valuation Valuation Valuation Approaches Fundamental Method Relative Method Other Method Income Based Asset Based Market Based Method Method Method Comparable Capitalization of Contingent Claim Companies Market Earning Method Valuation Book Value Method Multiples Method (Historical) (Option Pricing) (Listed Peers) Discounted Cash Flow Method Comparable Liquidation Value Price of Recent Transaction Multiples Method (Projected Investment Method Method Time Value) (Unlisted Peers) Rule of Thumb Replacement Value Market Value Method (Multiples: Method (For Quoted Customers, Rooms, Securities) Seats, No. of visitors etc.) - Depends upon Industry Corporate Valuations – Techniques & 20/12/2013 Application
Need of several valuation methods? Each has strengths and weaknesses Different methods useful in different situations Each gives a different “take” on the value of the company’s stock Provides a range of valuations instead of point estimates Helps in Sanity Check While concluding Value, all the methodologies must be considered and then weights applied as per the facts of the case. In other words, Value conclusion should be based on the Professional Judgement and Simple Average should best be avoided while concluding Value.
Choice of Valuation Approaches “Value in Valuation is a question, and Your choice of Method is the first step towards answer” Applicability of a particular approach depends upon: On whose behalf? – one buyer vs another buyer, buyer vs seller; For what purpose? – independent strategic acquisition, group company consolidation, cross border transaction; When? – distress situation, industry downturn, boom etc; Corporate Valuations – Techniques & 20/12/2013 Application
Choice of Valuation Approaches • In General, Income Approach is preferred; The dominance of profits for valuation of share was emphasised in “ McCathies case” (Taxation, 69 CLR 1) where it was said that “the real value of shares in a company will depend more on the profits which the company has been making and should be capable of making , having regard to the nature of its business, than upon the amount which the shares would realise on liquidation” . This was also re-iterated by the Indian Courts in Commissioner of Wealth Tax v. Mahadeo Jalan’s case (S.C.) (86 ITR 621) and Additional Commissioner of Gift Tax v. Kusumben D. Mahadevia (S.C.) (122 ITR 38). • However, Asset Approach is preferred in case of Asset heavy companies and on liquidation; • Market Approach is preferred in case of listed entity and to evaluate the value of unlisted company by comparing it with its listed peers; Corporate Valuations – Techniques & 20/12/2013 Application
Valuation depends upon Value Dispute Purpose Regulatory Accounting Creation Resolution • Equity Research • RBI • ESOP • Company Law • Mergers Board/ Courts • Income Tax • Credit Rating • Purchase Price • IPO • Arbitration Allocation • Corporate • Acquisitions / • SEBI • Impairment / Planning Investment • Mediation • Stock Exchange Diminution • Voluntary Assessment • Companies Act Corporate Valuations – Techniques & 20/12/2013 Application
Sources of Information for Valuation Historical financial results – Sources of Income Statement, Balance Information Sheets and Cash Flows Data available in Public Domain – Stock Exchange / MCA/SEBI/Independent Report Data on comparable companies – SALES/EV- EBITDA/ PAT/BV Promoters and Management background Data on projects Discussion and planned/under Representation with/by Industry and Regulatory implementation the management of the trends including future Company projection Corporate Valuations – Techniques & 20/12/2013 Application
Key drivers of valuation CASH FLOW Investor assign value based on the cash flow they expect to receive in the future That’s why DCF is most - Dividends / distributions - Sale of liquidation proceeds prominent valuation Value of a cash flow stream is a function of - Timing of cash Receipt method - Risk associated with the cashflow ASSETS Operating Assets - Assets used in the operation of the business including working capital, Property, Plant & Equipment & Intangible assets - Valuing of operating assets is generally reflected in the cash flow generated by the business Non - Operating Assets - Assets not used in the operations including excess cash balances, and assets held for investment purposes, such as vacant land & Securities - Investors generally do not give much value to such assets and Structure modification may be necessary Need for Restructuring 20/12/2013 Corporate Valuations – Techniques & Application
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