Mozer Methods Of Valuation

Page 1

للتقييم غزالة أبو Talal Abu-Ghazaleh Valuationطالل

© Talal Abu-Ghazaleh Valuation

2007

Valuing your IP: What is it worth?

Methods of Valuation: Which Type is Right for You?

Amman, October 31, 2007

Prof. Dr. Ulrich Moser, TAGValuation

Khaled Sewiti, TAGValuation

Page 2

Intellectual Property Valuation Talal Abu-Ghazaleh Valuation

طالل أبو غزالة للتقييم

IP Valuation Methods

Agenda

• Introduction to IP Valuation

• Basic Valuation Concepts

• Application of Income Approach

• Reasonableness of Valuation Result

• Appendix: Case Study

Page 3



11

Introduction to IP Valuation

Page 4



Basics on IP Valuation

• Intellectual Property and Intangible Assets

• Subject Asset

• Purpose of Valuation

Agenda

Page 5



Types of Intangible Assets

Supplier Capital• Favorable Contracts

Innovation Capital• Patents

• Know How

Human Capital• Assembled Workforce

• Sales Force

Process Capital• Organization

• Computer Software

Customer Capital• Customer Relationships

• Trademark

• Distribution Network

Investor Capital• Relationships

Location Capital

Page 6



Classification of IFRS 3 / FAS 141

Examples of intangible assets to be valued separatelyExamples of intangible assets to be valued separately

For the valuation, usually an external appraisal is usedFor the valuation, usually an external appraisal is used

Marketing-related intangible assets Trade marks Internet domain names Non-competition agreements

Customer-related intangible assets Customer lists Order or production backlog Customer contracts Customer relationships

Artistic-related intangible assets Plays Books Pictures

Contract-based intangible assets Licensing, royalty agreements Leasing agreements Broadcasting rights

Technology-based intangible assets Patented and unpatended

technologies Software Databases Secret formulas, processes

Starting point is a strict

identification process!!

Page 7



Fair Values - January 1, 200X

Goodwill

Working Capital

Tangible Fixed Assets

ENTITY

ENTITY

Portfolio

Proprietary TechnologyTM

PatentsIntellectual Property Rights

Contracts

Customer Relationship

…

Software

Market Value of

Equity

Market Value of

Debt

Assets and Liabilities of an Enterprise

Page 8



Valuation of Enterprise vs. Valuation of Assets

January 1, 200X

Goodwill

Working Capital


ENTITY

ENTITY

Portfolio

Proprietary TechnologyTM

PatentsIntellectual Property Rights

Contracts


…

Software

Market Value of

Equity

Market Value of

Debt

Implications• Asset to be valued is part

of a portfolio of assets(= Enterprise)

• The portfolio of assetsgenerates a cash flow

• Contribution of SubjectAsset has to be Identified

Page 9



Purpose of Valuation

LicensePurchase/Sale

Transactions

Debt / EquityStrategic alliance

…

Transaction Price Financial and tax purposes

IAS/IFRS-/ US GAAP-Accounting

(Purchase Price Allocation and Impairment Test)

Communication

internal

external (capitalm

arket)

Portfolio Management

Corporate Strategy

Collateral

Business Intellectual Property Finance

Page 10



22

Basic Valuation Concepts

Page 11



Basic Valuation Concepts

Future benefits are the driver of the value of assets

Net Present Value

Discounted

Cash-flow methods

Expected income of an alternative investment

Income Approach

Market Price

Market Transaction

Method

Judgement of others in the marketplace

Market Approach

Reproduction Cost

Replacement Cost

Amount of Expenses

Cost Approach

Real Options Approach

Page 12



Methodology of Income Approach

Time

Historical Performance

Financial Projections

Capitalizing with Cost of Capital

Future Cash Flows of the Subject Asset

DCF – MethodNet Present Value

Page 13



Market Approach – Basic Idea

Valuation of an asset using known transaction prices of

comparable assets

Example: Application of Sales Multiples

SalesComparable Asset

Transaction PriceComparable asset

SalesAsset to be valued

Market VaueAsset to be valued

Value Asset to be valued = Transaction Price Comparable

Sales Comparable

* Sales Asset to be valued

Page 14



33

Application of Income Approach

Page 15



Application of Income Approach

• Analysis of Subject Asset - Example Patent Protected Technology

• Analysis of Income Contribution of Subject Asset

• Valuation Methods Based on Income Approach

• Determination of Discount Rate

• Tax Amortization Benefit

Agenda

Page 16



Examples “Packaging”/ “Insulation sleeve”

Packaging Insulation Sleeve

EP

1 3

62 7

93

A2

Page 17



Characteristics of Patents – Analysis of Value Drivers

• Strategic Alignment• Availability of Comparable

Technology• Stage of development• Innovativeness• Technology Lifecycle

• Legal status / Validity• Claim Coverage• Territorial scope• Age

Legal ProtectionTechnology

• Strategic Alignment• Product Lifecycle• Protected Coverage

Product/Process

Commercialization

Patent value

Realization

Market potential

Industry structure

ExploitationBusiness use

Potential Future UseBlocking

Competitive advantagesExclusivity

Freedom-to-Operate

Market share

Margin

Complementary Assets

Solution

Value of unprotected

technologyValue of protection

rights

Page 18



Value of a Patent

Patent Value= Value of Protected Technology

Value of protection rights

Value of Business Unit• Owning the patent• Lack of Protection

Rights

Value of not patent protected technology

Lack of ProtectionRights• Trade Secret• Availability of

Technology

+

=

Page 19



Valuation of the Protected Technology

Products

Competitor

Patent-

portfolio

PatentePa 3 Pa 5 Pa 1 Pa 7 Pa 4 Pa 6Pa 2

P 1 P 2

P 1 P 2

Improvements, Features

Fundamental Invention

P 3

Complementary Protection

Valuation of Patent Portfolio or Single Patents

KnowHow

Page 20



Overview

Time

Historical Performance

Financial Projections

Capitalizing with Cost of Capital / Return Rate on Asset

Future Cash Flows of the Subject Asset

DCF – MethodNet Present Value

Three Steps1) Analyse the Cash Flows2) Project Future Cash Flows3) Estimate Capitalization Rate

Page 21



Analysis of Free Cash Flows of Business Unit

Sales

./. Cost of Sales

./. SG&A

Operating Profit

./. Tax

NOPLAT

./. Changes WC

./. CapEx

Free Cash Flow

Marketpotential

Market Share

Incremental Income Analysis• Increased Revenues

• Decreased Costs

IndustryStructue

CompetitiveAdvantages

Business Value

Capitalization

Royalty Analysis• Relief-from-Royalty

• Profit split

• Royalty Income

Residual Value / Excess Earnings

IP Valuation ModelsFinancial Impact of (Un-) Protected Technology on Free Cash Flows

Other Approaches

Page 22



Incremental Income Analysis(Premium Prices, Cost Savings)

Sales

./. Cost of Sales

./. SG&A

Operating Profit

./. Tax

NOPLAT

./. Changes WC

./. CapEx

Free Cash Flow

Marketpotential

Market Share

Basic Assumption• Comparable business unit without

protected technology is available

IndustryStructue


Business Value

Capitalization

Approach• Comparison of FCF based on protected

technology and FCF not applying

subject asset

CommentsAnalysis Impact of (Un-) Protected Technology on Free Cash Flows

Application is limited!• e.g. cost reductions realized by process patents (?)• e.g. price premium for a product feature – caused by patent or trademark

Page 23



Residual Value Method / Excess Earnings (Formula Method)

January 1, 200X

Asset to be valued

Working Capital


ENTITY

ENTITY

Portfolio

Proprietary TechnologyTM 2

TM 1Intellectual Property Rights

Contracts


…

Software

Market Value of

Equity

Market Value of

Debt

Enity Value (Income Approach)

./. Value of all other assets (e.g. Fixed assets, trademarks, Contracts)

= Value of asset to be valued

Valuation ofCore Asset

Application is limited - Example

Contribution to a joint venture

Other interpretations of approach

Assump t i ons

Risk of overerstimating

Page 24



Approaches to Calculate Residual Value

Income of Business Unit

Entity Value of Business Unit

Capitalization

Excess Earnings ApproachResidual Value Approach

./.

Value of all Other Assets,

e.g. Tangible Fixed Assets, Working Capital, Trademarks

Residual Value


./.

Contribution of all Other Assets to Income of Business Unit

Return on AssetsReturn of Assets

Excess Earnings

Capitalization

Residual Value!=

Page 25



Royalty Method (Relief-from-Royalty, Profit Split)

Sales

./. Cost of Sales

./. SG&A

Operating Profit

./. Tax

NOPLAT

./. Changes WC

./. CapEx

Free Cash Flow

Royalty Income

Basic Assumption• Availability of comparable licensing

transactions and detailed dataSaving ofRoyalty

Payments

Business Value

Capitalization

Approach => hybrid• Applying Market Transactions

• Applying profit split analysis

CommentsAnalysis of Royalty Savings

Application• Risk of underestimating value

Royalty Income• Analysis of market transactions• Favourable or unfavourable contract

Page 26



Project Future Cash Flows - Application of Lifecycle Analysis

Typical Life Cycle-models

DATA

Plausibility check of data

Modelling

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Produkt I 50 70 80 100 120 120 120 120 100 90 60 30 10Produkt II 112 108 117 126 140 134 164 153 170 170 240 293 357... Price Volume1

Research Studies

Benchmarks

Analysis of Products

Analysis of Technology

2

3

4

5

Business Plan

business

industry

Page 27



Determination of Capitalization Rate

Januar 1, 200X

Goodwill

Working Capital


Market Value ofEquity

Debt

Intangible Assets

X Cost of Equity

X Cost of Debt(after Tax)

Assetspecific

Risik

high

low

Rate of Return on individual Asset Weighted Average Cost of Capital

Asset Specific Risk Premium

=

+ / -

Weighted Average Rate of Return on total Assets Weighted Average Cost of Capital=

Page 28



WACC to WARA – Example

Assets Fair Value WARA

Goodwill 31.257,79 15,81%Net Working Capital 64.670,01 3,00%Fixed Assets 6.050,00 5,00%Trademark 95.391,45 12,85%Entity Value 197.369,25 9,85%

Weighted Average Cost of Capital

to

Weighted Average Return on Assets

Page 29



Determination of Weighted Average Cost of Capital – WACC

t)(1 DebtEquity

Debtr DebtEquity

Equity rr MM

M

Debt MM

M

Equity

(1-t) = Tax shield(1-t) = Tax shield

Page 30



Definition of Cost of Equity

Application of Capital Asset Pricing Model

Risikfree Rate iRisikfree Rate i

Market Risik Premium(rm – i)

Market Risik Premium(rm – i)

ß(Measure for

Systematic Risik)

ß(Measure for

Systematic Risik)

Cost of Equity

rE

Cost of Equity

rE

++

..

Page 31



Industry Specific ß-Factors

Industry Range

Automotive 0,5 0,8

Biotechnology 1,3 1,5

Building Materials 0,6 0,7

Chemical 0,7 0,8

Entertainment > 1,2

Environmental 0,4 0,5

Financial Services 0,5

Food & Beverage 0,4 0,6

Internet > 2

Metal Fabricating 0,7 0,8

Publishing 0,6 0,7

Semiconductor > 2

Software > 2

Steel 0,7 1

Util ity 0,5 0,6

Quelle: www.Damodaran.com

Page 32



Tax Amortisation Benefit (TAB)

Maximum Amount to be Payed for an Asset

Tax Deductability of Purchased Asset:Net Present Value of future tax benefits based on

depreciation/amortisation of purchase price

IncrementalIncome

+

ResidualValue

+

Relief-from-Royalty

+

MarketApproach

-

CostApproach

(+/-)

Purchase Price AllocationAsset Deal – Share Deal?

Page 33



Tax Amortisation Benefit - Basics

Fair Value = NPV (FCF) + TAB

TAB = t * NPV (Depreciation)

Depreciation = Fair Value / n

TAB = NPV (Fair Value / n)

Fair Value = NPV (FCF)

+ NPV (Fair Value / n)

Page 34



Tax Amortisation Benefit - Calculation

n

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VNPVV

1

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VsNPVV

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t

)1(1

1

qqq

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NPVV

n

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StepUp

n

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with

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Page 35



Reasonableness of Valuation Results

44

Page 36



Plausibility Check of Valuation Results

30405060

8070

90

100

80

40

115

15

Value Mio. €

Tangible fixed assets

Working Capital

Patent and Trademark Portfolio

Estimate of business value

350

Value of goodwill

Business Value Going Concern

Other Intanbible Assets

Page 37



Case Study

Packaging Solution

AppemdixAppemdix

Page 38



Basic Data

Case StudyCase Study

Page 39



Business Plan „Packaging Solution“

Remaining Useful Life of Patent: 7 Years (2013)Remaining Useful Life of Patent: 7 Years (2013)

Mio. EUR 2007 2008 2009Sales 320 336 349Cost of Sales -214 -224 -232Gross Profit 106 112 117SG&A -54 -56 -57Operating Profit 51 56 60Tax 40% -20 -22 -24Net Operating Profit 31 34 36

Page 40



Balance Sheet „Packaging Solution“

December 31, 2006 (Mio. EUR)

Goodwill

Patents

Trademarks

Other IntangibleAssets

Working Capital 75

Tangible Fixed Assets 100

ENTITY

ENTITY

Market Value of

Equity

Market Value of

Debt

to bedetermined

Equity : Ratio ofPeer Group 60 : 40

Page 41



General Assumptions

Market ResearchAnnual Growth Rate after 2009 about 2%BackgroundMature market, very long lifecycle

Technology ResearchExpectation of new technology after 2013

Risk Free Rate 4,00%

Market Risk Premium 4,50%

ß-Factor 1,2

Cost of Debt 6,00%

Tax Rate 40,00%

Page 42



Application of Income approach

Case StudyCase Study

Page 43



Analysis of Free Cash Flows of Business Unit

Sales

./. Cost of Sales

./. SG&A

Operating Profit

./. Tax

NOPLAT

./. Changes WC

./. CapEx

Free Cash Flow

Marketpotential

Market Share

Incremental Income Analysis• Increased Revenues

• Decreased Costs

IndustryStructue


Business Value

Capitalization

Royalty Analysis• Relief-from-Royalty

• Profit split

• Royalty Income

Residual Value / Excess Earnings

IP Valuation ModelsFinancial Impact of (Un-) Protected Technology on Free Cash Flows

Other Approaches

Page 44



Calculation of Weighted Average Cost of Capital

Weighting

Cost of Equity 9,40% 60% 5,64%

Risk free rate 4,00%

Risk Premium 5,40%

Market Risk Premium 4,50%

ß-Factor 1,2

Cost of Debt 3,60% 40% 1,44%

Cost of Debt pre Tax 6,00%

Tax 40% 2,40%

Weighted Av erage Cost of Capital 7,08%

Premium Patents 2,00%Capitalization Rate 9,08%

Page 45



Calculation of Discount Factors

111,09081,0908

2007 2008 2009 2010 2011 2012 2013

0,9168 0,8404 0,7705 0,7063 0,6476 0,5936 0,5442

111,09081,0908

111,090821,09082

111,090831,09083

111,090841,09084

111,090851,09085

111,090861,09086

111,090871,09087

Weighted Average Cost of Capital 9,08% Weighted Average Cost of Capital 9,08%

Discount Factor Discount Factor

Page 46



Royalty Analysis

Sales

./. Cost of Sales

./. SG&A

Operating Profit

./. Tax

NOPLAT

./. Changes WC

./. CapEx

Free Cash Flow

Royalty Income

Basic Assumption• Availability of comparable licensing

transactions and detailed dataSaving ofRoyalty

Payments

Business Value

Capitalization

Approach => hybrid• Applying Market Transactions

• Applying profit split analysis

CommentsAnalysis of Royalty Savings

Application• Risk of underestimating value

Royalty Income• Analysis of market transactions• Favourable or unfavourable contract

Page 47



Estimation of Royalty Rates

Royalty-Rate

Royalty Source ResearchMedical Device03-Dec-03Licensee: CHLicensee Business:

Licensor:Massachusetts

TechnologyLicensor Business:

AcademiaRoyalty Rate, % (low range):

1.50Royalty Rate, % (high range):

2.00Upfront Fee:

Licensed Property:This Agreement is made and entered into this day of , 1993. The Licensor hereby grants to LICENSEE the right and license to make, have made, use, lease and sell the LICENSED PRODUCTS and to practice the LICENSED PROCESSES in the TERRITORY for the FIELD OF USE. Technology relates to Case, "". "PRODUCT AREA" shall mean:. Compensation Detail:Royalty: For LICENSED PRODUCTS and LICENSED PROCESSES which do not contain substantial technical contribution, improvement, or change developed by LICENSEE, Running Royalties in an amount equal to Two Percent (2%) of the NET SALES of the LICENSED PRODUCTS leased or sold by LICENSEE and/or its SUBLICENSEE(S). For LICENSED PRODUCTS and LICENSED PROCESSES containing a substantial technical contribution, improvement, or change developed by LICENSEE, Running Royalties in an amount equal to One and One-Half Percent (1.5%) of the NET SALES of the LICENSED PRODUCTS leased or sold by SUBLICENSEE(S), or Twelve Percent (12%) of gross revenue received by LICENSEE from SUBLICENSEE(S), whichever of the two above referenced means of calculating sublicensing revenue yields a smaller number.Source: Form S-1

External Sources EY SourcesAnhaltspunkte für die Bestimmung des Lizenzsatzes in den einzelnen Industriezweigen können daraus entnommen werden, daß z. B. im allgemeinen

• in der Elektroindustrie ein Lizenzsatz von 1/2 - 5% • in der Maschinen- und Werkzeugindustrie ein Lizenzsatz von 1/3 - 10% • in der chemischen Industrie ein Lizenzsatz von 2 - 5% • auf pharmazeutischem Gebiet ein Lizenzsatz von 2 - 10%

vom Umsatz üblich ist. (11) Für den Fall besonders hoher Umsätze kann die nachfolgende, bei Umsätzen über 3 Millionen M einsetzende Staffel als Anhalt für eine Ermäßigung des Lizenzsatzes dienen, wobei jedoch im Einzelfall zu berücksichtigen ist, ob und in welcher Höhe in den verschiedenen Industriezweigen solche Ermäßigungen des Lizenzsatzes bei freien Erfindungen üblich sind. Bei einem Gesamtumsatz [Nach Rückfrage zur Euroumstellung beim Bundesministerium für Wirtschaft und Arbeit wurde am 14. November 2002 folgende Antwort gegeben: "Die Vergütungsrichtlinie ist nicht auf Euro-Beträge umgestellt worden. Insoweit ist darauf hinzuweisen, dass es sich bei dieser Richtlinie nicht um ein Gesetz handelt. DM-Beträge müssen daher entsprechend dem offiziellen Umrechnungskurs auf Euro-Beträge umgerechnet werden."]

• von 0-3 Millionen DMkeine Ermäßigung des Lizenzsatzes,

• von 3-5 Millionen DM10% ige Ermäßigung des Lizenzsatzes für den 3 Millionen DM übersteigenden Umsatz,

• von 5-10 Millionen DM 20% ige Ermäßigung des Lizenzsatzes für den 5 Millionen DM übersteigenden Umsatz,

• von 10-20 Millionen DM30% ige Ermäßigung des Lizenzsatzes für den 10 Millionen DM übersteigenden Umsatz,

• von 20-30 Millionen DM…..

Benchmarks

Literature

Examples

Page 48



Projection of Future Revenues

AssumptionsSales Projection Annual Growth Rate after 2009 2%Background Mature market, very long lifecycle, expectation

of new technology after 2013

Business Plan Extrapolation

actual proj. proj. proj.Mio. EUR 2006 2007 2008 2009 2010 2011 2012 2013Sales 300 320 336 349 356 364 371 378Sales Growth Rate 6,7% 5,0% 4,0% 2,0% 2,0% 2,0% 2,0%

Page 49



Relief-from-Royalty

TAB = Tax Amortisation Benefit

Mio. EUR 2007 2008 2009 2010 2011 2012 2013Sales 320 336 349 356 364 371 378Royalty Savings 5% 16 17 17 18 18 19 19Tax 40% -6 -7 -7 -7 -7 -7 -8Royalty Savings after Tax 10 10 10 11 11 11 11Discount Factor 0,9168 0,8404 0,7705 0,7063 0,6476 0,5936 0,5442Present Value 9 8 8 8 7 7 6Net Present Value 53TAB 1,4022 21Fair Value 74

Page 50



Projection of Future Cash Flows

Sales Projection• Annual Growth Rate 2%

Operating Profit Margin• Average of Profit Margin

2006 – 2008 = 16,6%

Business Plan

Mio. EUR 2007 2008 2009 2010 2011 2012 2013Sales 320 336 349 356 364 371 378Cost of Sales -214 -224 -232Gross Profit 106 112 117SG&A -54 -56 -57Operating Profit 51 56 60 59 60 62 63Tax 40% -20 -22 -24 -24 -24 -25 -25Net Operating Profit 31 34 36 36 36 37 38

Page 51



Relief-from-Royalty – Profit Split Analysis


Mio. EUR 2007 2008 2009 2010 2011 2012 2013Sales 320 336 349 356 364 371 378Cost of Sales -214 -224 -232Gross Profit 106 112 117SG&A -54 -56 -57Operating Profit 51 56 60 59 60 62 63Profit Split 25% 13 14 15 15 15 15 16Tax 40% -5 -6 -6 -6 -6 -6 -6Net Cash Flow 8 8 9 9 9 9 9Discount Factor 0,9168 0,8404 0,7705 0,7063 0,6476 0,5936 0,5442Present Value 7 7 7 6 6 5 5Net Present Value 44TAB 1,402184 18Fair Value 61

Page 52



Incremental Income Analysis

Sales

./. Cost of Sales

./. SG&A

Operating Profit

./. Tax

NOPLAT

./. Changes WC

./. CapEx

Free Cash Flow

Marketpotential

Market Share

Basic Assumption• Comparable business unit without

protected technology is available

IndustryStructue


Business Value

Capitalization

Approach• Comparison of FCF based on protected

technology and FCF not applying

subject asset

CommentsAnalysis Impact of (Un-) Protected Technology on Free Cash Flows

Application is limited!• e.g. cost reductions realized by process patents (?)• e.g. price premium for a product feature – caused by patent or trademark

Page 53



Incremental Income Analysis


Application of incremental income analysis is critical!

Mio. EUR 2007 2008 2009 2010 2011 2012 2013Increase of Revenues 32 34 35 36 36 37 38Increase of Expenses 14 15 16 16 16 17 17Incremental Income 18 18 19 20 20 20 21Tax 40% -7 -7 -8 -8 -8 -8 -8Incremental Income after Tax 11 11 12 12 12 12 12Discount Factor 0,9168 0,8404 0,7705 0,7063 0,6476 0,5936 0,5442Present Value 10 9 9 8 8 7 7Net Present Value 58TAB 1,4022 23Fair Value 81 The key issue is to identify the

Incremental Income.

Page 54



Residual Value Method / Excess Earnings (Formula Method)

January 1, 200X

Asset to be valued

Working Capital


ENTITY

ENTITY

Portfolio

Proprietary TechnologyTM 2

TM 1Intellectual Property Rights

Contracts


…

Software

Market Value of

Equity

Market Value of

Debt

Enity Value (Income Approach)

./. Value of all other assets (e.g. Fixed assets, trademarks, Contracts)

= Value of asset to be valued

Valuation ofCore Asset

Application is limited - Example

Contribution to a joint venture

Other interpretations of approach

Assump t i ons

Risk of overerstimating

Page 55



Residual Value & Excess Earnings Approach



Capitalization


./.



Residual Value


./.



Excess Earnings

Capitalization

Residual Value!=

Page 56



Calculation of Residual Valueproj. proj. proj. LC LC LC LC

Mio. EUR 2007 2008 2009 2010 2011 2012 2013Sales 320 336 349 356 364 371 378Cost of Sales -214 -224 -232Gross Profit 106 112 117SG&A -54 -56 -57Operating Profit 51 56 60 59 60 62 63Tax 40% -20 -22 -24 -24 -24 -25 -25Net Operating Profit 31 34 36 36 36 37 38Changes WC -15 -5 -2 -2 -2 -2 103Net Capital Expenditure 11,0 1,0 13,0 1,0 15,0 15,0 44,0Net Cash Flow 26,7 29,4 47,2 34,6 49,3 49,9 184,7Discount Factor 7,08% 0,9339 0,8721 0,8145 0,7606 0,7103 0,6634 0,6195Present Value 25,0 25,6 38,4 26,3 35,0 33,1 114,4Net Present Value 297,83 Business Unit "Packaging Solution"Fair Value

Fixes Assets -100,00 Cost ApproachWorking Capital -80,00 Cost ApproachOther Intangible Assets -29,57 Trademark, Other Patents, Others: Relief from Royalty

Residual Value 88,26TAB 1,4022 35,50Fair Value 123,76


Page 57



Residual Value & Excess Earnings Approach



Capitalization


./.



Residual Value


./.



Excess Earnings

Capitalization

Residual Value!=

Page 58



Calculation of Excess Earnings Approach

Mio. EUR 2006 2007 2008 2009 2010 2011 2012Sales 320 336 349 356 364 371 378Cost of Sales -214 -224 -232Gross Profit 106 112 117SG&A -54 -56 -57Operating Profit 51 56 60 59 60 62 63Tax 40% -20 -22 -24 -24 -24 -25 -25Net Operating Profit 31 34 36 36 36 37 38Charges 4.94% -16 -17 -17 -18 -18 -18 -19Net Cash Flow 15 17 19 18 18 19 19Discount Factor 0.9168 0.8404 0.7705 0.7063 0.6476 0.5936 0.5442Present Value 14 14 14 13 12 11 10Net Present Value 88TAB 1.402184 35Fair Value 124

AssumptionsSales Growth after 2008 2.0%Operating Profit Margin after 2008 16.6%Contributory Asset Charges after Tax 4.94%


Page 59



Calculation of Income Contribution of Other Assets: Contributory Asset Charges

Deduction of Other Assets Using Contributory Asset Charges

Fair Value Return of Asset Percent of Salespre Tax after Tax

Sales 2006 320Tax 40,00%

Tangible Assets 100 9% 9,0 2,8%Working Capital 80 3% 2,4 0,8%Trademark *) 0,50% 0,3%Other Patents *) 0,80% 0,5%Other Intangible Assets *) 1,00% 0,6%Contributory Asset Charges After Tax 4,9%*) Application of Relief-from-Royalty

Page 60



Interpretation of Valuation Results

Patent Value (Mio. EUR)Net Present Value 88 53 44Residual Value Charge 4.9% 7.0% 7.5%Relief from Royalty Royalty Rate 8.4% 5.0% 4.1%Profit Split Ratio 50.4% 30.1% 25.0%

Patent Value (Mio. EUR)Fair Value (including TAB) 1.4022 124 74 61Residual Value Charge 4.9% 7.0% 7.5%Relief from Royalty Royalty Rate 8.4% 5.0% 4.1%Profit Split Ratio 50.4% 30.1% 25.0%

Page 61



Tax Amortisation Benefit - Modelling

Depreciation Method linear

Calculation of tax amortizaton benefit Tax amortization period 7Trademark Cost of Capital 9,08%

Year MonthPresent

value factor Amortizatio

n factor

Present value

amortization factor

1 12 0,9168 0,1429 0,1310 Total sum of present value amortization factors 0,7171

2 24 0,8404 0,1429 0,1201

3 36 0,7705 0,1429 0,1101 Total corporate tax rate 40,0%

4 48 0,7063 0,1429 0,1009

5 60 0,6476 0,1429 0,0925 Total tax savings percentage 0,2868

6 72 0,5936 0,1429 0,0848

7 84 0,5442 0,1429 0,0777 Converted into a step up (1/1-total tax savings %) 1,4022

8 96 0,4989 0,0000 0,0000

9 108 0,4574 0,0000 0,0000

10 120 0,4193 0,0000 0,0000

11 132 0,3844 0,0000 0,0000

12 144 0,3524 0,0000 0,0000

13 156 0,3231 0,0000 0,0000

14 168 0,2962 0,0000 0,0000

15 180 0,2715 0,0000 0,0000

Page 62



Contact

Prof. Dr. Ulrich MoserTAGValuation

Erfurt University of Applied Sciences (Germany)

WP/StB/CVATel.: +962 6 5100600 Fax: +962 6 510-0601

E-Mail: [email protected]

Page 63



Contact

Khalid SweitiTAGValuation Manager

CPAAmman-Jordan

Tel.: +962 6 5100600 Fax: +962 6 510-0601

E-Mail: [email protected]