BUSINESS VALUATION

REASONS QUOTED COMPANIES

When there is a takeover bid and

the offer price is an estimated fair value in excess of the current market price of the shares.

UN-QUOTED COMPANIES
Wishes to go public (to fix issue

price) Scheme of merger Shares are sold Shares are pledged as collateral for a loan

MERGERS & TAKEOVERS

TAKE OVER Acquiring controlling interest in voting share capital of other company Recent take overs SCB tookover UNION BANK ABN AMRO to PRIME BANK BARCLAYS to ABN AMRO

MERGERS & TAKEOVERS

MERGER Business combination that result in creation of a new reporting company formed from the combining parties, in which the shareholders of the combining entities come together in a partnership for the mutual sharing of the risks and benefits of the combined entity and no one party is dominant . EXAMPLES PWH merged with COOPERS AND LYBRAND AND FORMED PWC SHALL AND PREMIER OIL (UPSTREAM AND DOWNSTREAM)

MERGERS & TAKEOVERS

REASON FOR MERGERS AND TAKEOVERS Synergistic effect (2+2 = 5) Acquisition provide means of entering a market at lower cost than from scratch Companies with history of little growth and low returns usually merg. Other Factors Operating economies- elimination of duplicate and competing facilities Management Diversification Spreading risk Asset Backing Liquidity Cost may be cheaper method than internal expansion Tax factors tax efficient Defensive merger -

BUSINESS VALUATION
SUBSIDIARY COMPANIES
Holding company negotiating the

sale of subsidiary to a management buyout or to external buyer.

BUSINESS VALUATION MODELS

BUSINESS VALUATION MODELS

EARNING MODELS

P/E

RATIOS

DIVIDEN ARR YIELD MODEL MODEL

P/E RATIO MODEL

P/E Ratio = Price EPS TRAITS
Common for controlling

interest calculations

Higher P/E results in higher

price

Dictates share price

P/E RATIO MODEL

HIGHER P/E RATIO INDICATES
OPTIMISTIC EXPECTATIONS Expectations EPS will grow rapidly in future Many internet Cos in 90s were not in profit but had high value

P/E RATIO MODEL

CASE STUDIES
April 1999, Internet Portal

Company Yahoo with very limited assets commanded a higher share value than Boeing.
Amazon.com had valued $20

billion but had yet to make profits.

P/E RATIO MODEL

SECURITY OF EARNINGS

Well established low

risk company will have higher P/E ratio then similar company whose earnings are subject to greater uncertainty.

P/E RATIO MODEL

STATUS P/E OF UN-QUOTED IS

FURTHER DISCOUNTED DUE TO HIGH RISK PERMIUM CASE STUDY FINANCIAL TIMES Construction 9.03% Food processing 10.47% Chemicals 17.08% Telecom 23.03% Software 35.98%

P/E RATIO MODEL

ABC Takeover

XYZ(un-quoted)

M.V of share = 3.20 EPS = 0.20 P/E ratio = 16

Shares = 100,000 Current Earnings = 50,000

ARR MODEL
Value of business = Estimate future profits ROCE ABC Takeover XYZ(un-quoted)

PAT of XYZ = Rs 480,000 After re-organization by ABC Expected PAT = Rs 600,000 ARR after tax of ABC group for all group companies = 15%

Share value ?????????????

ARR MODEL
TRAITS OF ARR MODEL
Assess maximum price to be paid

Return which acquiring company thinks obtainable after any post acquisition re-organization.

DIVIDEND YIELD MODEL

Dividend Yield = Dividend per share M.V per share Suitable for valuation of small shareholding in unquoted companies, since they cant control decisions affecting the companys profits and earnings.

Lower the dividend yield higher level of growth in share price

Dividend yield of un-quoted company is higher than quoted why ???

DCF Model
Future Cash flows of target company is discounted at current cost of capital in expected pay back period of the acquiring company.

DCF Model
Example
ABC Takeover XYZ(un-quoted)

Year 0 1 2 3 4 5

(100,000) (80,000) 60,000 100,000 150,000 1,50,000

.87 .75 .65 .57 049

ASSET BASED MODEL

TRAITS Intangible assets should be excluded unless have market value Which valuation basis should be used Historic basis Balance sheet value of net assets Meaningless totals NRV basis Minimum value or scrap value basis (not going concern)

ASSET BASED MODEL

Replacement Cost basis Maximum price a buyer might be willing to pay Starting up business from scratch Assessment of replacement of depreciated asset is difficult due to technological changes

ASSET BASED MODEL

DRAWBACK OF ASSET BASE MODEL Ignore unrecorded assets such as goodwill

Comprehensive Illustration
.BC Company ACQUIRES XYZ (PVT) LTD Summarised Balance Sheet of XYZ: Fixed Assets at WDV Patents Current Assets 3,500,000 350,000 1.500.000 5,350,000 525,000 700,000 1,000,000 3,125,000 5,350,000

Longterm loans Current Liabilities S.C(100,000 of Rs 10) Revenue reserves Total

PAT for last five years Year 1 325 thousand Year 2 300 thousand Year 3 320 thousand Year 4 305 thousand Year 5 340 thousand Annual dividend 160 thousand for last five years Revauled fixed assets = 4500 thousand Public companies in similar business have; Avg. Divid. Yield = 18% PE Ratio = 9 Next year budgeted PAT = 375 thousand with 10% growth over next five years ABC use 19% to measure profitibility Similar companies to XYZ earn 12.5% on tangible assets

REQUIRED: Value of share of XYZ (PVT) LTD on different basis$