JP Morgan M&a DCF and Merger Analysis

S T R I C TL Y
P R I V A T E
AN D
C O N F I D E N T I A L
DECEMBER 2004
M&A:
DCF
AND
MERGER
ANALYSIS
M&A - DCF and M&A analysis
[For any pitchbook or presentation including advisory, equity or debt security or loan product or combinations thereof.
NOT for use in fairness/valuation or Commercial Bank presentations.]
DC F
AN D
M E R G E R
AN ALY SI S
This presentation was prepared exclusively for the benefit and internal use of the JPMorgan client to whom it is directly addressed and delivered (including
such clients subsidiaries, the Company) in order to assist the Company in evaluating, on a preliminary basis, the feasibility of a possible transaction or
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The information in this presentation is based upon any management forecasts supplied to us and reflects prevailing conditions and our views as of this date,
all of which are accordingly subject to change. JPMorgans opinions and estimates constitute JPMorgans judgment and should be regarded as indicative,
preliminary and for illustrative purposes only. In preparing this presentation, we have relied upon and assumed, without independent verification, the
accuracy and completeness of all information available from public sources or which was provided to us by or on behalf of the Company or which was
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accounting effects of consummating a transaction. Unless expressly contemplated hereby, the information in this presentation does not take into account
the effects of a possible transaction or transactions involving an actual or potential change of control, which may have significant valuation and other
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M&A:
This presentation does not constitute a commitment by any JPMorgan entity to underwrite, subscribe for or place any securities or to extend or arrange
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Agenda
Introduction
Discounted cash flow analysis
Relative value analysis
56
Merger consequences
71
M&A:
DC F
AN D
M E R G E R
AN ALY SI S
Page
Valuation methodologies
Valuation
methodologies
Publicly traded
comparable
companies
analysis
Public Market
Valuation
Value based on
market trading
multiples of
comparable
companies
I N T R O D U C TI O N
Applied using
historical and
prospective
multiples
Does not include a
control premium
Comparable
transactions
analysis
Private Market
Valuation
Value based on
multiples paid for

comparable
companies in sale
transactions
Includes control
premium
Discounted
cash flow
analysis
Intrinsic value
of business
Present value of
projected free
cash flows
Incorporates both
short-term and
long-term
expected
performance
Risk in cash flows
and capital
structure captured
in discount rate
Leveraged
buyout/recap
analysis
Value to a
financial/LBO
buyer
Value based on
debt repayment
and return on
equity investment
Other
Liquidation
analysis
Break-up analysis
Historical trading
performance
Expected IPO
valuation
Discounted future
share price
EPS impact
Dividend discount
model
The valuation process

Determining a final valuation recommendation is a process of triangulation using insight from each
of the relevant valuation methodologies
(1) Discounted
Cash Flow
Analyzes the
present value of
a company's free
cash flow.
(2) Publicly Traded

Comparable
Companies
Utilizes market
trading multiples
from publicly
traded companies
to derive value.
(3) Comparable
Acquisition
Transactions
Utilizes data from
M&A transactions
involving similar
companies.
(4) Leveraged
Buy Out
Used to determine
range of potential
value for a
company based on
maximum leverage
capacity.
The valuation summary is the most important slide in a

valuation presentation
The science is performing each valuation method correctly, the art is using each
method to develop a valuation recommendation
Price per share
$20.00
$26.75
$15.00
$15.00
Implied
offer =
$8.46
$9.75
$10.00
$10.25
$5.00
$5.00
$5.00
$5.50
$6.00
$4.00
$4.94
$4.00
$3.75
$3.50
$3.00
$0.00
52-week
high/low
15.0x to 19.0x
2005E EBIT
of $20.6
19.0x to 25.0x
2005E cash
EPS of $0.16
Public trading comparables
15.0x to 20.0x
2006E cash
EPS of $0.25
2.5x to 4.0x
LTM revenue
of $185.7
Transaction
comparables
Mgmt. Case
Street Case
12% to 15%
Discount Rate
EBIT exit mult.
of 15.0x to 20.0x
12% to 15%
Discount Rate
EBIT exit mult.
of 15.0x to 20.0x
DCF analysis
A primer: firm value vs. equity value

Firm value
Market value of all capital invested in a business(1)

(often referred to as enterprise value or firm value or asset value)
The value of the total enterprise: market value of equity + (total debt +
Capitalized Leases - Cash and Cash equivalents) + Minority Interest +
Preferred Equity
Total debt includes all Long term debt, Current portion of Long term
debt, short term debt and overdrafts
Equity value
Assets
Enterprise
value
Market value of the shareholders equity

(often referred to as offer value)
The market value of a companys equity (shares outstanding x current
stock price)
Liabilities and Shareholders Equity
Enterprise
Value
Net debt, etc.
Equity value
1
The value of debt should be a market value. It may be appropriate to assume book value of debt approximates the market
value as long as the companys credit profile has not changed significantly since the existing debt was issued.
5
Agenda
Introduction
56
Merger consequences
71
M&A:
DC F
AN D
M E R G E R
AN ALY SI S
Page
Discounted cash flow analysis as a valuation methodology
Valuation
methodologies
Publicly traded
comparable
companies
analysis
Valuation
Value based on
Applied using
historical and
prospective
multiples
D I S C O UN T E D
F L OW
market trading
multiples of
comparable
companies
C A S H
AN AL Y SI S
Public Market
Does not include a
control premium
Comparable
transactions
analysis
Private Market
Valuation
Value based on
multiples paid for

comparable
companies in sale
transactions
Includes control
premium
Discounted
cash flow
analysis
Intrinsic value
of business
Present value of
projected free
cash flows
Incorporates both
short-term and
long-term
expected
performance
Risk in cash flows
and capital
structure captured
in discount rate
Leveraged
buyout/recap
analysis
Value to a
financial/LBO
buyer
Value based on
debt repayment
and return on
equity investment
Other
Liquidation
analysis
Break-up analysis
Historical trading
performance
Expected IPO
valuation
Discounted future
share price
EPS impact
Dividend discount
model
Overview
M&Aflow
- DCF and M&A analysis
Free cash
Terminal value
Overview of DCF analysis
WACC
Other topics
Discounted cash flow analysis is based upon the theory that the value of a
business is the sum of its expected future free cash flows, discounted at an
appropriate rate
DCF analysis is one of the most fundamental and commonly-used valuation
techniques
Widely accepted by bankers, corporations and academics
Corporate clients often use DCF analysis internally
D I S C O UN T E D
C A S H
F L OW
AN AL Y SI S
One of several techniques used in M&A transactions; others include:
Comparable companies analysis

Comparable transaction analysis
Leveraged buyout analysis
Recapitalization analysis, liquidation analysis, etc.
DCF analysis may be the only valuation method utilized, particularly if no
comparable publicly-traded companies or precedent transactions are

available
Overview
M&Aflow
Free cash
Terminal value
Overview of DCF analysis
WACC
Other topics
DCF analysis is a forward-looking valuation approach, based on several key
projections and assumptions

Free cash flows
What is the projected operating and financial performance of the

business?
Terminal value
What will be the value of the business at the end of the projection period?
Discount rate
D I S C O UN T E D
C A S H
F L OW
AN AL Y SI S
What is the cost of capital (equity and debt) for the business?
Depending on practical requirements and availability of data, DCF analysis can
be simple or extremely elaborate

There is no single correct method of performing DCF analysis, but certain
rules of thumb always apply

Do not simply plug numbers into equations
You must apply judgment in determining each assumption
Overview
M&Aflow
Free cash
Terminal value
The process of DCF analysis
WACC
Other topics
Project the operating results and free cash flows of the business
Projections/FCF
Projections/FCF
over the forecast period (typically 10 years, but can be 520 years
depending on the profitability horizon)
Estimate the exit multiple and/or growth rate in perpetuity of the
Terminal
Terminal value
value
business at the end of the forecast period
D I S C O UN T E D
C A S H
F L OW
AN AL Y SI S
Estimate the companys weighted-average cost of capital to

Discount
Discount rate
rate
determine the appropriate discount rate range
Determine a range of values for the enterprise by discounting the

Present
Present value
value
projected free cash flows and terminal value to the present
Adjust the resulting valuation for all assets and liabilities not
Adjustments
Adjustments
accounted for in cash flow projections
10
Overview
M&Aflow
Free cash
Terminal value
DCF theory and its application
WACC
Other topics
DCF theory: The value of a productive asset is equal to the present value of all
expected future cash flows that can be removed without affecting the assets value
(including an estimated terminal value), discounted using an appropriate weightedaverage cost of capital
The cash-flow streams that are discounted include
Unlevered or levered free cash flows over the projection period
Terminal value at the end of the projection period
D I S C O UN T E D
C A S H
F L OW
AN AL Y SI S
These future free cash flows are discounted to the present at a discount rate
commensurate with their risk

If you are using unlevered free cash flows (our preferred approach), the
appropriate discount rate is the weighted-average cost of capital for debt and
equity capital invested in the enterprise in optimal/targeted proportions
If you are using levered free cash flows, the appropriate discount rate is simply
the cost of equity capital (often referred to as flows to shareholders or dividend

discount model)
11
Overview
M&Aflow
Free cash
Terminal value
The two basic DCF approaches must not be confused
WACC
Other topics
DCF of unlevered cash flows (the focus of these materials)

Projected income and cash-flow streams are free of the effects of debt, net of
excess cash
Present value obtained is the value of assets, assuming no debt or excess cash
(firm value or enterprise value)

Debt associated with the business is subtracted (and excess cash balances are
added) to determine the present value of the equity (equity value)
DCF of levered cash flows (most common in valuation of financial institutions)

Projected income and cash-flow streams are after interest expense and net of any
interest income
Present value obtained is the value of equity
Cash flows are discounted at the cost of equity
D I S C O UN T E D
C A S H
F L OW
AN AL Y SI S
Cash flows are discounted at the weighted-average cost of capital
12
Overview
M&Aflow
Free cash
Terminal value
Other considerations
WACC
Other topics
Reliability of projections
DCF results are generally more sensitive to cash flows (and terminal value) than to
small changes in the discount rate. Care should be taken that assumptions driving
cash flows are reasonable. Generally, we try to use estimates provided by analysts
from reputable Wall Street firms if the client has not provided projections
Sensitivity analysis
approximate. Use several scenarios to bound the targets value. Generally, the best
variables to sensitize are sales, EBITDA margin, WACC and exit multiples or
perpetuity growth rate
D I S C O UN T E D
C A S H
F L OW
AN AL Y SI S
Remember that DCF valuations are based on assumptions and are therefore
Hence, always present a range for the valuation!
13
Overview
M&Aflow
Free cash
Terminal value
Always remember
WACC
Other topics
Three key drivers

Projections and incremental cash flows (unlevered free cash flow)
Residual value at end of the projection period (terminal value)
Weighted-average cost of capital (discount rate)
Avoid pitfalls
Validate and test projection assumptions
Determine appropriate cash flow stream
Thoughtfully consider terminal value methodology
Carefully consider all variables in calculation of the discount rate
Sensitize appropriately (base projection variables, synergies, discount rates,
terminal values, etc.)

Footnote assumptions in detail
Think about other value enhancers and detractors
D I S C O UN T E D
C A S H
F L OW
AN AL Y SI S
Use appropriate cost of capital approach
Always double-check with a calculator!
14
Overview
The first step in DCF analysis is projection of unlevered

free cash flows
M&Aflow
Free cash
Terminal value
WACC
Other topics
Calculation of unlevered free cash flow begins with financial projections

Comprehensive projections (i.e., fully-integrated income statement, balance
sheet and statement of cash flows) typically provide all the necessary elements
Quality of DCF analysis is a function of the quality of projections
Often required to fill in the gaps
Confirm and validate key assumptions underlying projections
Sensitize variables that drive projections
Sources of projections include
Acquiring companys management
Research analysts
Bankers
D I S C O UN T E D
C A S H
F L OW
AN AL Y SI S
Target companys management
15
Overview
M&Aflow
Free cash
Terminal value
Projecting financial statements
WACC
Other topics
Ideally projections should go out as far into the future as can reasonably be
estimated to reduce dependence on the terminal value

Most important assumptions
Sales growth: Use divisional, product-line or location-by-location build-up or
simple growth assumptions

Operating margins: Evaluate improvement over time, competitive factors, SG&A
costs
Synergies: Estimate dollars in Year 1 and evaluate margin impact over time
D I S C O UN T E D
C A S H
F L OW
AN AL Y SI S
Depreciation: Should conform with historic and projected capex

Capital expenditures: Consider both maintenance and expansion capex
Changes in net working capital: Should correspond to historical patterns and grow
as the business grows

Should show historical financial performance and sanity check projections against
past results. Be prepared to articulate why projections may or may not be similar to
past results (e.g. reasons behind margin improvements, increased sales growth, etc.)
Analyze projections for consistency
Sales increases usually require working capital increases
CAPEX and depreciation should converge over time
16
Overview
Free cash flow is the cash that remains for creditors and
owners after taxes and reinvestment
M&Aflow
Free cash
Terminal value
WACC
Other topics
Unlevered free cash flows can be forecast from a firms financial projections, even if
those projections include the effects of debt

To do this, simply start your calculation with EBIT (earnings before interest and
taxes)
EBIT (from the income statement)
Plus: Non-tax-deductible goodwill amortization

Less: Taxes (at the marginal tax rate)
Equals: Tax-effected EBITA
AN AL Y SI S
Plus: Deferred taxes1

Plus: Depreciation and any tax-deductible amortization
F L OW
Less: Capital expenditures

Plus/(less): Decrease/(increase) in net working investment
D I S C O UN T E D
C A S H
Equals: Unlevered free cash flow
Although beyond the scope of our current discussions, you should only include actual cash taxes paid in the DCF. Depending on the firm and industry, you may want to adjust
for the non-cash (or deferred) portion of a firms tax provision. The tax footnote in the financial statements will give you a good idea of whether this is a meaningful issue
for your analysis
17
Overview
M&Aflow
Free cash
Terminal value
Example: Calculating unlevered free cash flows
WACC
Other topics
Stand-alone
Stand-alone DCF
DCF analysis
analysis of
of Company
Company X
X
$
millions
$ millions
Fiscal year ending December 31,
Net sales
AN AL Y SI S
2004P
2005P
2006P
2007P
2008P
$440.0
$484.0
$532.4
$585.6
$644.2
$708.6
$779.5
80.0
88.0
96.8
106.5
117.1
128.8
141.7
155.9
Less: Depreciation
12.0
13.2
14.5
16.0
17.6
19.3
21.3
23.4
EBITA
68.0
74.8
82.3
90.5
99.6
109.5
120.5
132.5
Less: Taxes at marginal rate
27.2
29.9
32.9
36.2
39.8
43.8
48.2
53.0
$40.8
$44.9
$49.4
$54.3
$59.7
$65.7
$72.3
$79.5
16.0
17.6
19.3
21.3
23.4
20.0
22.0
24.2
26.6
29.3
Less: Incr./(decr.) in working capital
10.0
8.5
7.0
5.5
4.0
Unlevered free cash flow
40.3
46.8
53.8
61.4
69.6
Adjustment for deal date
(40.3)
$0.0
$46.8
$53.8
$61.4
$69.6
Plus: Deferred taxes
F L OW
2003
$400.0
Plus: Depreciation
C A S H
2002
EBITDA
Tax-effected EBITA
D I S C O UN T E D
2001
Unlevered FCF to acquirer
Key assumptions:
Deal/valuation date = 12/31/04
Marginal tax rate = 40%
18
Overview
Valuing the incremental effects of changes in projected

operating results
M&Aflow
Free cash
Terminal value
WACC
Other topics
In performing DCF analysis, we often need to determine the incremental impact on
value of certain events or adjustments to the projections, including:

Synergies achievable through the M&A transaction
Revenue
Cost
Capital expenditures
Expansion plans
Cost reductions
Change in sales growth
These incremental effects can be valued by discounting them independently (net of
taxes) or by adjusting the DCF model and simply measuring the incremental impact
D I S C O UN T E D
C A S H
F L OW
AN AL Y SI S
Margin improvements
19
Overview
Once unlevered free cash flows are calculated, they must

be discounted to the present
M&Aflow
Free cash
Terminal value
WACC
Other topics
The standard present value calculation takes into account the cost of capital by attributing
greater value to cash flows generated earlier in the projection period than later cash flows
Present value =
FCF1
(1+r)1
FCF2
(1+r)2
FCF3
(1+r)3
...
FCFn
(1+r)n
D I S C O UN T E D
C A S H
F L OW
AN AL Y SI S
Since most businesses do not generate all of their free cash flows on the last day of the
year, but rather more-or-less continuously during the year, DCF analyses often use the socalled mid-year convention, which takes into account the fact that free cash flows occur
during the year
JPMorgan
JPMorgan
standard
standard
Present value =
FCF1
(1+r)0.5
FCF2
(1+r)1.5
FCF3
(1+r)2.5
...
FCFn
(1+r)n-0.5
This approach moves each cash flow from the end of the applicable period to the middle of
the same period (i.e., cash flows are moved closer to the present)
20
It is important to differentiate between the transaction

date and the mid-year convention
Transaction
Transaction date:
date: 01/01
01/01
Year
0.5
First cash flow,

mid-year 1
CF1
Discounting =
Second cash flow,

mid-year 2
CF2
(1+r)0.5
1.5
CF3
(1+r)1.5
2.5
3.5
3.5
Third cash flow,

mid-year 3
.
(1+r)2.5
Period 1 CF to buyer
Year
D I S C O UN T E D
0.5
0.75
First cash flow,

mid-period 1
C A S H
F L OW
AN AL Y SI S
Transaction
Transaction date:
date: 06/30
06/30
Discounting =
CF1
(0.75-0.5)
(1+r)
1.5
Second cash flow,

mid-year 2
CF2
(1.5-0.5)
(1+r)
2.5
Third cash flow,

mid-year 3
CF3
(2.5-0.5)
(1+r)
21
Practice exercise
Transaction
Transaction date:
date: 09/30
09/30
Period 1 CF
to buyer
Year
0.5
0.75
Discounting =
CF1
(1+r)(0.875-0.75)
2nd cash flow,

mid-year 2
CF2
(1+r)(1.5-0.75)
2.5
3.5
3rd cash flow,

mid-year 3
CF3
(1+r)(2.5-0.75)
D I S C O UN T E D
C A S H
F L OW
AN AL Y SI S
1st flow,
mid-period 1
1.5
22
Overview
M&Aflow
Free cash
Terminal value
Example: Discounting free cash flows
WACC
Other topics
Stand-alone
Stand-alone DCF
DCF analysis
analysis of
of Company
Company X
X
$
millions
$ millions
2001
2002
2003
2004P
2005P
2006P
2007P
2008P
$400.0
$440.0
$484.0
$532.4
$585.6
$644.2
$708.6
$779.5
EBITDA
80.0
88.0
96.8
106.5
117.1
128.8
141.7
155.9
Less: Depreciation
12.0
13.2
14.5
16.0
17.6
19.3
21.3
23.4
EBITA
68.0
74.8
82.3
90.5
99.6
109.5
120.5
132.5
27.2
29.9
32.9
36.2
39.8
43.8
48.2
53.0
$40.8
$44.9
$49.4
$54.3
$59.7
$65.7
$72.3
$79.5
16.0
17.6
19.3
21.3
23.4
20.0
22.0
24.2
26.6
29.3
10.0
8.5
7.0
5.5
4.0
40.3
46.8
53.8
61.4
69.6
(40.3)
$0.0
$46.8
$53.8
$61.4
$69.6
Memo: Discounting factor
0.0
0.5
1.5
2.5
3.5
$0.0
$44.6
$46.7
$48.4
$49.9
Net sales
Tax-effected EBITA
Plus: Depreciation
D I S C O UN T E D
C A S H
F L OW
AN AL Y SI S
Discounted value of unlevered FCF

Discounted value of FCF 2005P2008P
Formula
Key assumptions:
Discount rate = 10%
$189.6 =
189.6
$46.8
(1+.10)0.5
$53.8
(1+.10)1.5
$61.4
(1+.10)2.5
$69.6
(1+.10)3.5
23
Overview
Terminal value can account for a significant portion of

value in a DCF analysis
M&Aflow
Free cash
Terminal value
WACC
Other topics
Terminal value represents the businesss value at the end of the projection period;
i.e., the portion of the companys total value attributable to cash flows expected
after the projection period
Terminal value is typically based on some measure of the performance of the
business in the terminal year of the projection (which should depict the business
operating in a steady-state/normalized manner)
Terminal (or Exit) multiple method
Assumes that the business is valued/sold at the end of the terminal year at a
multiple of some financial metric (typically EBITDA)
Assumes that the business is held in perpetuity and that free cash flows
continue to grow at an assumed rate
A terminal multiple will have an implied growth rate and vice versa. It is
Once calculated, the terminal value is discounted back to the appropriate date using
Attempt to reduce dependence on the terminal value
D I S C O UN T E D
F L OW
essential to review the implied multiple/growth rate for sanity check purposes
C A S H
AN AL Y SI S
Growth in perpetuity method
the relevant rate
What is appropriate projection time frame?

What percentage of total value comes from the terminal value?
24
Overview
M&Aflow
Free cash
Terminal value
Terminal multiple method
WACC
Other topics
This method assumes that the business will be valued at the end of the last year of
the projected period

The terminal value is generally determined as a multiple of EBIT, EBITDA or
EBITDAR; this value is then discounted to the present, as were the interim free cash
flows
The terminal value should be an asset (firm) value; remember that not all
multiples produce an asset value

Note that in the exit multiple method terminal value is always assumed to be
Should the terminal multiple be an LTM multiple or a forward multiple?

If the terminal value is based on the last year of your projection then the multiple
should be based on an LTM multiple (most common)

There are circumstances where you will project an additional year of EBITDA and
apply a forward multiple
D I S C O UN T E D
C A S H
F L OW
AN AL Y SI S
calculated at the end of the final projected year, irrespective of whether you are
using the mid-year convention
25
Overview
M&Aflow
Free cash
Terminal value
Most common error: The final year is not normalized
WACC
Other topics
Consider adding a year to the projections which represents a normalized year

A steady-state, long-term industry multiple should be used rather than a current
multiple, which can be distorted by contemporaneous industry or economic factors

Treat the terminal value cash flow as a separate, critical forecast
Growth rate
Consistent with long-term economic assumptions

Net working investment consistent with projected growth
Capital expenditures needed to fuel estimated growth
Depreciation consistent with capital expenditures
Margins
Adjusted to reflect long-term estimated profitability

Normalized tax rate
D I S C O UN T E D
C A S H
F L OW
AN AL Y SI S
Reinvestment rate
26
Overview
M&Aflow
Free cash
Terminal value
Example: Terminal multiple method
WACC
Other topics
Stand-alone
Stand-alone DCF
DCF analysis
analysis of
of Company
Company X
X
$
$ millions
millions
D I S C O UN T E D
C A S H
F L OW
AN AL Y SI S
Net sales
EBITDA
Less: Depreciation
EBITA
Tax-effected EBITA
Plus: Depreciation
2001
$400.0
80.0
12.0
68.0
27.2
$40.8
2001
$440.0
88.0
13.2
74.8
29.9
$44.9
2003
$484.0
96.8
14.5
82.3
32.9
$49.4

EBITDA in 2008P
Exit multiple
Firm value at exit
Discounted terminal value
Total present value to acquirer
Key assumptions:
Discount rate = 10%
Exit multiple of EBITDA = 7.0x
2004P
$532.4
106.5
16.0
90.5
36.2
$54.3
16.0
20.0
10.0
40.3
(40.3)
$0.0
2005P
$585.6
117.1
17.6
99.6
39.8
$59.7
17.6
22.0
8.5
46.8
$46.8
2006P
$644.2
128.8
19.3
109.5
43.8
$65.7
19.3
24.2
7.0
53.8
$53.8
2007P
$708.6
141.7
21.3
120.5
48.2
$72.3
21.3
26.6
5.5
61.4
$61.4
2008P
$779.5
155.9
23.4
132.5
53.0
$79.5
23.4
29.3
4.0
69.6
$69.6
0.0
0.5
1.5
2.5
3.5
$0.0
189.6
$44.6
$46.7
$48.4
$49.9
$155.9
7.0x
1,091.3
745.4
$934.9
Formula
($155.9 * 7.0x)
$745.4 =
(1+.10)4
27
Overview
M&Aflow
Free cash
Terminal value
Example: Terminal multiple method (contd)
WACC
Other topics
Stand-alone
Stand-alone DCF
DCF analysis
analysis of
of Company
Company X
X
$
millions,
except
per
share
data
$ millions, except per share data
D I S C O UN T E D
C A S H
F L OW
AN AL Y SI S
Discounted
Firm value
FCF
at 2008P EBITDA multiple of
Discount rate
20052008
6.0x
7.0x
8.0x
6.0x
7.0x
8.0x
8%
$196.8
$687.5
$802.1
$916.7
$884.4
$999.0
$1,113.6
9%
193.1
662.6
773.1
883.5
855.8
966.2
1,076.7
10%
189.6
638.9
745.4
851.8
828.4
934.9
1,041.4
11%
186.1
616.2
718.9
821.6
802.3
904.9
1,007.6
12%
182.7
594.5
693.5
792.6
777.2
876.3
975.3
Net debt
Discount rate
12/31/04
8%
Equity value
Equity value per share1
6.0x
7.0x
8.0x
6.0x
7.0x
8.0x
$100.0
$784.4
$899.0
$1,013.6
$19.17
$21.97
$24.77
9%
100.0
755.8
866.2
976.7
$18.47
$21.17
$23.87
10%
100.0
728.4
834.9
941.4
$17.80
$20.41
$23.01
11%
100.0
702.3
804.9
907.6
$17.16
$19.67
$22.18
12%
100.0
677.2
776.3
875.3
$16.55
$18.97
$21.39
Note: DCF value as of 12/31/01 based on mid-year convention

1 Based on 40.91 million diluted shares outstanding
28
Overview
M&Aflow
Free cash
Terminal value
Growth in perpetuity method
WACC
Other topics
This method assumes that the business will be owned in perpetuity and that the
business will grow at approximately the long-term macroeconomic growth rate

Few businesses can be expected to have cash flows that truly grow forever; be
conservative when estimating growth rates in perpetuity

Take free cash flow in the last year of the projection period, n, and grow it one
more year to n+1;1 this free cash flow is then capitalized at a rate equal to the
discount rate minus the growth rate in perpetuity
To ensure that the terminal year is normalized, JPMorgan models are set up to
JPM
JPM recommended
recommended method
method
Terminal value = (FCFn * (1 + g))/(WACC g)
Terminal value = (FCFn+1)/(WACC g)
F L OW
where FCFn = FCF in final projected period

g = growth rate in perpetuity
WACC = weighted-avg. cost of capital
where
PV of terminal value = terminal value/(1+WACC)n-0.5
PV of terminal value = terminal value/(1+WACC)n-0.5
D I S C O UN T E D
Academic
Academic formula
formula
C A S H
AN AL Y SI S
project one year past the projection year and allow for normalizing adjustments;
this FCFn+1 is then discounted by the perpetuity formula
FCFn+1
g
WACC
= FCF in year after projections

= growth rate in perpetuity
= weighted-avg. cost of capital
This step is taken because the perpetuity growth formula is based on the principle that the terminal value of a business is the value of its next cash flow, divided by the
difference between the discount rate and a perpetual growth rate
29
Overview
M&Aflow
Free cash
Terminal value
Growth in perpetuity method (contd)
WACC
Other topics
Note that when using the mid-year convention, terminal value is discounted as if
cash flows occur in the middle of the final projection period

Here the growth-in-perpetuity method differs from the exit-multiple method
Typical adjustments to normalize free cash flow in Year n include revising the
relationship between revenues, EBIT and capital spending, which in turn affects
CAPEX and depreciation
Working capital may also need to be adjusted
D I S C O UN T E D
C A S H
F L OW
AN AL Y SI S
Often CAPEX and depreciation are assumed to be equal
30
Overview
M&Aflow
Free cash
Terminal value
Example: Growth in perpetuity method
WACC
Other topics
Stand-alone
Stand-alone DCF
DCF analysis
analysis of
of Company
Company X
X
$
millions
$ millions
2001
2002
2003
2004P
2005P
2006P
2007P
2008P
$400.0
$440.0
$484.0
$532.4
$585.6
$644.2
$708.6
$779.5
EBITDA
80.0
88.0
96.8
106.5
117.1
128.8
141.7
155.9
Less: Depreciation
12.0
13.2
14.5
16.0
17.6
19.3
21.3
23.4
EBITA
68.0
74.8
82.3
90.5
99.6
109.5
120.5
132.5
27.2
29.9
32.9
36.2
39.8
43.8
48.2
53.0
$40.8
$44.9
$49.4
$54.3
$59.7
$65.7
$72.3
$79.5
16.0
17.6
19.3
21.3
23.4
20.0
22.0
24.2
26.6
29.3
10.0
8.5
7.0
5.5
4.0
40.3
46.8
53.8
61.4
69.6
(40.3)
$0.0
$46.8
$53.8
$61.4
$69.6
0.0
0.5
1.5
2.5
3.5
$0.0
$44.6
$46.7
$48.4
$49.9
Net sales
Tax-effected EBITA
Plus: Depreciation
D I S C O UN T E D
C A S H
F L OW
AN AL Y SI S

189.6
PV of Terminal Value
733.7
Total present value to acquirer

Key assumptions:
Discount rate = 10%
Perpetuity growth rate = 3%
$923.3
Formula
$69.6 * (1 + .03)
$733.6 =
(.10 - .03)*(1+.10)3.5
31
Overview
M&Aflow
Free cash
Terminal value
Example: Growth in perpetuity method (contd)
WACC
Other topics
Stand-alone
Stand-alone DCF
DCF analysis
analysis of
of Company
Company X
X
$
$ millions,
millions, except
except per
per share
share data
data
A
Discount rate
8%
9%
10%
11%
12%
Firm value
FCF
at perpetuity growth rate of
2.5%
$991.0
811.9
681.5
582.6
505.1
3.0%
$1,095.4
883.8
733.7
622.0
535.8
3.5%
$1,223.0
968.9
794.0
666.7
570.1
12/31/04
$100.0
100.0
100.0
100.0
100.0
2.5%
$1,187.8
1,005.0
871.1
768.7
687.9
3.0%
$1,292.2
1,077.0
923.3
808.1
718.5
3.5%
$1,419.8
1,162.0
983.6
852.8
752.8
E
Equity value
2.5%
$1,087.8
905.0
771.1
668.7
587.9
3.0%
$1,192.2
977.0
823.3
708.1
618.5
3.5%
$1,319.8
1,062.0
883.6
752.8
652.8
2.5%
$26.59
$22.12
$18.84
$16.34
$14.37
3.0%
$29.14
$23.88
$20.12
$17.31
$15.12
3.5%
$32.26
$25.96
$21.59
$18.40
$15.95
D I S C O UN T E D
C A S H
F L OW
Net debt
Discount rate
8%
9%
10%
11%
12%
Discounted
20052008
$196.8
193.1
189.6
186.1
182.7
AN AL Y SI S

1
Based on 40.91 million diluted shares outstanding
32
Overview
Terminal multiples and perpetuity growth rates are often

considered side-by-side
M&Aflow
Free cash
Terminal value
WACC
Other topics
Assumptions regarding exit multiples are often checked for reasonableness by calculating the
growth rates in perpetuity that they imply (and vice versa)

To go from the exit-multiple approach to an implied perpetuity growth rate:
g = [(WACC*terminal value) / (1+WACC)0.5 - FCFn] / [FCFn + (terminal value / (1 + WACC)0.5)]

To go from the growth-in-perpetuity approach to an implied exit multiple:
multiple = [FCFn * (1 + g)(1 + WACC)0.5] / [EBITDAn * (WACC - g)]

the mid-year convention
D I S C O UN T E D
C A S H
F L OW
AN AL Y SI S
These formulas adjust for the different approaches to discounting terminal value when using
33
Overview
M&Aflow
Free cash
Terminal value
Terminal multiple method and implied growth rates
WACC
Other topics
Standalone
Standalone Company
Company X
X DCF
DCF analysis
analysis
$
$ millions
millions
A
Discounted
FCF
20052008
$196.8
193.1
189.6
186.1
182.7
Discount
rate
8%
9%
10%
11%
12%
AN AL Y SI S
D
Net debt
12/31/04
$100.0
100.0
100.0
100.0
100.0
D I S C O UN T E D

6.0x
7.0x
8.0x
$687.5
$802.1
$916.7
662.6
773.1
883.5
638.9
745.4
851.8
616.2
718.9
821.6
594.5
693.5
792.6
C
Firm value
6.0x
7.0x
8.0x
$884.4
$999.0 $1,113.6
855.8
966.2
1,076.7
828.4
934.9
1,041.4
802.3
904.9
1,007.6
777.2
876.3
975.3
Terminal value as percent

of total firm value
6.0x
7.0x
8.0x
78%
80%
82%
77%
80%
82%
77%
80%
82%
77%
79%
82%
76%
79%
81%

6.0x
7.0x
8.0x
$19.17
$21.97
$24.77
$18.47
$21.17
$23.87
$17.80
$20.41
$23.01
$17.16
$19.67
$22.18
$16.55
$18.97
$21.39
Implied perpetuity growth rate

E
Equity value
6.0x
7.0x
8.0x
$784.4
$899.0 $1,013.6
755.8
866.2
976.7
728.4
834.9
941.4
702.3
804.9
907.6
677.2
776.3
875.3
C A S H
F L OW
Discount
rate
8%
9%
10%
11%
12%
6.0x
0.2%
1.1%
2.0%
2.9%
3.8%
7.0x
1.3%
2.2%
3.1%
4.0%
4.9%
8.0x
2.1%
3.0%
3.9%
4.8%
5.8%
At a 9% discount rate and an 8.0x exit multiple the price

is $23.87 and the implied terminal growth rate is 3.0%
1
Based on 40.91 million diluted shares outstanding
34
Overview
M&Aflow
Free cash
Terminal value
Perpetuity growth rate and implied terminal multiples
WACC
Other topics
Standalone
Standalone Company
Company X
X DCF
DCF analysis
analysis
$
$ millions
millions
A
Discounted
FCF
20052008
$196.8
193.1
189.6
186.1
182.7
Discount
rate
8%
9%
10%
11%
12%
D
Net debt
12/31/04
$100.0
100.0
100.0
100.0
100.0
D I S C O UN T E D

Firm value
2.5%
3.0%
3.5%
$991.0 $1,095.4 $1,223.0
811.9
883.8
968.9
681.5
733.7
794.0
582.6
622.0
666.7
505.1
535.8
570.1
2.5%
3.0%
3.5%
$1,187.8 $1,292.2 $1,419.8
1,005.0
1,077.0
1,162.0
871.1
923.3
983.6
768.7
808.1
852.8
687.9
718.5
752.8
Terminal value as percent

of total firm value
2.5%
83%
81%
78%
76%
73%
3.0%
85%
82%
79%
77%
75%
3.5%
86%
83%
81%
78%
76%
E
Equity value
2.5%
3.0%
3.5%
$1,087.8 $1,192.2 $1,319.8
905.0
977.0 1,062.0
771.1
823.3
883.6
668.7
708.1
752.8
587.9
618.5
652.8
C A S H
F L OW
AN AL Y SI S
Discount
rate
8%
9%
10%
11%
12%

2.5%
$26.59
$22.12
$18.84
$16.34
$14.37
3.0%
$29.14
$23.88
$20.12
$17.31
$15.12
3.5%
$32.26
$25.96
$21.59
$18.40
$15.95
Implied EBITDA exit multiple

2.5%
8.6x
7.4
6.4
5.7
5.1
3.0%
9.6x
8.0
6.9
6.1
5.4
3.5%
10.7x
8.8
7.5
6.5
5.8
At a 9% discount rate and a terminal growth rate of 3.0%,

the price is $23.88 and the implied exit multiple is 8.0x
1 Based on 40.91 million diluted shares outstanding
35
Overview
Choosing the discount rate is a critical step in

DCF analysis
M&Aflow
Free cash
Terminal value
WACC
Other topics
The discount rate represents the required rate of return given the risks inherent in
the business, its industry, and thus the uncertainty regarding its future cash flows, as
well as its optimal capital structure
Typically the weighted average cost of capital (WACC) will be used as a foundation
for setting the discount rate

The WACC is always forward-looking and is predicted based on the expectations of
an investment's future performance; an investor contributes capital with the

expectation that the riskiness of cash flows will be offset by an appropriate return
The WACC is typically estimated by studying capital costs for existing investment
AN AL Y SI S
opportunities that are similar in nature and risk to the one being analyzed
The WACC is related to the risk of the investment, not the risk or creditworthiness of
D I S C O UN T E D
C A S H
F L OW
the investor
In valuing a company, always use the riskiness of its cash flows or comparable companies in estimating a weighted average cost of capital. Never use the acquirers cost
capital unless, by some chance, it is engaged in an extremely similar line of business. However, if a business is small relative to an acquirors, sometimes ti may be
appropriate to consider the use of the acquirors WACC in performing the valuation. The additional value created by using the acquirors WACC can be viewed as a synergy to
the acquiror in the context of the transaction.
36
Overview
JPMorgan estimates the cost of equity using the capital

asset pricing model
M&Aflow
Free cash
Terminal value
WACC
Other topics
The Capital Asset Pricing Model (CAPM) classifies risk as systematic and
unsystematic. Systematic risk is unavoidable. Unsystematic risk is that portion of

risk that can be diversified away, and thus will not be paid for by investors
The CAPM concludes that the assumption of systematic risk is rewarded with a risk
premium, which is an expected return above and beyond the risk-free rate. The size
of the risk premium is linearly proportional to the amount of risk taken. Therefore,
the CAPM defines the cost of equity as equaling the risk-free rate plus the amount of
systematic risk an investor assumes
D I S C O UN T E D
C A S H
F L OW
AN AL Y SI S
The CAPM formula follows:
Cost of equity = Risk-free rate + (beta * market risk premium)

re = rf + * (rm - rf)
Where
re =
rf =
rm =
=
the required market return on the equity of the company

the risk-free rate
the return on the market
the companys projected (leveraged) beta
There is also an error term in the CAPM formula, but this is usually omitted
37
Overview
M&Aflow
Free cash
Terminal value
The cost of equity is the major component of the WACC
WACC
Other topics
The cost of equity reflects the long-term return expected by the market (dividend
yield plus share appreciation)

Risk-free rate based on the 10 year bond yield
Incorporates the undiversifiable risk of an investment (beta)
Equity risk premium reflects expectations of todays market
The market risk premium (rm - rf; i.e., the spread of market return over the risk-free
Cost of equity
D I S C O UN T E D
Risk free rate
Beta
Equity risk premium
Adjustment for
correlation to
stock market
returns
Appropriate extra
return above risk free
x
rate
Long-term return on
equity investment in
=
todays market
Long-term risk-free
rate of return
(beta=0)
10-year bond yield

(annual average)
Predicted betas
Estimated using
various techniques
4.97%
1.00
5.00%
9.97%
C A S H
F L OW
AN AL Y SI S
rate) is periodically estimated by M&A research based on analysis of historical data
For market average
38
Overview
M&Aflow
Free cash
Terminal value
JPMorgan estimates the equity risk premium at 5.0%
WACC
Other topics
Equity risk premiums is estimated based on expected returns and recent historical returns
Equity
Equity premiums
premiums
Rolling
Rolling average
average over
over 10-year
10-year bond
bond
14%
Rolling 30 years
Rolling 40 years
Equity
Equity returns
returns less
less 10-year
10-year bond
bond yield
yield
Arithmetic
average
Arithmetic average
Rolling 50 years
12%
Equity risk premium (%)
1994
2.7
1995
3.4
1996
4.4
1997
4.7
1998
5.2
1999
6.2
2000
5.8
2001
5.0
8%
6%
4%
D I S C O UN T E D
C A S H
F L OW
AN AL Y SI S
10%
30 years ending
2%
1955 1959 1963 1968 1972 1976 1980 1984 1988 1993 1997 2001
39
Overview
M&Aflow
Free cash
Terminal value
Beta
WACC
Other topics
Beta provides a method to estimate an asset's systematic (non-diversifiable) risk

Beta equals the covariance between expected returns on the asset and on the stock
market, divided by the variance of expected returns on the stock market

A company whose equity has a beta of 1.0 is as risky as the overall stock market
and should therefore be expected to provide returns to investors that rise and fall as
fast as the stock market; a company with an equity beta of 2.0 should see returns on
its equity rise twice as fast or drop twice as fast as the overall market
Returning to our CAPM formula, the beta determines how much of the market risk
Since the cost of capital is an expected value, the beta value should be an expected
value as well
Although the CAPM analysis, including the use of beta, is the overwhelming favorite
for DCF analysis, other capital asset pricing models exist, such as multi-factor
models like the Arbitrage Pricing Theory
D I S C O UN T E D
C A S H
F L OW
AN AL Y SI S
premium will be added to or subtracted from the risk-free rate
40
Overview
JPMorgan uses predicted betas to calculate the cost of

equity
M&Aflow
Free cash
Terminal value
WACC
Other topics
Predicted betas are constructed to adjust for many risk factors, incorporating firms earnings
volatility, size, industry exposure, and leverage

Predicted betas are more consistent and less volatile than historical betas
Historical betas only measure the past relationship between a firms return and market returns
and are often distorted

Projected betas can be obtained from Barra or an online database (e.g., IDD)
Barra predicted betas can be found through the Investment Bank Home Web page1
Note that Bloomberg betas are based on historic prices and are therefore not forward-looking
D I S C O UN T E D
C A S H
Distribution
Distribution of
of predicted
predicted and
and historical
historical betas
betas for
for 5,600
5,600 publicly-traded
publicly-traded companies
companies
800
Historical Beta
Predicted Beta
800
600
# of companies
# of companies
F L OW
AN AL Y SI S
Impute unlevered beta for private company from public comparables
400
200
0
(1.5) (1.0) (0.5) 0.0
Supermarkets
0.78
Predicted betas
600
400
200
Cellular
1.62
Food
0.52
Internet
2.09
Utilities
0.43
0
0.5
1.0
1.5
Beta
2.0
2.5
3.0
3.5
4.0
(0.5)
0.2
1.0
Beta
1.9
2.6
41
Delevering and relevering beta

Recalling our previous discussion regarding the difference between asset values and
equity values, a similar argument exists for betas. The predicted equity beta, i.e.,
the observed beta, included the effects of leverage. In the course of performing a
variance analysis, which looks at different target capitalizations, the equity beta
must be delevered to get an asset, or unlevered, beta. This asset beta is then
used in the CAPM formula to determine the appropriate cost of capital for various
debt levels
The formula follows:
D I S C O UN T E D
C A S H
F L OW
AN AL Y SI S
U= L/[1 = ((1 T) * (Debt/Equity))]
Where:
U = unlevered (asset) beta
BL = leveraged beta
T = marginal tax rate
To relever the beta at a target capital structure:
L= U*[1 + ((1 T) * (Debt/Equity))]
42
Delevering and relevering beta (contd)

Note that JPMorgan M&A sometimes uses a factor, tau, in place of the marginal tax
rate, T
Tau, currently equal to 0.26, represents the average blended benefit a
shareholder gets from a company borrowing (reflects many factors)

The value of Tau is derived by researchers using complicated statistical analyses
Although the delevering/relevering methodology is standard for WACC analyses, the
formula does not produce a highly accurate result

Remember the fundamentals: the market charges more for equity of companies that
Exercise
1. Levered Beta = 1.25, T = 40%, D/E= 0.75; What is the Beta Unlevered?
2. Find the levered Beta at a D/E = 1.0
D I S C O UN T E D
C A S H
F L OW
AN AL Y SI S
are financially risky
43
Overview
M&Aflow
Free cash
Terminal value
The cost of a firms equity should be adjusted for size
WACC
Other topics
Size
Size premium
premium by
by market
market cap
cap
Based
on
historical
Based on historical returns
returns analysis
analysis
Investors typically expect higher returns
when investing in smaller companies
Market cap ($mm)
5.2%
Increased risk
3.1%
Lower liquidity
2.5%
1.9%
1.7%
1.4%
1.1%
Betas vary very little by size

Historical equity returns suggest higher
D I S C O UN T E D
C A S H
F L OW
AN AL Y SI S
return required by investors in smaller

companies
P/E growth ratios (PEG) tend to decline with
size
0.8%
0.0%
$0
100
$100
250
$250
500
$500
700
$7001,000
$1,000 $1,500 $2,500

$5,000+
1,500
2,500
5,000
Size
Size premium
premium by
by market
market cap
cap
Based
on
PE/growth
Based on PE/growth (PEG)
(PEG)
Market cap ($mm)
2.2%
1.6%
Empirical data combined with judgement
1.1%
should be applied when estimating the cost

of equity for smaller firms
0.8%
0.0%
$100500
$5001,000
$1,0002,500
$2,5005,000
$5,000+
44
Overview
JPMorgan uses the long-term cost of debt in

estimating WACC
M&Aflow
Free cash
Terminal value
WACC
Other topics
The long-term cost of debt is used because the cost of capital is normally applied to
long-term cash flows

Using the long-term cost of debt removes any refinancing costs/risks from the
valuation analysis
To the extent a company can fund its investments at a lower cost of debt (with
the same risk), this value should be attributed to the finance staff
D I S C O UN T E D
C A S H
F L OW
AN AL Y SI S
JPMorgan uses the companys normalized cash tax rate
45
Overview
The cost of equity and debt are blended together based

on a target capital structure
M&Aflow
Free cash
Terminal value
WACC
Other topics
The target capital structure reflects the companys rating objective

Firms generally try to minimize the cost of capital through the appropriate use of leverage
The percentage weighting of debt and equity is usually based on the market value of a firms equity and debt
position
Most firms are at their target capital structure
Adjustments should be made for seasonal or cyclical swings, as well as for firms moving toward a target
Using a weighted average cost of capital assumes that all investments are funded with the same mix of equity
and debt as the target capital structure

WACC
WACC formula
formula
AN AL Y SI S
WACC = rd *
Where:
T = Marginal tax rate
E = Market value of equity

D = Market value of debt
re = Return on equity
rd = Return on debt
Illustrative
Illustrative SYSCO
SYSCO weighted
weighted average
average cost
cost of
of capital
capital calculation
calculation
F L OW
Cost of equity
Cost of debt
Cost of capital
10-year T-bond (Avg)
C A S H
D I S C O UN T E D
[D *(1-T)] + re * E
D+E
D+E
4.97%
Market risk premium

(x) Beta (current predicted)
Adjusted market premium
Cost of equity
5.00%
0.62
3.10%
=
Target capital structure

(Assumes current = optimal)
Cost of debt
6.25%
(-) Tax shield1
2.19%
After-tax cost of debt
4.06%
Debt/total capital2 = 6.1%
8.07%
Nominal WACC = 7. 82%

1
2
Assumes 35% marginal tax rate

Total capital = debt + market value of equity
46
Example: Calculating WACC based on

comparable companies
Target
Target WACC
WACC analysis
analysis as
as of
of 1/1/01
1/1/01
Macroeconomic
Macroeconomic assumptions
assumptions
Risk free rate1
5.40%
Estimated market equity risk premium
Projected Target marginal tax rate
40.0%
4.0%
Industry
Industry beta
beta analysis
analysis
D I S C O UN T E D
C A S H
F L OW
AN AL Y SI S
Comparable
company
Projected
levered beta3
Net
debt/mkt.
cap
Total
debt/mkt.
equity
Tax rate
Unlevered
beta4
Cost of
levered
equity
Cost of
unlevered
equity
Company A
1.06
17.2%
22.5%
0.40
0.93
9.6%
9.1%
Company B
0.90
18.0
22.2
0.40
0.79
9.0
8.6
Company C
0.90
40.3
78.4
0.40
0.61
9.0
7.8
Company D
0.89
8.6
10.1
0.40
0.84
9.0
8.8
Average
0.94
21.0%
33.3%
0.40
0.79
9.1%
8.6%
Levered beta
assuming
unlevered
beta of 0.79
Cost of
levered
equity
Target
nominal
WACC
Target
Target WACC
WACC calculation
calculation
Optimal
debt/market
capitalization
Optimal debt/equity
Spread to
10-yr
treasuries
(bp)
Country risk
premium
Pre-tax long
term cost of
debt
30.0%
42.9%
175.0
0.00%
7.1%
1.00
9.4%
7.9%
40.0
66.7
200.0
0.00
7.4
1.11
9.8
7.7
50.0
100.0
300.0
0.00
8.4
1.27
10.5
7.8
60.0
150.0
400.0
0.00
9.4
1.51
11.4
8.0
70.0
233.3
500.0
0.00
10.4
1.91
13.0
8.3
1 Risk-free rate=yield-to-maturity of 10-year U.S. Treasury bond as of 1/1/01 (Source: Bloomberg)

2 Source: JPMorgan M&A research
3 Source: Barra predicted betas
4 Unlevered beta=Levered beta/(1 + (total debt/market value of equity)*(1-tax rate)). Assumes beta of debt equals zero
47
Overview
The appropriate cost of capital will depend on the entity

which is being valued
M&Aflow
Free cash
Terminal value
WACC
Other topics
For
For illustrative
illustrative purposes
purposes
Risk
premium
Unlevered
beta
Optimal
debt/equity
Re-levered
beta
Cost of
equity
Cost of
financing
WACC
5.0%
0.70
20%
0.80
9.0%
6.25%
8.2%
$1BN target
5.0%-6.5%
0.70
20%
0.80
9.0%10.3%
6.25%7.50%
8.3%9.3%
$500mm target
5.0%-7.0%
0.70
20%
0.80
9.0%10.6%
6.25%8.00%
8.4%9.7%
$200mm target
5.0%-7.5%
0.70
20%
0.80
9.0%11.0%
6.25%8.50%
8.4%10.1%
SYSCO
SYSCO
SYSCO WACC
WACC sensitivity
sensitivity
$1bn target
target WACC
WACC sensitivity
sensitivity
$1bn
10%
20%
30%
40%
0.65 7.8%
7.5%
7.3%
7.0%
0.70 8.1%
7.7%
7.5%
7.2%
0.75 8.3%
7.9%
7.7%
7.4%
0.80 8.5%
8.2%
7.8%
7.6%
0.85 8.8%
8.4%
8.0%
7.8%
Levered beta
Levered beta
Debt/equity
Debt/equity
10%
20%
30%
40%
0.70
9.1%
8.7%
8.4%
8.2%
0.75
9.4%
9.0%
8.7%
8.4%
0.80
9.7%
9.3%
8.9%
8.7%
0.85
10.0%
9.6%
9.2%
8.9%
0.90
10.3%
9.8%
9.4%
9.1%
10%
20%
30%
40%
0.70
9.8%
9.4%
9.1%
8.9%
0.75
10.1%
9.8%
9.4%
9.1%
0.80
10.5%
10.1%
9.7%
9.4%
0.85
10.8%
10.4%
10.0%
9.7%
0.90
11.2%
10.7%
10.3% 10.0%
D I S C O UN T E D
C A S H
F L OW
AN AL Y SI S
Debt/equity
$200mm target
target WACC
WACC sensitivity
sensitivity
$200mm
Levered beta
Company
Note: Assumes 35% marginal tax rate

1 Assuming an equity risk premium of 6.5%
2 Assuming an equity risk premium of 7.5%
48
Overview
M&Aflow
Free cash
Terminal value
DCF in-class exercise
WACC
Other topics
The Forecasted EBITDA and FCF for the next three years (2005, 2006, 2007) are
EBITDA (US $mm): 450, 500, 550
FCF (US $mm): 250, 261, 277
Other assumptions:
Perpetuity growth rate of 3.0%
Terminal exit multiple of 7.5x
Unlevered beta of 0.80
Risk free rate= 4.6%
Cost of debt: 6.2%
Marginal tax rate: 35%
Market value of equity=US $4,541mm
Net debt= US $2,524mm
D I S C O UN T E D
C A S H
F L OW
AN AL Y SI S
Market risk premium= 6%
49
Overview
M&Aflow
Free cash
Terminal value
DCF in-class exercise (contd)
WACC
Other topics
Calculate
The cost of equity
WACC
PV of FCF
NPV of company Perpetual growth method
PV of Exit multiple method
What if we use end period discounting in:
Perpetual growth method

Exit multiple method
Use Exit/Perpetual growth methods using mid year conventions
Use Exit/Perpetual growth methods using end year conventions
D I S C O UN T E D
C A S H
F L OW
AN AL Y SI S
What is the valuation if we need to value the company as on March 31, 2005?
50
Overview
M&Aflow
Free cash
Terminal value
Most common errors in calculating WACC
WACC
Other topics
Cost of equity
Equity risk premium based on very long time frame (post 1926: Ibbotson data)
Substitute hurdle rate (goal) for cost of capital
Use of historical (or predicted) betas that are clearly wrong
Investment specific risk not fully incorporated (e.g., country risk premiums)
Incorrect releveraging of the cost of equity
Target capital structure

The actual, not target, capital structure is used
WACC calculated based on book weights
D I S C O UN T E D
C A S H
F L OW
AN AL Y SI S
Cost of equity based on book returns, not market expectations
51
Overview
M&Aflow
Free cash
Terminal value
Valuing synergies
WACC
Other topics
When two businesses are combined, the term synergies refers to the changes in
their aggregate operating and/or financial results attributable to their being

operated as a combined enterprise. Synergies can take many forms
Revenue enhancements
Cost savings
Raw material discounts/purchasing power

Sales and marketing overlap, Corporate overhead reductions
Distribution cost reductions, Facilities consolidation
Tax savings
D I S C O UN T E D
C A S H
F L OW
AN AL Y SI S
Merger related expenses (restructuring, additional CAPEX, integration expenses)

The value of achievable synergies is often a key element in whether to proceed with
a proposed transaction
Calculate synergies for both the acquiring company and the target
Remember incremental cash flow
Synergies are generally valued by toggling pre-tax changes to various financial
statement line items into a DCF model of the combined enterprise and simply
measuring the incremental impact
52
Overview
M&Aflow
Free cash
Terminal value
Valuing synergies
WACC
Other topics
Sources of synergy projections

Management
Research
Estimates from comparable transaction (% of sales, increase in EBITDA
margin etc.)
DCF with synergies
Valued separately from standalone DCF
Run sensitivity on synergy valuations
Timeline for achieving synergies

Run as sensitivity various cases of realization e.g., 25%, 50%, 75%, 100% realization
Tax impact
Costs incurred to achieve synergies
D I S C O UN T E D
C A S H
F L OW
AN AL Y SI S
Other considerations
53
Overview
Sensitivity analysis is vital when presenting the results of

DCF analysis
M&Aflow
Free cash
Terminal value
WACC
Other topics
Recall that DCF valuation is highly sensitive to projections and assumptions

So-called sensitivity tables chart the output based on ranges of input variables
It is common to use a 3x3 table (i.e., showing three different values for each of
two input variables) to enable the reader to triangulate to the appropriate

inferences
Since DCF results are by their nature approximate, depicting sensitivity tables
enables users of DCF output to assess the degree of fuzziness in the results
growth rates generally show sensitivities for the method used to calculate terminal
value and a range of discount rates
Sensitivities can be shown for any variable in the model (including financial
projections)
Judge which sensitivities would be useful to decision makers
D I S C O UN T E D
C A S H
F L OW
AN AL Y SI S
As shown in our previous examples, DCF analyses using exit multiples and perpetuity
54
Overview
Companies with multiple businesses are often valued on a

sum-of-the-parts basis
M&Aflow
Free cash
Terminal value
WACC
Other topics
This approach is sometimes referred-to as a break-up valuation

Particularly common when the company is believed to be undervalued by
the public
Better accounts for discrepancies in market conditions facing the businesses
The methodology requires estimating financial results for each business (EBIT,
EBITDA and/or net income), which can then be used with appropriate
multiples or growth rates in order to arrive at a firm value for each part
before the results are summed
D I S C O UN T E D
C A S H
F L OW
AN AL Y SI S
Completing a sum-of-the-parts valuation can be more challenging than a
straightforward (single-business/consolidated) DCF analysis

Typically less detailed financial data is publicly-available for segments
Often assumptions must be made about how to allocate expenses,
especially those that are clearly shared across businesses (like corporatelevel SG&A)
Need to consider different characteristics of each business segment
(discount rate, terminal value assumptions, etc.)
55
Agenda
Introduction
56
Merger consequences
71
M&A:
DC F
AN D
M E R G E R
AN ALY SI S
Page
56
Introduction to relative valuation

Relative valuation is utilized to illustrate how the value of one company compares to
another company
Typically, relative valuation analysis is utilized in the context of stock-for-stock
exchanges to determine the appropriate exchange ratio offered to shareholders in a

transaction
The exchange ratio reflects the number of acquiror shares offered for each target
share
So if you are a target shareholder and you are offered an exchange ratio of
0.500x, you are being offer 1/2 of an acquiror share for each share of the target
you own
Several relative valuation approaches exist
Contribution analysis
Relative multiple and discounted cash flow analysis
Valuation of synergies
R E L A T I V E
V A L U E
AN A L Y S I S
Historical trading and exchange ratio analysis
57
Historical trading and exchange ratio analysis

Historical exchange ratio analysis Illustrates the relative movement in stock prices
(and implied exchange ratios, aka natural exchange ratios) looking back over a
certain timeframe
Calculated simply as the target share price on a given date divided by the acquiror
share price on the same date

Does not include any premium to the target
Provides a historical benchmark to justify the contemplated exchange ratio
Issues to consider when analyzing data include
Liquidity of shares / trading volume (small vs. large cap)
Relative market attention / analyst coverage
Multiple expansion of one of the companys peer group versus the other over the
R E L A T I V E
V A L U E
AN A L Y S I S
selected time horizon
58
Illustrative historical trading and exchange ratio analysis
Acquiror shares per Target share

Implied Target share price
$12.00 ratio as a premium

Implied Target pro forma ownership
Ratio at
$12.00
Current1
0.347x
0.194x
Last
month1
0.184x
Last 3
months1
Last 6
months1
Last 12
months1
0.203x
0.236x
0.270x
$12.00
$6.70
$6.38
$7.02
$8.15
$9.33
0%
79.1%
88.2%
71.0%
47.3%
28.7%
38.7%
24.6%
23.6%
25.6%
28.9%
32.2%
Historical
Historical exchange
exchange ratio
ratio
Current stock price2
# of acquiror shares per target share

0.45x
Current market capitalization2
Acquiror
Target
Acquiror
Target
$34.60
$6.70
$274.8
$89.7
0.40x
More
favorable
to Target
At $12 per share = 0.347x
0.35x
0.30x
R E L A T I V E
V A L U E
AN A L Y S I S
0.25x
0.20x
Less
favorable
to Target
Source:
Current = 0.194x
0.15x
0.10x
0.05x
0.00x
Jun-00
1
2
3
Sep-00
Dec-00
Mar-01
Jun-01
Sep-01
Dec-01
Mar-02
Jun-02
Represents average exchange ratio over the trailing period ended June 27, 2002
Closing prices as of June 27, 2002
Assumes acquirors current price of $34.60 per share
59
Contribution analysis
Compares the relative equity valuation of two parties to their respective
contribution to a combined companys financial performance

Typical firm value metrics would include
Revenues
EBITDA
EBIT
Unlevered free cash flow measures
Industry-specific (i.e. customers, reserves, etc.)
Typical equity value metrics would include
Net income
Cautionary note: contribution analysis does not measure the growth and risk profile
of the two companies financial performance and differing multiples may be

justifiablie when assessing relative value
R E L A T I V E
V A L U E
AN A L Y S I S
Levered free cash flow measures
60
Relative contribution analysis

$
$ millions
millions
Implied equity value
Market value
% contribution
Firm value
% contribution
Implied
Acquiror
Target
Total
Acquiror
Target
exchange ratio
$18,150
$7,653
$25,803
$18,150
$7,653
0.4340x
70.3%
29.7%
70.3%
29.7%
$38,450
$19,592
$18,150
$7,653
66.2%
33.8%
70.3%
29.7%
$5,275
$3,528
$14,482
$11,322
59.9%
40.1%
56.1%
43.9%
$5,320
$3,253
$15,716
$10,087
62.1%
37.9%
60.9%
39.1%
$1,790
$1,210
$15,397
$10,406
59.7%
40.3%
59.7%
40.3%
$2,018
$1,380
$15,326
$10,477
59.4%
40.6%
59.4%
40.6%
$58,042
0.4340x
EBITDA
2004E
% contribution
2005E
% contribution
$8,803
$8,573
0.8046x
0.6606x
Net income
2004E
% contribution
R E L A T I V E
V A L U E
AN A L Y S I S
2005E
% contribution
$3,000
$3,398
0.6956x
0.7036x
As of 2/6/02; net debt for ACQUIROR as of 12/31/01 (per press release) and for TARGET as of 9/30/01 (per 10-Q); pro forma for acquisitions
2001A for ACQUIROR; based on company press release; other estimates based on JPMorgan Equity Research
3 Based on I/B/E/S consensus estimates; ACQUIROR 2002E EPS based on company guidance; TARGET EPS estimates based on I/B/E/S consensus estimates post 1/29/02
1
2
61
Sample contribution analysis
Target
$25,308
$58,042
$8,803
56.1%
70.3%
70.3%
Relative owner ship
Acquiror
Exchange r atio
0.5385x
Tar get
35.0%
Acquir or
65.0%
$8,573
$3,000
$3,398
60.9%
59.7%
59.4%
R E L A T I V E
V A L U E
AN A L Y S I S
Offer =
35.0%
43.9%
29.7%
29.7%
Market value
Firm value
.4340x
Implied
ER
.4340x
39.1%
40.3%
40.6%
2002E EBITDA
2003E EBITDA
2002E Net Income
2003E Net Income
.8046x
.6606x
.6956x
.7036x
62
Calculating the implied exchange ratio

Company statistics
statistics
Company
Implied
Implied exchange
exchange ratio
ratio (equity
(equity value
value metrics)
metrics)
Acquiror
Current share price
$34.22
% of net income contributed by acquiror
59.7%
Fully-diluted share count
531
Fully-diluted market cap
18,150
Fully-diluted acquiror shares
530
Net debt
20,300
888
EBITDA
5,320
Pro forma shares outstanding to yield

59.7% ownership
Net income
1,790
Implied shares issued to target
358
Current target shares outstanding
515
Target
Current share price
$14.85
515
7,653
Net debt
11,939
3,253
Net income
1,210
0.6956x
Natural exchange ratio based on current

share prices ($14.85 / $34.22)
0.4340x
R E L A T I V E
V A L U E
AN A L Y S I S
EBITDA
Implied exchange ratio based on net

income (358 / 515)
63
Calculating the implied exchange ratio (contd)

Company
Company statistics
statistics
Implied
Implied exchange
exchange ratio
ratio (firm
(firm value
value metrics)
metrics)
Acquiror
Current share price
$34.22
531
18,150
Net debt
20,300
EBITDA
Net income
Combined firm value
58,042
Combined equity value
25,803
% EBITDA contributed by acquiror
62.1%
5,320
Firm value based on EBITDA contribution
36,044
1,790
Implied equity value
15,744
As a % of total equity value
60.9%
Target
Fully-diluted acquiror share count
531
Pro forma shares outstanding to yield 61.0% acquiror

ownership
871
11,939
Implied shares issued to target
340
EBITDA
3,253
Fully-diluted target share count
515
Net income
1,210
Current share price

515
7,653
Net debt
Implied exchange ratio based on EBITDA (338 / 515)
0.66x
Natural exchange ratio based on current share prices

($14.85 / $34.22)
0.43x
R E L A T I V E
V A L U E
AN A L Y S I S
$14.85
64
Class exercise
Company
Company statistics
statistics
Calculate the % contribution based on
Acquiror
Current share price
$12.1
Fully-diluted share count (mm)
110.3
Net debt
450
EBITDA
172
Net income
the EBITDA and the Net income

What is the implied exchange ratio?
65
Target
Current share price
Net debt
$14.1
30.4
295
81
Net income
25
R E L A T I V E
V A L U E
AN A L Y S I S
EBITDA
65
Relative multiple and discounted cash flow valuation

Compares the ranges suggested by stand-alone valuations of two companies on a
multiples or discounted cash flow basis

Step 1: Valuation the acquiror and the target separately
Step 2: Create a relative value summary
Need to consider which ends of the range it is appropriate to compare when
determining an appropriate exchange ratio / ownership percentage

High/Low and Low/High
R E L A T I V E
V A L U E
AN A L Y S I S
High/High and Low/Low
66
Sample relative value football field: Target valuation

Price
Price per
per share
share
$20.00
$26.75
$15.00
$15.00
$9.75
$10.00
$5.00
R E L A T I V E
V A L U E
AN A L Y S I S
Highest public
comp price
$0.00
$5.00
$4.94
$5.00
$4.00
$4.00
$10.25
Implied offer1 = $8.46
$5.50
$6.00
$3.75
$3.50
$3.00
Lowest public
comp price
52-week
high/low
Street case DCF
15.0x to 19.0x
2001E EBIT
of $20.6
19.0x to 25.0x
2001E cash
EPS of $0.16
Public trading comparables
15.0x to 20.0x
2002E cash
EPS of $0.25
2.5x to 4.0x
LTM revenue
of $185.7
Transaction
comparables2
Mgmt. Case
Street Case3
12% to 15%
Discount Rate
EBIT exit mult.
of 15.0x to 20.0x
12% to 15%
Discount Rate
EBIT exit mult.
of 15.0x to 20.0x
DCF analysis
Based on the offer exchange ratio of 0.311x and Pedros closing price $27.19 as of 7/12/01
Certain of the multiples implied by precedent transactions have been adjusted by indexing them to the movement in an index of stock prices of companies comparable to
Pablo
3 Based on IBES EPS growth estimate and average margin estimates of brokerage reports
1
2
67
Sample relative value football field: Acquiror valuation

Price
Price per
per share
share
$50.00
DCF
$40.00
Highest public
comp price
$43.25
$33.00
$28.00
$30.00
$29.25
$29.50
$30.75
$26.50
$20.00
$21.28
Lowest public
comp price
$21.00
$22.50
$20.50
Current = $27.19
AN A L Y S I S
$10.00
$0.00
R E L A T I V E
V A L U E
52-week
high/low
10.0x to 12.0x
2001E EBITDA
of $346
12.0x to 15.0x
2001E EBIT
of $239
19.0x to 25.0x
2001E EPS
of $1.18
Comparable diversified company analysis

1
2
Sum-of-the-parts
Discount rate 9% to 13%

EBITDA with exit multiple
of 11.0x to 13.0x
Public company analysis
DCF analysis2
Comparable diversified company analysis and public company analysis are based on brokerage report estimates
Based on management projections
68
Relative valuation summary

Less
favorable to
Acquiror
Exchange ratio1
1.000x
0.750x
High/Low
Low/High
$5.00/$20.50 $3.00/$33.00
High/Low
Low/High
$5.50/$30.75 $3.50/$43.25
0.488x
0.476x
0.500x
0.441x
0.313x
Offer: 0.311x
0.311x
0.244x
0.250x
0.179x
0.219x
0.162x
0.237x
R E L A T I V E
V A L U E
AN A L Y S I S
0.182x
Natural exchange
ratio
More
favorable to
Acquiror
0.081x
0.091x
0.000x
Public
comparables to
Public
comparables
(Sum of Parts &
Diversified)
Transaction
comparables to
Public
comparables
(Sum of Parts &
Diversified)
0.217x
0.074x
Street case/Mgmt. Street case/Mgmt. Mgmt. case/Mgmt. Mgmt. case/Mgmt.

case
case w ith $40 mm
case
case w ith $40 mm
of synergies
of synergies
0.073x
Contribution
analysis
Discounted Cash Flow Analysis
Exchange ratio ranges computed by taking the high/low equity value per share of Target using various valuation methodologies over the low/high valuation of
the acquiror using various valuation methodologies
69
Merger of Equals transactionsexample

$
$ in
in millions
millions
Acquiror
Transaction
Acquiror/
NewCo
pro forma
target
Chairman
CEO
ownership
Board Split
Accounting
regime
date
Target
Acquiror
value
Premium1
3/19/01
Billiton PLC
BHP Ltd
$11,511
20.9%
Acquiror
Acquiror
58.0%
9/9
United Kingdom
6/20/00
Seagram
Vivendi
40,428
22.8%
Acquiror
Acquiror
59.0%
14/6
France
5/17/00
Compass Group PLC
Granada group PLC
8,089
3.4%
Acquiror
Joint
66.3%
8/8
United Kingdom
5/16/00
Lycos Inc.
Terra Networks (Telefonica SA)
6,188
58.3%
Acquiror
Target
63.0%
11/3
Spain
2/21/00
Norwich Union PLC
CGU PLC
11,858
(12.2%)
Acquiror
Target
58.5%
9/8
United Kingdom
1/17/00
SmithKline Beecham
Glaxo Wellcome
75,961
(2.3%)
Acquiror
Target
58.8%
8/8
United Kingdom
12/21/99
Pharmacia & Upjohn
Monsanto
26,486
(7.1%)
Acquiror
Target
51.0%
9/9
United States
9/27/99
VIAG AG
VEBA AG
13,153
6.8%
Acquiror
Joint
67.0%
7/3
United States
6/30/99
Banca Commerciale Italiana SpA
Banca Intesa Spa
15,940
8.5%
Acquiror
Joint
57.0%
NA
Italy
5/17/99
Hoechst
Rhone Poulenc
21,918
(9.9%)
Target
Target
47.0%
5/5
France
1/5/99
AirTouch Communications
Vodafone group PLC
60,287
40.6%
Target
Acquiror
50.0%
7/7
United Kingdom
1/15/99
Banco Central Hispanoamericano
Banco de Santander SA
11,320
(3.6%)
Joint
Target
63.8%
13/12/2
Spain
12/9/98
Astra AB
Zeneca Group plc
32,199
9.8%
Target
Acquiror
53.5%
7/7
United Kingdom
France
12/2/98
Synthelabo SA
Sanofi SA
11,234
5.7%
Acquiror
Joint
64.1%
4/3/5
8/11/98
Amoco
British Petroleum
55,040
22.7%
Joint
Acquiror
60.0%
13/9
United Kingdom
5/7/98
Chrysler Corp
Daimler-Benz AG
40,467
38.0%
Joint
Joint
58.0%
6/6
United States
United Kingdom
2/25/98
General Accident
Commercial Union
11,152
(4.2%)
Acquiror
Target
53.6%
7/7
12/8/97
Swiss Bank
Union Bank of Switzerland
22,765
0.3%
Acquiror
Target
60.0%
4/4/1
IAS
5/12/97
Guinness PLC
Grand Metropolitan
15,970
1.3%
Joint
Acquiror
52.8%
5/5
United Kingdom
3/7/96
Ciba-Geigy AG
Sandoz AG
29,000
9.5%
Target
Acquiror
55.0%
8/8
IAS
Premium to target share price one day prior to announcement

Source: Press releases, SEC filings, SDC
R E L A T I V E
V A L U E
AN A L Y S I S
Ann.
70
Agenda
Introduction
56
Merger consequences
71
Accretion/(dilution) review
Pro forma balance sheet analysis review
M&A:
DC F
AN D
M E R G E R
AN ALY SI S
Page
71
Introduction
Pro forma analysis provides both acquirers and targets insight into the
income statement and balance sheet impact of a transaction

Revenue, EBITDA or earnings impact
Capitalization, leverage and credit capacity impact
Valuable tool for both acquirer and target
Indicates buyers ability to pay
Suggests most appropriate form of consideration to offer
Allows buyer to predict or manage market reaction to announcement
Demonstrates landscape of competing buyers
Balance sheet and income statement impact go hand-in-hand
M E R G E R
C O N S E Q U EN C E S
Both driven by form and amount of consideration
72
Agenda
Introduction
56
Merger consequences
71
M&A:
DC F
AN D
M E R G E R
AN ALY SI S
Page
73
Overview of accretion/(dilution) analysis

Accretion/(dilution) primarily measures the impact of a merger or acquisition on the
income statement of a potential buyer

Accretion/(dilution) analysis can be based on revenue, EBITDA, earnings, after-tax
cash flow, and dividends per share

EPS is most commonly used form of accretion/(dilution) analysis
Industry will typically dictate which are the most relevant metrics (e.g. wireless
telecom companies may prefer to show EBITDA)

Two methods exist for calculating accretion/(dilution)
Top down: integrated merger model
Bottom up: transaction-adjusted, estimate-based model
Key measures for accretion/(dilution)
Dollar and percent change of acquirer earnings per share
M E R G E R
Pre-tax synergies required for break-even impact to EPS

Pro forma ownership when stock is used as an acquisition currency
Pro forma leverage/capitalization
Note that capitalization will change when stock is used and net debt leverage levels will change when cash is used
74
Purpose of accretion/(dilution) analysis

Accretion/(dilution) analysis can be used to determine
The capacity of the acquirer (or potential acquirers) to pay a premium for a
target
Optimal form of consideration (cash, stock, other securities, combination)
Used by both buyers and sellers
Buyers identify highest price they can afford to pay and what currency to offer
Buyers evaluate how much competing bidders can afford to pay
Sellers evaluate what price potential buyers can afford to pay and in what
currency
In the context of a divestiture, sellers also evaluate their break-even sale price
and required currency
M E R G E R
Typically, JPMorgan performs sensitivity analyses to find break-even points where
the offer price for a target results in no incremental earnings or losses to acquirers
earnings per share
75
Two primary methods exist to compute

accretion/(dilution)
Description
Description
Benefits
Benefits
Top down
Bottom up
Integrated merger model with projected balance

sheet and cash flow statement for target, acquirer
and the combined company
EPS estimate-based analysis that combines acquirer

and target projections, adjusting for impact of
incremental transaction-related expenses and
income
Provides most accurate picture of combined

companies
Quick and intuitive demonstration of accretive or

dilutive impact
Reflects impact of debt pay-down and other

cash flow implications to net interest expense
and net income
Flexible analysis that can incorporate multiple

buyers or targets
Clearly and accurately shows balance sheet

impact in pro forma statistics
M E R G E R
Considerations
Considerations
Difficult to efficiently incorporate multiple

acquirers and targets for competitive analysis
Risks over-simplifying pro forma analysis and overor under-stating impact to acquirer
Relies on estimates which, although more

robust, are also subject to uncertainty or
questionable assumptions
May be inappropriate for a deal where the

acquirers credit rating is impacted by the
transaction
Must be customized for asset deals, joint ventures
and other transactions
76
Sample transaction assumptions

Transaction
Transaction description
description
Acquirer buying target with the following
Target
Target
transaction assumptions:
Current share price

Shares outstanding
$12.25
41.500
Transaction closes 12/31/04
Market capitalization
$508.4
Advisory fees of 0.25% of transaction value
Net debt (6/30/04)
500.0
Firm value
Earnings per share:
2004E
2005E
2006E
$1,008.4
Financing fees of 1.0% on debt issued (amortized
as deferred financing fees over 7 years)

Interest rates assumptions
Tranche I ($300mm maximum senior debt):
7.0%
Tranche II (subordinated debt): 12.5%
Dividend per share (annual):

Implied gross dividends paid (annual, $mm):
$1.20
0.95
1.45
$0.48
$19.2
Interest rate earned on existing cash: 3.0%

Tax rate on incremental earnings and expenses
Acquirer
Acquirer
(including net interest expense): 35%

Dividend policy of acquirer remains unchanged
M E R G E R
50% of excess purchase price allocated to
goodwill (approximately $70 million)

Remaining 50% of excess purchase price
allocated to asset write-up and depreciated
over 20 years
Target's existing debt not refinanced
Current share price

Shares outstanding
Market capitalization
$20.03
58.669
$1,175.1
Net debt (6/30/04)

Firm value
Earnings per share:
2004E
2005E
2006E
Dividend per share (annual):
Implied gross dividends paid (annual, $mm):
750.0
$1,925.1
$1.56
1.68
1.80
$0.85
$44.6
77
Key adjustments to pro forma income statement

The
The applicability
applicability of
of most
most income
income statement
statement adjustments
adjustments depends
depends on
on the
the consideration
consideration issued
issued to
to the
the seller
seller and
and the
the way
way the
the
acquiror
funds
an
acquisition
acquiror funds an acquisition
Consideration
Adjustment
Stock
After-tax financing fee amortization
Cash
Mix
Non-deductible advisory fee amortization

After-tax incremental DD&A from asset write-up
M E R G E R
After-tax interest on transaction debt

After-tax interest deduction from cash used
After-tax interest (loss) gain on dividend shortfall
After-tax synergies
Transaction goodwill impairment
Change in pro forma fully diluted shares
78
What is in a consensus estimate?

While
While First
First Call
Call or
or I/B/E/S
I/B/E/S estimates
estimates may
may provide
provide a
a perceived
perceived Street
Street consensus,
consensus, they
they introduce
introduce some
some degree
degree of
of uncertainty
uncertainty
First Call and I/B/E/S consensus estimates are based on an aggregation of research analysts
estimates, with little discretion applied to mean and median calculations

Quality of estimates and analysts varies dramatically across consensus samples
Modeling conventions are often not explained or apparent
Analysts may be assuming different projected share counts, rather than net income
Some estimates included in consensus numbers are out-dated
May not reflect updated company guidance or recent financial results
May not reflect abrupt changes to underlying industry economics
May not reflect recent M&A transactions or securities offerings
Items embedded in consensus estimates are not always clearly explained or uniform
M E R G E R
across samples
Fully diluted share assumptions and treatment of options and convertibles may vary
Interest expense
Tax rates
Accounting policies
Stock-based compensation and amortization of intangibles other than goodwill
79
Transaction assumptions are the foundation of all

sound analysis
Always
Always clearly
clearly describe
describe transaction
transaction assumptions
assumptions
Choose an appropriate closing date reflecting available information and transaction structure
Timing of process requirements for closing (share registration, shareholder votes, etc.)
Timing of regulatory requirements for closing (HSR review, etc.)
Seasonality of industry economics and impact on estimates or calendarization
Capital structures should best reflect current circumstances
Equity currency should be reviewed in context of recent share price and larger equity market
performance
Cash deals should reflect reasonable interest rates and lending market capacity
Pro forma leverage and interest coverage levels should be consistent with acquirers desired credit
rating
Both advisory and financing fees have a meaningful impact on pro forma financials
M E R G E R
Although equity analysts tend to look through some extraordinary charges, advisory and other one-
time fees will impact the cash balance used in the transaction and subsequent annual interest
expense
Amortization of financing fees will impact EPS over the immediate future of the combined entity
Tax rate on incremental earnings and expenses should reflect acquirors and targets combined tax
efficiencies and adjustments should be made to post-transaction tax expenses for potential NOLs
assumed by an acquirer
80
Sample transaction100% stock consideration

Assumptions
Assumptions
Earnings
Earnings impact
impact ($
($ millions,
millions, except
except per
per share
share data)
data)
Acquirer share price:

2003 P/E
2004 P/E
$20.03
12.0x
11.1
Acquirer shares outstanding
58.669
Target share price:

2003 P/E
2004 P/E
$12.25
12.9x
8.4
Transaction assuming 25% premium

Offer price (assuming 25% premium)
Shares acquired
Implied exchange ratio (T/A)
Shares issued
$15.31
42.468
0.764x
32.466
2003
2004
Acquirer EPS
Acquirer net income
$1.68
98.3
$1.80
105.7
Target EPS
Target net income
$0.95
39.4
$1.45
60.2
Adjustments
M E R G E R
Tax rate on incremental expenses:
35.0%

After-tax DD&A from asset write-up
After-tax synergies
Transaction goodwill amortization (or impairment)
Other reductions
Total adjustments to net income
Pro forma net income
Pro forma shares outstanding
($0.0)
0.0
(2.3)
(0.0)
(0.1)
(0.2)
0.0
0.0
0.0
(2.5)
$135.2
91.135
Pro forma EPS

Accretion/(dilution) ($)
Accretion/(dilution) (%)
$1.48
($0.19)
(11.5%)
Pre-tax synergies to break-even
$26.9
($0.0)
0.0
(2.3)
(0.0)
(0.1)
(0.3)
0.0
0.0
0.0
(2.7)
$163.2
91.135
$1.79
($0.01)
(0.6%)
$1.5
1 Should be calculated using the offer price not current target price
Used to fund transaction expenses and advisory fees of $2.9 million
81
Considerations for a stock transaction

P/Es and relative valuations play a meaningful role in accretion/(dilution) analysis
High P/E of an acquirer may imply stock may be cheap acquisition currency,
relative to lower P/E stock or the implied debt P/E

A number of issues will play an important role in the optics, attitudes and receptivity
of principals and investors in a transaction

Exchange ratios should not be grossly inconsistent with historical relative trading
performance of acquirer and target

Purchase price and pro forma ownership should take into account contribution
analysis
Flow back and sell-off of acquirer stock could meaningfully affect acquirers share
prices on announcement/closing
Cross-shareholder analysis
M E R G E R
Whether acquirer and target are included in the same indexes, if any
Fund limitations on owning international stocks and/or stocks not listed on local
exchanges
Dividend policy implications of receiving acquirer stock
82
Sample transaction100% cash consideration

Earnings
Earnings impact
impact
Assumptions
Assumptions
Earnings
Earnings impact
impact
Figures in millions, except per share data
Target share price:

Shares acquired
$12.25
15.31
42.468
Acquirer EPS
Acquirer net income
Target EPS
Target net income
2003
2004
$1.68
$1.80
98.3
105.7
$0.95
$1.45
39.4
60.2
($0.6)
($0.6)
Debt issued to fund acquisition:

Equity purchased with cash
Transaction fees
Financing fees
Cash balance used in transaction
Total debt raised
$650.3
2.9
6.6
(0.0)
$659.8
Debt allocation:
Tranche I
$300.0
Tranche II
359.8
Interest Rates:
M E R G E R
Adjustments

7.0%
Tranche II
12.5%
(42.9)
(44.8)
0.0
0.0
0.4
0.8
After-tax synergies
0.0
0.0
0.0
0.0
Other reductions
0.0
0.0
(45.4)
(47.0)
$92.4
$118.9
58.669
58.669
$1.57
$2.03

Interest rate on foregone cash balance
3.0%
Pro forma EPS

Tax rate on incremental earnings
35.0%
($0.10)
$0.23
(6.1%)
12.5%
$9.1
NM

1
0.0
(2.3)
Tranche I
0.0
(2.3)
Should be calculated using the offer price not current target price
83
Considerations for a cash transaction

Use multiple tranches of debt where appropriate
Reflects capital structure and market capacity limitations for larger deals
Varying interest rate on debt tranches will impact interest expense on offer price increases or
decreases
Note that depending on debt mix, stock may be more or less appropriate as an acquisition
currency
Financing assumptions should reflect both acquirers stand-alone and combined debt capacity and
ratings circumstances
Debt coverage and capitalization statistics should be included to highlight potential ratings issues
and support interest rate assumptions

Current and recent ratings history of acquirer should be reviewed to confirm ability to issue debt
securities
Covenants of existing acquirer debt should be considered
Review transaction and pro forma financials with ratings advisory and DCM teams to determine
M E R G E R
appropriate rates
Use existing acquirer cash sparingly, if at all
Existing cash is likely used to meet working capital funding requirements
Minimum cash balance may be required for debt covenants
Opportunity cost of using cash on hand should always be contemplated and reflected in interest
expense
Restricted cash considerations
84
Sample transaction50% cash/50% stock consideration

Earnings
Earnings impact
impact
Mixed
Mixed consideration
consideration assumptions
assumptions
Earnings impact
impact
Earnings
Figures in millions, except per share data
Target share price:

Shares acquired
$12.25
15.31
42.468
Acquirer EPS
Acquirer net income
Target EPS
Target net income
Shares issued
2003
2004
$1.68
$1.80
98.3
105.7
$0.95
$1.45
39.4
60.2
($0.3)
($0.3)
16.233
Adjustments
Debt issued to fund acquisition:

Equity purchased with cash
Transaction fees
0.0
0.0
(2.3)
(2.3)
(16.2)
(16.9)
0.0
0.0
0.1
0.2
After-tax synergies
0.0
0.0
Debt allocation:
0.0
0.0
Tranche I
$300.0
Other reductions
Tranche II
31.3
Cash balance used in transaction

Total debt raised
Non-deductible advisory/ other fee
2.9
Financing fees
M E R G E R
$325.1
3.3
(0.0)
$331.3
0.0
0.0
(18.7)
(19.3)
$119.1
$146.6
74.902
74.902
$1.59
$1.96
($0.09)
$0.16
(5.1%)
8.6%
$9.9
NM

Interest Rates:
Tranche I
7.0%
Tranche II
12.5%

Pro forma EPS
Interest rate foregone on cash balance

Tax rate on incremental earnings
3.0%
35.0%
85
The role of P/E valuations in accretion/(dilution)

For stock-for-stock deals, accretion or dilution potential will usually be evident by simply
comparing the P/E multiples of the acquirer and the target

If the acquirer has a higher P/E than the target, the deal will be accretive because the acquirer
is buying more EPS than the target shareholders are accepting as consideration
If the acquirer has a lower P/E than the target, the deal will be dilutive because the acquirer is
buying less EPS than the target shareholders are accepting as consideration
Remember to take the premium into account when calculating the targets P/E
Utility of comparison will also depend on transaction assumptions regarding goodwill impairment
or other asset amortization

For 100% cash transactions, the cost of debt (interest payments) and cost of acquiring the targets
earnings will determine the accretive or dilutive impact of a transaction

Where the inverse cost of debt (1/(after-tax cost of debt)) is greater than the P/E of the target,
the deal will be accretive
M E R G E R
Where the inverse cost of debt is lower than the P/E of the target, the deal will be dilutive
86
Presenting accretion/(dilution) with sensitivities

Sensitivities provide the total picture of a transactions potential impact; relevant
sensitivities to demonstrate may include

Premium (discount)
Consideration offered (% of stock/% of cash)
y Acquirers stock price

y Earnings per share
y Synergies
Interest rate(s) on debt issued
Sensitivities should reflect consideration specifics
Purchase price and ownership (stock)
2003
2003 accretion/(dilution)(%
accretion/(dilution)(% per
per share)
share)
2003
2003 synergies
synergies to
to break-even($mm)
break-even($mm)
Stock consideration
Stock consideration
M E R G E R
62.5%
75.0%
87.5%
100.0%
50.0%
62.5%
75.0%
87.5%
100.0%
10.0%
1.0%
(1.1%)
(3.0%)
(4.8%)
(6.4%)
10.0%
NM
$2.2
$6.3
$10.4
$14.4
20.0%
(3.0%)
(4.6%)
(6.5%)
(8.3%)
(9.8%)
20.0%
5.8
9.3
13.8
18.3
22.8
30.0%
(7.7%)
(8.4%)
(10.2%)
(11.9%)
(13.4%)
30.0%
15.0
17.3
22.3
27.2
32.1
40.0%
(14.1%)
(13.5%)
(15.2%)
(16.8%)
(18.1%)
40.0%
28.2
28.8
34.3
39.9
45.3
50.0%
(20.2%)
(19.0%)
(19.9%)
(21.3%)
(22.5%)
50.0%
41.7
41.9
46.6
52.8
58.9
Premium
Premium
50.0%
87
Relevant sample transaction sensitivities

Stock
Stock deals
deals
2003
per share)
share)
2003
per share)
share)
Acquirer stock price

$20.03
$21.00
$22.00
$23.00
$5.0
$10.0
$15.0
$20.0
$25.0
10.0%
(8.1%)
(6.4%)
(5.0%)
(3.5%)
(2.2%)
10.0%
(4.2%)
(2.0%)
0.2%
2.5%
4.7%
20.0%
(11.6%)
(9.8%)
(8.3%)
(6.8%)
(5.5%)
20.0%
(7.7%)
(5.5%)
(3.3%)
(1.2%)
1.0%
30.0%
(15.2%)
(13.4%)
(11.8%)
(10.3%)
(8.9%)
30.0%
(11.3%)
(9.2%)
(7.1%)
(5.0%)
(2.9%)
40.0%
(20.0%)
(18.1%)
(16.5%)
(15.0%)
(13.5%)
40.0%
(16.1%)
(14.1%)
(12.1%)
(10.1%)
(8.1%)
50.0%
(24.4%)
(22.5%)
(20.9%)
(19.3%)
(17.8%)
50.0%
(20.6%)
(18.7%)
(16.8%)
(14.9%)
(13.0%)
Premium
Premium
$19.00
Pre-tax synergies realized 2003
Cash
Cash deals
deals
2003
per share)
share)
2003
per share)
share)
M E R G E R
Blended interest rate (%)
6.5%
7.0%
7.5%
8.0%
8.5%
10.0%
3.1%
2.1%
1.1%
0.1%
(0.9%)
20.0%
(2.4%)
(3.4%)
(4.3%)
(5.3%)
(6.3%)
30.0%
(8.4%)
(9.4%)
(10.4%)
(11.4%)
(12.4%)
40.0%
(17.1%)
(18.1%)
(19.1%)
(20.1%)
(21.1%)
50.0%
(25.9%)
(26.9%)
(27.9%)
(28.9%)
(29.9%)
Premium
Premium
Interest rate on senior debt (Tranche 1)

11.0%
10.5%
10.0%
9.5%
9.0%
10.0%
(2.3%)
(0.1%)
2.1%
4.2%
6.4%
20.0%
(7.7%)
(5.5%)
(3.4%)
(1.2%)
1.0%
30.0%
(13.8%)
(11.6%)
(9.4%)
(7.2%)
(5.1%)
40.0%
(22.5%)
(20.3%)
(18.1%)
(15.9%)
(13.7%)
50.0%
(31.3%)
(29.1%)
(26.9%)
(24.7%)
(22.6%)
88
Synergies and transaction related costs

Synergies
For top-down modeling simplicity, assume synergies come from cost-savings unless told
otherwise
Revenue synergies
Incremental revenues may have costs associated with them that need to be reflected
in any synergy calculations (e.g variable margins on incremental revenues)
Equity markets heavily discount or, in many cases, disregard revenue synergies, as
they are typically difficult to quantify and accurately project
Synergies are typically realized gradually over time and should be phased in accordingly
It may be prudent to risk-adjust any expected synergies to account for ability to
realize them and/or for negative synergies (i.e., integration costs)

Consider the cash flow impact of synergies
One-time charges and expenses
M E R G E R
Acquiring companies will incur one-time merger-related costs due to reorganization,
severance packages
One-time charges are disclosed in SEC filings
From a valuation perspective, the Street looks through one-time charges
Include the net interest impact of cash changes
89
Additional items to consider

Tax benefits
In assuming additional options are exercised under premium scenarios a tax shield will be generated
based on the implied deductible compensation expense generated from the vesting / exercise of
options at a discount to the acquisition price
Asset write-ups have tax implications1
Acquirers may be forced to pay interest on interest
In using cash and thereby raising debt, an acquirer will incur future interest and amortization
payments that may require additional borrowing

AccretionOne calculation method
Asset write-ups and additional depreciation expenses
While asset write-ups will reduce goodwill generated in a transaction, they will increase annual
depreciation expenses based on the incremental increase in depreciable assets

Limiting asset write-ups will reduce negative impact of increased depreciation expenses
M E R G E R
In some cases, asset write-downs may impact EPS accretion / dilution

Impact of dividends paid by acquirer
Additional cash will be necessary to fund new dividends paid and should be reflected in incremental
expenses
Dividend accretion/(dilution) analysis may be relevant to determine appropriate premium
Write-ups create a deferred tax liability (equal to the write-up multiplied by the tax rate)
90
Summary considerations for EPS accretion/(dilution)

analysis
EPS-based accretion/(dilution) is only a back-of-the-envelope exercise and is not a
substitute for an integrated merger model

Does not necessarily reflect cash flow implications and debt pay-down capabilities of
combined company
EPS estimates should be used with caution
First Call and I/B/E/S estimates are consensus numbers that do not always reflect
consistent underlying assumptions

Small differences in EPS figures can have dramatic impact on net income ($0.05 per
share on 200 million shares reflects a $10 million variance in net income)
Share count of target must be a dynamic number
Share count should increase (decrease) with offer price to reflect additional (reduced)
shares underlying in-the-money options
M E R G E R
Negative net income targets CANNOT create meaningful accretion

Accretion/(dilution) should always be sanity-checked
Relative P/Es
Acquirers cost of debt vs. cost of targets earnings
Accretion/(dilution) should always be checked with your calculator
91
Agenda
Introduction
56
Merger consequences
71
M&A:
DC F
AN D
M E R G E R
AN ALY SI S
Page
92
Overview of pro forma balance sheet analysis

Pro forma balance sheet analysis provides a means of assessing the impact of a
potential transaction on an acquirers cost of borrowing, market access, and

financial flexibility
Two methods exist for demonstrating balance sheet impact:
Top down: integrated merger model with income statement, balance sheet and
cash flow statement (preferred)

Bottom up: transaction-adjusted, LTM-based model
Pro forma balance sheet analysis relies primarily upon a comparison of an acquirers
pre- and post-acquisition credit metrics

Key credit metrics include:
Pretax interest coverage
EBITDA interest coverage
M E R G E R
Funds from operations to interest

Funds from operations to debt
Debt to EBITDA
Debt to book capitalization
93
Significance of pro forma balance sheet analysis

Pro forma balance sheet analysis is critical in determining
The debt-financed acquisition capacity of an acquirer (or competing bidders)
Required equity component of an offer to ensure a particular rating outcome
Financing implications of a particular transaction structure (cost of capital and
market access)
In a divestiture, the pro forma credit rating of the seller and the minimum level of
cash consideration needed

Used by both buyers and sellers
Buyers identify highest price they can afford to pay and how much cash can be
offered
Buyers evaluate how much other competitive bidders can afford to pay
Sellers evaluate how much potential buyers can afford to pay and how much cash
M E R G E R
to demand
Typically, JPMorgan performs sensitivity analyses to address relevant inflection
points where the offer price for a target results in meaningful changes to a combined
capital structure
94
Credit ratings as a key financing decision driver

A companys corporate credit rating determines its
Cost of borrowing
Breadth and depth of access to the capital markets
Financial flexibility (liquidity/covenant constraints)
Pro forma balance sheet analysis allows potential acquirers to assess
leverage breakpoints and their associated ratings outcomes in order to

develop a comprehensive financing plan
Significant debt-financed transactions can erode credit profile and can
lead to a ratings downgrade

The determination of potential financing structures is often bound by the
M E R G E R
trade-offs between maximizing EPS subject to limiting ratings pressure
95
Sample transaction 100% cash consideration
Acquirer
Target
Adjustments
Pro forma
Balance sheet:
Total debt
Shareholders equity value
Minority interest
$800.0
950.0
0.0
$575.0
525.0
0.0
$659.8
(525.0)
0.0
$2,034.8
950.0
0.0
Income statement:
LTM EBITDA
LTM EBIT
LTM interest expense
$226.0
176.0
55.0
$119.0
94.0
40.0
42.6
$345.0
270.0
137.6
84.2%
45.7%
109.5%
52.3%
214.2%
68.2%
3.5x
4.5
4.1
3.2
4.8x
6.1
3.0
2.4
5.9x
7.5
2.5
2.0
M E R G E R
Capitalization:
Debt/equity
Debt/total capitalization1
Coverage ratios:
Debt/LTM EBITDA
Debt/LTM EBIT
LTM EBITDA/interest
LTM EBIT/interest
Note: excludes lease-related leverage and hybrid securities

1 Includes minority interest
96
Sample transaction100% stock consideration
Acquirer
Target
Adjustments
Pro forma
Balance sheet:
Total debt
Shareholders equity value
Minority interest
$800.0
950.0
0.0
$575.0
525.0
0.0
$0.0
125.3
0.0
$1,375.0
1,600.3
0.0
Income statement:
LTM EBITDA
LTM EBIT
LTM interest expense
$226.0
176.0
55.0
$119.0
94.0
40.0
0.0
$345.0
270.0
95.0
84.2%
45.7%
109.5%
52.3%
85.9%
46.2%
3.5x
4.5
4.1
3.2
4.8x
6.1
3.0
2.4
4.0x
5.1
3.6
2.8
M E R G E R
Capitalization:
Debt/equity
Debt/total capitalization1
Coverage ratios:
Debt/LTM EBITDA
Debt/LTM EBIT
LTM EBITDA/interest
LTM EBIT/interest
Note: excludes lease-related leverage and hybrid securities

1 Includes minority interest
97
Pro forma balance sheet sensitivities

Debt/total
Debt/total capitalization
capitalization
Stock consideration
Similar to EPS analysis, sensitivities provide

Sensitivities should demonstrate the impact
of changes to relevant metrics

Consideration (stock vs. cash)
Premium
the whole picture
Estimates (EBITDA)
0.0%
25.0%
50.0%
75.0%
100.0%
10.0%
67.3%
62.4%
57.4%
52.5%
47.5%
20.0%
67.9%
62.6%
57.3%
52.0%
46.6%
30.0%
68.5%
62.8%
57.2%
51.5%
45.7%
40.0%
69.4%
63.2%
57.0%
50.7%
44.4%
50.0%
70.3%
63.5%
56.8%
50.0%
43.2%
Assumptions (premium, interest rates,
etc.)
Debt/EBITDA
Debt/EBITDA
EBITDA/interest
EBITDA/interest
M E R G E R
Stock consideration
0.0%
25.0%
50.0%
75.0%
100.0%
10.0%
5.66x
5.24x
4.83x
4.41x
3.99x
20.0%
5.82
5.36
4.91
4.45
3.99
30.0%
6.00
5.49
4.99
4.49
3.99
40.0%
6.25
5.68
5.12
4.56
3.99
50.0%
6.50
5.88
5.25
4.62
3.99
Premium
Premium
Stock consideration
0.0%
25.0%
50.0%
75.0%
100.0%
10.0%
2.63x
2.89x
3.19x
3.39x
3.63x
20.0%
2.54
2.81
3.13
3.37
3.63
30.0%
2.45
2.73
3.06
3.35
3.63
40.0%
2.34
2.62
2.97
3.32
3.63
50.0%
2.23
2.51
2.88
3.29
3.63
98

JP Morgan M&amp;a DCF and Merger Analysis

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JP Morgan M&amp;a DCF and Merger Analysis

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S T R I C TL Y

M&A - DCF and M&A analysis

M&A - DCF and M&A analysis

Discounted cash flow analysis

Relative value analysis

M&A - DCF and M&A analysis

multiples paid for

M&A - DCF and M&A analysis

The valuation process

(2) Publicly Traded

The valuation summary is the most important slide in a

M&A - DCF and M&A analysis

Public trading comparables

M&A - DCF and M&A analysis

A primer: firm value vs. equity value

Market value of all capital invested in a business(1)

Market value of the shareholders equity

Liabilities and Shareholders Equity

Net debt, etc.

M&A - DCF and M&A analysis

Discounted cash flow analysis

Relative value analysis

M&A - DCF and M&A analysis

Discounted cash flow analysis as a valuation methodology

Does not include a

multiples paid for

Overview of DCF analysis

Corporate clients often use DCF analysis internally

One of several techniques used in M&A transactions; others include:

Comparable companies analysis

DCF analysis may be the only valuation method utilized, particularly if no

comparable publicly-traded companies or precedent transactions are

Overview of DCF analysis

DCF analysis is a forward-looking valuation approach, based on several key

projections and assumptions

What is the projected operating and financial performance of the

be simple or extremely elaborate

rules of thumb always apply

The process of DCF analysis

business at the end of the forecast period

Estimate the companys weighted-average cost of capital to

determine the appropriate discount rate range

Determine a range of values for the enterprise by discounting the

projected free cash flows and terminal value to the present

accounted for in cash flow projections

DCF theory and its application

commensurate with their risk

the cost of equity capital (often referred to as flows to shareholders or dividend

The two basic DCF approaches must not be confused

DCF of unlevered cash flows (the focus of these materials)

(firm value or enterprise value)

added) to determine the present value of the equity (equity value)

DCF of levered cash flows (most common in valuation of financial institutions)

Cash flows are discounted at the weighted-average cost of capital

Hence, always present a range for the valuation!

Three key drivers

terminal values, etc.)

Use appropriate cost of capital approach

Always double-check with a calculator!

The first step in DCF analysis is projection of unlevered

Calculation of unlevered free cash flow begins with financial projections

Target companys management

Projecting financial statements

estimated to reduce dependence on the terminal value

JP Morgan M&a DCF and Merger Analysis

JP Morgan M&a DCF and Merger Analysis