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MERGERS & ACQUISITIONS
Introduction to Valuation MethodsGranite Equity Leadership Day Presentation
MERGERS & ACQUISITIONSCAPITAL MARKETSFINANCIAL RESTRUCTURINGFINANCIAL ADVISORY SERVICES
HL.com
May 21, 2013
Confidential
Table of ContentsIntroduction to Valuation Methods
Page
Introduction 2
Overview of Valuation Methodologies & Approaches 4g pp
Market Approach 9
Transaction Approach 19
Discounted Cash Flow Approach 28
Di l i 38Disclaimer 38
1
Introduction
Presentation Outline and ObjectivesIntroduction
The objectives of this presentation are to:
Discuss various valuation applications
Provide a more thorough understanding for the three primary valuation methodologies, including:
the Market Approach
the Transaction Approach
the Discounted Cash Flow Approach
Provide a better understanding for some of the key factors that drive valueov de a bette u de sta d g o so e o t e ey acto s t at d ve va ue
3
Overview of Valuation Methodologies & Approaches
Valuation ApplicationsOverview of Valuation
Methodologies & Approaches
Acquisitions or DivestituresHow much should an
acquirer pay or for how much Fairness
Private Equity Portfolio for how much
should the company or
division be sold?
OpinionsDetermine if the
price paid or received is fair
from a financial point of view.
Portfolio CompaniesIndependent valuation of
portfolio companies owned
by PE firms.
Valuation A l i
Hostile DefenseIs the subject
company undervalued? The
b
Hedge Fund Portfolios
Independent valuation of Analysis company may be
vulnerable to a raider.
valuation of illiquid portfolio
securities.
Equity OfferingsAt what price
might a company raise equity
capital?
Debt OfferingsDetermine value
of the issuing company which
ResearchStock price targets and
buy/sell recommendation.
5
may be considered by
lenders.
Valuation MethodologiesOverview of Valuation
Methodologies & Approaches
Valuation Methodologies
T ti Di t d C h
Public market valuation
Market ApproachTransaction Approach
Discounted Cash Flow Approach
Other
Third-party transaction valuation
“Intrinsic” value of the b i
LBO analysisvaluation
Value based on earnings multiples (typically) of public companies
“Relative” valuation
transaction valuation
Value based on transaction multiples at which similar companies have been acquired
business
Present value of future expected free cash flows to all capital providers
Liquidation analysis
Accretion/dilution analysis
Break-up analysis Relative valuation
that compares a firm’s financial performance and risk to selected public companies
Typically higher than publicly traded multiples because of control premium
Expected IPO valuation
Premiums paid analysis
6
Enterprise Value Versus Equity ValueOverview of Valuation
Methodologies & Approaches
Enterprise value is the value of the underlying business operations, or otherwise expressed as the totalvalue of a business/enterprise to all providers of capital, not just providers of equity.
Enterprise Value
Enterprise Value = Market Value of Equity + Net Debt1 + Preferred Stock + Minority Interest
Equity value is the market value of shareholders’ equity.
Equity Value
Market Value of Equity = Shares Outstanding x Current Stock Price
or
Market Value of Equity = Enterprise Value - Net Debt1 - Preferred Stock - Minority Interest
Assets Liabilities and Equity
Enterprise Value
=Market Value of Equity
Net Debt 1
Preferred Stock
7
Note: Diagram not to scale.1. Net debt equals total debt plus capitalized leases minus cash and cash equivalents.
Minority Interest
Valuation SummaryOverview of Valuation
Methodologies & Approaches
When valuing a company, it is standard practice (when possible) to use the three primary methods of
valuation. As illustrated below, the concluded enterprise value often times falls somewhere within the range
of values determined by the Market Approach, Transaction Approach and Discounted Cash Flow Approach.
$105.0
$110.0
$115.0
ns) $103.9
$90.0
$95.0
$100.0
rise
Val
ue ($
mill
ion $100.1
$96.4
$100.1
$87 4
$98.8
$70.0
$75.0
$80.0
$85.0
Ent
erp $86.7
$82.6
$86.7 $87.4
$83.6
Sources: Subject company management, Capital IQ and public SEC filings.
Market Approach Market Approach Market Approach Transaction Approach Discounted Cash Flow Approach6.5x - 7.5x
Adjusted LTM EBITDA6.0x - 7.0x
Adjusted NFY EBITDA5.5x - 6.5x
Adjusted NFY+1 EBITDA6.5x - 7.5x
Adjusted LTM EBITDADiscount Rate: 12.5% - 13.5%Terminal Multipe: 5.0x - 6.0xAdjusted Terminal EBITDA
8
j p y g , p Q p gNote: In the above example, the transaction involving the subject company implies an enterprise value of $89.7 million.LTM – Latest Twelve Months.NFY – Next Fiscal Year.EBITDA – Earnings Before Interest, Tax, Depreciation and Amortization.
Market Approach
IntroductionMarket Approach
The Market Approach is a methodology that values a company by comparing it with publicly held companies
engaged in reasonably similar lines of business
The Market Approach provides a marketable minority indication of value. In other words, no premium for control or discountfor lack of marketability is factored in the value (as would typically be found in an M&A transaction).
The challenge of this analysis is finding companies that are truly comparable to the subject company. No two companies arel bl b i i i f i id if i i h i d h i d b i il i
engaged in reasonably similar lines of business.
exactly comparable, but it is informative to identify companies in the same industry that are impacted by similar economicfactors.
A l th bj t d d t i “ t ti ” “ li d” l l f h fl d i ( dj t
Key Steps in the Market Approach:
Analyze the subject company and determine “representative” or “normalized” levels of revenue, cash flow and earnings (adjustfor extraordinary and/or one-time items, etc.).
Select publicly traded companies for comparison.
Determine the relevant industry-specific multiples of earnings and cash flow (typically) and then calculate those multiples forthe selected publicly traded companies.p y p
Perform a comparative risk analysis with selected publicly traded companies in order to select multiple ranges – simplyselecting the median of a range may not be appropriate.
Determine fair market value of the subject company by applying the selected multiples to the appropriate representative levelsof the subject company.
10
Representative LevelsMarket Approach
The subject company’s earnings are adjusted for non-recurring items, both historically and for the forecasted
period. The resulting adjusted earnings figures represent a normalized level of earnings.period. The resulting adjusted earnings figures represent a normalized level of earnings.
($ millions)
3-Year Fiscal Year Ended December 31, LTM Ended Fiscal Year Ended December 31,Adjusted EBITDA Calculation Average 2005 2006 2007 05/31/2008 2008E 2009E 2010E 2011E 2012E
Reported Net Revenue $151.6 $150.8 $148.5 $155.5 $159.2 $174.1 $187.2 $195.8 $211.5 $228.3Revenue Growth % NA -1.6% 4.7% 11.9% 7.6% 4.6% 8.1% 7.9%
Less: Cost of Goods Sold 130.0 129.4 130.8 132.2 145.4 156.0 161.9 174.8 188.9Gross Profit $20.9 $19.1 $24.7 $27.0 $28.7 $31.2 $33.9 $36.8 $39.4
Gross Margin % 13.8% 12.9% 15.9% 17.0% 16.5% 16.7% 17.3% 17.4% 17.3%
Less: Selling, General & Administrative 15.7 15.5 16.4 16.9 18.4 18.9 19.7 20.4 21.3Less: Other Operating Expenses 2.7 0.5 5.5 (0.1) (0.1) 0.2 0.7 0.2 0.2Add: Depreciation & Amortization 3.4 2.1 1.4 1.6 2.3 2.6 3.2 4.4 4.6
1Add: Total Adjustments1 3.1 2.5 7.5 1.6 1.2 0.4 0.9 0.3 0.2
Adjusted EBITDA $9.4 $9.0 $7.6 $11.7 $13.3 $13.8 $15.2 $17.6 $20.8 $22.8EBITDA Margin % 6.2% 6.0% 5.1% 7.5% 8.4% 7.9% 8.1% 9.0% 9.8% 10.0%
Footnotes:Source: Subject company management.NA - Not Available.EBIT - Earnings Before Interest and Taxes.EBITDA - Earnings Before Interest, Taxes, Depreciation and Amortization.(1) Total Adjustments:
Restructuring Charges $3.1 $0.0 $7.4 $0.3 $0.2 $0.2 $0.0 $0.0 $0.0Plant Closure Costs 0.0 0.0 0.0 0.0 0.5 0.2 0.9 0.3 0.2Other Non-Recurring Charges 0.0 2.5 0.1 1.3 0.5 0.0 0.0 0.0 0.0
Total Adjustments $3.1 $2.5 $7.5 $1.6 $1.2 $0.4 $0.9 $0.3 $0.2
11
Selecting Publicly Traded CompaniesMarket Approach
Key factors to consider when selecting publicly traded companies for the Market Approach:
Operational Considerations
Industry
Business model
P d i
Operational Considerations
Industry
Business model
P d i
Financial Considerations
Level of integration (vertical/horizontal)
Economic factors
P fi bili ( d hi i d
Financial Considerations
Level of integration (vertical/horizontal)
Economic factors
P fi bili ( d hi i d Product mix
Size
Market area served (geography)
Suppliers
Product mix
Size
Market area served (geography)
Suppliers
Profitability (current and historic trends… should not be distressed)
Growth prospects
Liquidity of stock (actively traded, analyst coverage, news coverage)
Profitability (current and historic trends… should not be distressed)
Growth prospects
Liquidity of stock (actively traded, analyst coverage, news coverage)
Customers Customersg , g )
Ensure the company has not announced a potential transaction
g , g )
Ensure the company has not announced a potential transaction
Goal: Start with a broad list of possible selections then gradually narrow the list to aGoal: Start with a broad list of possible selections, then gradually narrow the list to a
reasonable and defensible group of selected publicly traded companies.
12
Common MultiplesMarket Approach
The following are the most commonly utilized multiples:
Debt-Free Multiples
EV/Revenue
EV/EBITDA
EV/EBIT
Debt-Free Multiples
EV/Revenue
EV/EBITDA
EV/EBIT
Leveraged Multiples
Price/Earnings
Price/Cash Flow
P i /N B k V l
Leveraged Multiples
Price/Earnings
Price/Cash Flow
P i /N B k V l EV/EBIT
EV/Assets
These multiples are not impacted by capital
EV/EBIT
EV/Assets
These multiples are not impacted by capital
Price/Net Book Value
These multiples are capital structure-dependent
Price/Net Book Value
These multiples are capital structure-dependent
structurestructure
The applicability of the leveraged multiples largely depends on the level of similarityThe applicability of the leveraged multiples largely depends on the level of similarity
among the capital structures of the selected publicly traded companies.
13
EV refers to Enterprise Value.Price refers to Market Value of Equity.
Choosing the Proper MultiplesMarket Approach
For many industries, EV/EBITDA multiples are the most common trading metric (e.g., industrials, transportation,di ib i )
Even with standard metrics, certain multiples are more relevant for some industries than others.
distribution, etc.).
For certain other industries, P/E multiples are more widely followed (financials, insurance, etc.)
Look to analyst reports to gain understanding of the metrics analysts use to value the sector and the industry.
Certain sectors have unique metrics, as shown below.
Telecommunications
Enterprise Value to
R R R
Enterprise Value to
R R R
Healthcare
Adjusted Enterprise Valueto EBITDAR
Adjusted Enterprise Valueto EBITDAR
Natural Resources
Enterprise Value to
EBITDAX
Enterprise Value to
EBITDAX Run Rate Revenue
Net PPE
Route Miles
Fiber Miles
Run Rate Revenue
Net PPE
Route Miles
Fiber Miles
Enterprise Value to
Beds
Facilities
Cost per Visit
Enterprise Value to
Beds
Facilities
Cost per Visit
EBITDAX
Reserves
Production
EBITDAX
Reserves
Production
Access Lines Access Lines Physicians Physicians
14
Adjusted Enterprise Value represents the sum of a company’s Enterprise Value plus capitalized Rent Expense.EBITDAR refers to earnings before interest, taxes, depreciation, amortization and rent expense. EBITDAX refers to earnings before interest, taxes, depreciation/depletion, amortization and exploration expenses. This metric is commonly used for oil and mineral exploration and production companies.
Market Multiple SampleMarket Approach
After selecting the appropriate multiple(s) (EV/EBITDA in this example), calculate the multiples for the
selected publicly traded companies. Be sure to include the high, low, median and mean analysis as well.
($ millions)
Share Equity Market Enterprise Enterprise Value1 to Adjusted EBITDA2
Company Price3 Value3,4 Value3,4 FYE5 LTM6 NFY7 NFY+18
C Mi l I t ti l I $72 18 $2 343 7 $2 817 7 15 3 13 2 10 2 7 9Compass Minerals International, Inc. $72.18 $2,343.7 $2,817.7 15.3x 13.2x 10.2x 7.9xGeorgia Gulf Corporation $2.78 $95.8 $1,490.6 6.7x 7.0x 7.8x 6.4xMethanex Corporation $24.66 $2,366.6 $2,592.5 4.0x 4.8x 5.3x 5.5xNewMarket Corporation $58.84 $916.8 $1,036.1 7.6x 7.3x 6.9x 6.4xWestlake Chemical Corporation $13.41 $880.5 $1,427.5 5.1x 5.4x 5.9x 6.3x
Low 4.0x 4.8x 5.3x 5.5xHigh 15.3x 13.2x 10.2x 7.9x
Median 6.7x 7.0x 6.9x 6.4xMean 7.7x 7.5x 7.2x 6.5x
Footnotes:Sources: Subject company management, Capital IQ and public SEC filings.j p y g , p Q p gNote: No company used in this analysis for comparative purposes is identical to the subject company.(1) Enterprise Value equals Equity Market Value + Debt Outstanding + Preferred Stock + Minority Interest – Cash and Cash Equivalents.(2) Adjusted EBITDA refers to Earnings Before Interest, Taxes, Depreciation and Amortization adjusted for certain non-recurring items. (3) Based on closing prices as of July 09, 2008.(4) Based on reported fully-diluted shares common shares and common share equivalents.(5) FYE refers to the most recently completed fiscal year for which financial information has been made public.
15
(6) LTM refers to the most recently completed twelve month period for which financial information has been made public.(7) NFY refers to the next fiscal year for which financial information has not been made public.(8) NFY+1 refers to the fiscal year following NFY.
Comparative Risk AnalysisMarket Approach
When selecting a multiple range, it is helpful to analyze how the subject company ranks compared to
selected publicly traded companies. Just choosing the median multiple may not be appropriate.
Size Size1 Historical Growth Historical Growth Projected Growth(LTM Revenue, millions) (Enterprise Value as of 07/09/2008, millions) (2-Fiscal Year Revenue) (1-Fiscal Year Revenue) (1-Fiscal Year Revenue)Name Value Name Value Name Value Name Value Name Value
Westlake Chemical Corporation $3,388.4 Compass Minerals International, Inc. $2,817.7 Georgia Gulf Corporation 17.8% Georgia Gulf Corporation 30.0% Compass Minerals International, Inc. 25.2%Georgia Gulf Corporation $3,156.0 Methanex Corporation $2,592.5 Methanex Corporation 16.9% Compass Minerals International, Inc. 29.8% Westlake Chemical Corporation 13.5%Methanex Corporation $2,328.5 Georgia Gulf Corporation $1,490.6 Westlake Chemical Corporation 14.4% Westlake Chemical Corporation 28.5% ABC Company 11.9%NewMarket Corporation $1,447.4 Westlake Chemical Corporation $1,427.5 NewMarket Corporation 13.1% NewMarket Corporation 8.8% NewMarket Corporation 11.0%C Mi l I i l I $973 1 N M k C i $1 036 1 C Mi l I i l I 7 5% M h C i 7 5% G i G lf C i 0 4%Compass Minerals International, Inc. $973.1 NewMarket Corporation $1,036.1 Compass Minerals International, Inc. 7.5% Methanex Corporation 7.5% Georgia Gulf Corporation 0.4%ABC Company $159.2 ABC Company 1.5% ABC Company 4.7% Methanex Corporation -2.7%
Historical Growth Historical Growth Projected Growth Projected Growth Profitability(2-Fiscal Year EBITDA) (1-Fiscal Year EBITDA) (1-Fiscal Year EBITDA) (5-Fiscal Year EPS) (LTM EBIT to LTM Revenue)Name Value Name Value Name Value Name Value Name Value
NewMarket Corporation 37.3% ABC Company 53.2% Compass Minerals International, Inc. 50.4% Westlake Chemical Corporation 7.0% Methanex Corporation 18.5%Methanex Corporation 20.2% NewMarket Corporation 19.6% ABC Company 17.5% ABC Company 2.0% Compass Minerals International, Inc. 17.8%ABC Company 14.3% Compass Minerals International, Inc. 19.1% NewMarket Corporation 10.4% Georgia Gulf Corporation 1.0% NewMarket Corporation 7.9%Compass Minerals International, Inc. 0.4% Georgia Gulf Corporation -9.5% Georgia Gulf Corporation -13.9% NewMarket Corporation NA ABC Company 7.4%p , g p g p p p yGeorgia Gulf Corporation -0.8% Methanex Corporation -18.5% Westlake Chemical Corporation -14.3% Compass Minerals International, Inc. NA Westlake Chemical Corporation 4.8%Westlake Chemical Corporation -20.6% Westlake Chemical Corporation -30.5% Methanex Corporation -25.4% Methanex Corporation NA Georgia Gulf Corporation 1.9%
Profitability Relative Depreciation Internal Investment Liquidity Leverage2
(LTM EBITDA to LTM Revenue) (LTM Depreciation to LTM EBITDA) (LTM Capital Expenditures to LTM Revenue) (Current Ratio as of 07/09/2008 ) (Debt to EV as of 07/09/2008 )Name Value Name Value Name Value Name Value Name ValueMethanex Corporation 23.3% Georgia Gulf Corporation 71.7% Methanex Corporation 15.5% Westlake Chemical Corporation 2.9 NewMarket Corporation 16.1%Compass Minerals International, Inc. 22.0% Westlake Chemical Corporation 39.4% Compass Minerals International, Inc. 4.9% NewMarket Corporation 2.8 Compass Minerals International, Inc. 20.5%NewMarket Corporation 9.8% Methanex Corporation 20.6% Westlake Chemical Corporation 4.7% Compass Minerals International, Inc. 2.5 Methanex Corporation 24.5%ABC Company 8 4% NewMarket Corporation 19 3% NewMarket Corporation 2 5% Methanex Corporation 2 4 Westlake Chemical Corporation 38 9%ABC Company 8.4% NewMarket Corporation 19.3% NewMarket Corporation 2.5% Methanex Corporation 2.4 Westlake Chemical Corporation 38.9%Westlake Chemical Corporation 7.9% Compass Minerals International, Inc. 19.0% Georgia Gulf Corporation 2.3% ABC Company 2.3 Georgia Gulf Corporation 94.4%Georgia Gulf Corporation 6.8% ABC Company 11.8% ABC Company NA Georgia Gulf Corporation 1.3
16
Sources: Subject company management, Capital IQ and public SEC filings.
Market Approach ValuationMarket Approach
Based on the subject company’s risk ranking relative to the selected public companies, a multiple range is
chosen and then applied to the subject company’s adjusted EBITDA. As illustrated below, compare the
selected multiple range to the median multiple, simply as a supporting analysis.selected multiple range to the median multiple, simply as a supporting analysis.
Representative Selected IndicatedLevel Multiple Range Enterprise Value Range
LTM Adjusted EBITDA $13.3 6.5 x -- 7.5 x $86.7 -- $100.1
NFY Adjusted EBITDA $13.8 6.0 x -- 7.0 x $82.6 -- $96.4
NFY+1 Adjusted EBITDA $15.2 5.5 x -- 6.5 x $83.6 -- $98.8
Median $83.6 -- $98.8$ $Mean $84.3 -- $98.4
Selected Enterprise Value Range (rounded) $84.3 -- $98.4
RangeLTM Low High Mean Median Selected Range Percent of Median
Adjusted EBITDA 4.8 x -- 13.2 x 7.5 x 7.0 x 6.5 x -- 7.5 x 93.4% -- 107.8%
NFYAdjusted EBITDA 5.3 x -- 10.2 x 7.2 x 6.9 x 6.0 x -- 7.0 x 87.4% -- 102.0%
17
NFY+1 Adjusted EBITDA 5.5 x -- 7.9 x 6.5 x 6.4 x 5.5 x -- 6.5 x 86.3% -- 102.0%
Advantages and DisadvantagesMarket Approach
Earnings multiples of publicly traded companies are important benchmarks as to how the market
may value the subject company.
Advantages
Liquid markets typically ensure that trading values reflect potential growth, industry-specific trends, business risks, etc.
Advantages
Liquid markets typically ensure that trading values reflect potential growth, industry-specific trends, business risks, etc.
Disadvantages
Truly comparable companies are rare, and many adjustments to the financial statements are often required.
Disadvantages
Truly comparable companies are rare, and many adjustments to the financial statements are often required.
Values obtained from selected publicly traded companies should represent the marketable minority investment (as opposed to controlling) value of the company.
Comparable companies that truly share
Values obtained from selected publicly traded companies should represent the marketable minority investment (as opposed to controlling) value of the company.
Comparable companies that truly share
Stocks with a small capitalization, that are thinly traded and/or have limited analyst coverage may not fully reflect fundamental value.
Multiples can be distorted by stock market
Stocks with a small capitalization, that are thinly traded and/or have limited analyst coverage may not fully reflect fundamental value.
Multiples can be distorted by stock market Comparable companies that truly share similar financial and business attributes with the subject company can represent a very reasonable proxy for value.
Comparable companies that truly share similar financial and business attributes with the subject company can represent a very reasonable proxy for value.
Multiples can be distorted by stock market psychology, irrational exuberance or other factors not related to the intrinsic value of the business.
Multiples can be distorted by stock market psychology, irrational exuberance or other factors not related to the intrinsic value of the business.
18
Transaction Approach
IntroductionTransaction Approach
The primary difference between the Transaction Approach and the Market Approach is the level of value being analyzed
The Transaction Approach is a market-based approach that uses values derived from “change of control”
transactions involving companies that are similar to the subject company.
The primary difference between the Transaction Approach and the Market Approach is the level of value being analyzed.
Values indicated by the Market Approach are considered to be minority interest values. Investors owning a minority interest ina company (e.g., 100 shares of Microsoft Corporation) do not enjoy the benefits of control.
Indicated values from transaction multiples typically represent a controlling interest.
Transaction multiples typically incorporate a premium for control because they reflect multiples that acquirers have paid aboveTransaction multiples typically incorporate a premium for control because they reflect multiples that acquirers have paid aboveand beyond the current trading price, to gain control of the company’s assets. This is typically referred to as a “controlpremium.”
FactSet Mergerstat LLC publishes a quarterly report that discloses all public acquisitions and their associated acquisitionpremiums. The “premiums paid” increased during the recent recession and have remained at these elevated levels in recent years.
40.0%
45.0%
50.0%
Historical Acquisition Premiums
15.0%
20.0%
25.0%
30.0%
35.0%
Med
ian
Prem
ium
Pai
d
20
0.0%
5.0%
10.0%
2005 2006 2007 2008 2009 2010 2011 2012
M
Source: Mergerstat.
Key StepsTransaction Approach
The key steps to employing the Transaction Approach are very similar to those steps involved with
the Market Approach.
K St i th T ti A h
Step 1Find and select
relevant transactions
Step 2Analyze transaction
details
Step 3Determine the
implied valuation lti l
Step 4Apply multiples to subject company
t ti l l
Key Steps in the Transaction Approach
multiples representative levels
21
Transaction Selection ProcessTransaction Approach
Selection criteria for the Transaction Approach is similar to selecting public companies in the
Market Approach.
Similar Approach
Search for relevant M&A
Similar Approach
Search for relevant M&A
Key Transaction-Specific
Considerations
bl T
Key Transaction-Specific
Considerations
bl T
Similar Multiples
Key multiples typically include
Similar Multiples
Key multiples typically include transactions involving target companies that share both operational (industry, products, customers, business model, etc.) and financial (size, capital t t t ) h t i ti
transactions involving target companies that share both operational (industry, products, customers, business model, etc.) and financial (size, capital t t t ) h t i ti
Public vs. Private Target Availability of Information Business Description of Target Size of Target (Revenues,
Enterprise Value, Total Assets)
Public vs. Private Target Availability of Information Business Description of Target Size of Target (Revenues,
Enterprise Value, Total Assets)
one or more of the following:
EV/Revenues
EV/EBITDA
EV/EBIT
one or more of the following:
EV/Revenues
EV/EBITDA
EV/EBITstructure, etc.) characteristics with the subject company.structure, etc.) characteristics with the subject company. Date of Transaction
Closed vs. Pending Status Acquisition of Controlling
Interest vs. Minority Interest
Date of Transaction Closed vs. Pending Status Acquisition of Controlling
Interest vs. Minority Interest
Price/Earnings Price/Earnings
Start the search at a very high level (i.e., select appropriate SIC codes) and then narrow the field. Sources of informationinclude databases such as Capital IQ or Mergerstat, as well as trade publications, equity research reports, news articles andacquisitions by any selected public company.
22
Transaction DetailTransaction Approach
In order to fully understand a selected public transaction, it is often times necessary to analyze the specific
details of the transaction.
($ millions) Target Memry Corp. Memry Corp Adjusted Financial DataTarget Industry Segment Basic ChemicalsAcquiror SAES Getters spA FYE LTM NFY NFY + 1Acquiror SAES Getters spA FYE LTM NFY NFY 1
Revenue $54.2 $54.8 $61.4 $70.2Announced 6/24/2008Effective Pending EBITDA $4.9 $5.1 $6.5 $7.8
EBIT $1.6 $2.0 NA NATarget Description Net Income NA NA NA NA
Total Assets (net of cash) $49.7 $52.6 NA NAMemry Corporation provides design, engineering, development, and manufacturing services primarily to the medical device industry using proprietary shape memory alloy and specialty
EBITDA Margin 9.0% 9.3% 10.6% 11.1%EBIT Margin 3.0% 3.6% NA NAEBITDA ROA 9.9% 9.7% NA NAEBIT ROA 3.3% 3.8% NA NANet Income Margin NA NA NA NA
Projected Revenue Growth 13.3% 14.3%Projected EBITDA Growth 32.7% 20.0%
polymer-extrusion technologies. The company operates in two segments, Nitinol Products and Polymer Products. The Nitinol Products segment offers design support, as well as manufactures and markets materials, which possess the ability to change shape in response to thermal and mechanical changes, and the ability to return to original shape following deformations. The Polymer Products segment designs, manufactures, and markets specialty polymer-extrusion products to companies serving the medical device, laser, fiber-optic, automotive, and industrial markets. Memry Corporation sells its products primarily in the United States and the Dominican Republic. The company was founded in 1981 and is headquartered in Bethel, Connecticut.
Projected EBITDA Growth 32.7% 20.0%Acquiror Description 0 NA NA
0 NA NA
Transaction Pricing
Fully-Diluted Shares (Target) NAPrice Paid per Share NA
Implied Equity Value $75.7
SAES Getters S.p.A. provides ‘getter’ technology, which is used to create and maintain vacuum and purified gas environments. It also operates in the field of ultra pure gases handling for both semiconductor and other high tech markets, manufacturing and distributing purifiers, trace impurity analyzers, and quality assurance certification services. The company’s products include ‘getters,' gas purifiers, and gas analyzer apparatuses. SAES Getters is organized into the Components Aggregate and the Equipment Aggregate divisions. The Components Aggregate division consists of the Display Devices, Light Sources Electronic Devices and Flat Panels and Vacuum Systems and Thermal Insulation Implied Equity Value $75.7
Implied Equity Value $75.7Comments on Transaction Add: Total Debt 0.0
Add: Preferred Stock 0.0Add: Minority Interest 0.0Less: Cash & Cash Equivalents 0.0
Implied Enterprise Value $75.7
Sources, Electronic Devices and Flat Panels, and Vacuum Systems and Thermal Insulation business areas.
SAES Getters SpA (CM: SG) signed an agreement and plan of merger to acquire Memry Corp. (AMEX: MRY) for approximately $75.7 million in cash on June 24, 2008. As per the deal terms, SAES Getters will acquire all outstanding Memry shares at an offer price of $2.51 per share and will give approximately $1.9 million and $0.2 million to cancel approximately 0.3 million Memry warrants and approximately 3 million Memry options,
ti l I ti ith th h ld f i t l 20% f th
23
Transaction Multiples
FYE LTM NFY NFY + 1EV/Revenue 1.40 x 1.38 x 1.23 x 1.08 xEV/EBITDA 15.4 x 14.8 x 11.6 x 9.7 xEV/EBIT 46.7 x 37.8 x NA NAEV/Assets 1.52 x 1.44 x NA NA
respectively. In connection with the merger, holders of approximately 20% of the outstanding shares of Memry have agreed to vote in favor of the transaction. Following the completion of the transaction, Memry shares will get delisted from the American Stock Exchange.
Calculating the Implied Transaction MultiplesTransaction Approach
This analysis calculates implied EV/Revenue and EV/EBITDA multiples that will later help determine the
selected range of transaction multiples used in the analysis.
($ illi )($ millions)
Transaction Transaction Value/ EBITDA
Announced Target Acquiror Value Revenue EBITDA Margin %06/24/08 Memry Corp. SAES Getters SpA $75.7 1.38x 14.8x 9.3%05/21/08 P.T. Tri Polyta Barito Pacific Timber tbk PT $170.0 0.37x 3.9x 9.3%04/28/08 Deuchem Co., Ltd. Elementis Holdings Limited $80.5 1.07x 7.1x 15.0%
/ / $03/05/08 A H Marks and Company Limited Nufarm Ltd. $74.6 1.20x NA NA NA01/22/08 YLA, Inc. TenCate Advanced Composites USA, Inc. $32.0 1.39x NA NA NA01/15/08 OY Forcit AB, Finndisp Division Rohm & Haas Co. $90.5 1.71x NA NA NA10/15/07 Solvay Caprolactones Perstorp Holding AB $294.0 3.33x NA NA NA09/04/07 Borchers GmbH OM Group Inc. $18.1 0.35x NA NA NA06/29/07 LANXESS India Private Ltd. Ineos Group Ltd. $67.3 0.51x 4.6x NA05/11/07 Elementis plc, Global Color Pigments Business Rockwood Holdings Inc. $140.0 0.81x 7.8x 10.5%03/22/07 E Wood Holdings Plc 3M UK Holdings Plc $80 2 1 49x 10 4x 14 3%03/22/07 E Wood Holdings Plc 3M UK Holdings Plc $80.2 1.49x 10.4x 14.3%02/19/07 LESCO Inc. Deere & Co. $147.2 0.25x N/A N/ NA10/30/06 Northwest Coatings LLC (Caltius Capital Management LLC) Ashland, Inc. $72.0 1.80x NA NA NA10/09/06 Eastman Chemical Company, Polyethylene Business Westlake Chemical Corp. $255.0 0.38x NA NA NA10/04/06 Ciba Specialty Chemicals Masterbatch SA Clariant AG $24.0 0.38x NA NA NA08/23/06 Air Products & Chemicals Amines Business (Air Products & Chemicals, Inc Taminco NV $211.0 0.68x NA NA NA06/29/06 Ameron International Corp. PPG Industries, Inc. $115.0 0.55x NA NA NA05/16/06 Showa Highpolymer Co., Ltd. Showa Denko KK $168.7 0.54x 8.7x 6.2%05/02/06 JohnsonDiversey Holdings, Inc. BASF AG $470.0 1.31x NA NA NA04/28/06 Clariant AG, Pharmaceutical Fine Chemicals Unit TowerBrook Capital Partners $88.0 0.52x NA NA NA04/05/06 Sico, Inc Akzo Nobel NV $264.4 0.96x 7.8x 12.3%03/22/06 Tomah Products, Inc. Air Products & Chemicals, Inc. $115.0 1.58x NA NA NA02/24/06 Huntsman Corp. /US Butadiene & MTBE Business Texas Petrochemicals Holdings, Inc. $262.0 0.41x 6.1x 6.7%
Low $18.1 0.25x 3.9x 6.2%Hi h $470 0 3 33 14 8 15 0%
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High $470.0 3.33x 14.8x 15.0%
Median $115.0 0.81x 7.8x 9.9%Mean $144.1 1.00x 7.9x 10.5%Sources: Capital IQ and public SEC filings.
Transaction Approach ValuationTransaction Approach
Based on an analysis of the selected transactions, a multiple range is chosen and then applied to the subject
company’s adjusted LTM EBITDA. Adjusted EBITDA is sourced from the representative levels page (earnings
have been adjusted for extraordinary and/or one-time items).have been adjusted for extraordinary and/or one time items).
($ millions) Representative Selected IndicatedLevel Multiple Range Enterprise Value Range
LTM Adjusted EBITDA $13.3 6.5 x -- 7.5 x $86.7 -- $100.1
6.50 x 7.50 xSelected Enterprise Value Range (rounded) $86.7 -- $100.1
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Advantages and DisadvantagesTransaction Approach
Although similar to the Market Approach, the Transaction Approach has different advantages
and disadvantages.
Advantages
Recent public transactions can reflect supply and demand for saleable assets.
Realistic, in that past transactions were
Advantages
Recent public transactions can reflect supply and demand for saleable assets.
Realistic, in that past transactions were
Disadvantages
Data points can become irrelevant quickly, and past transactions are rarely directly comparable.
Disadvantages
Data points can become irrelevant quickly, and past transactions are rarely directly comparable. Realistic, in that past transactions were
successfully completed at certain prices.
Indicates a range of premiums offered to gain control of a target company.
Trends, such as acquisitions by strategic b f i h fi i l b
Realistic, in that past transactions were successfully completed at certain prices.
Indicates a range of premiums offered to gain control of a target company.
Trends, such as acquisitions by strategic b f i h fi i l b
Public data on past transactions can be incomplete, misleading and/or difficult to find.
Typically based on historic information instead of forward looking data.
N d f h ifi i
Public data on past transactions can be incomplete, misleading and/or difficult to find.
Typically based on historic information instead of forward looking data.
N d f h ifi ibuyers, foreign purchasers, or financial buyers may become clear.buyers, foreign purchasers, or financial buyers may become clear.
Need to factor out the specific circumstances surrounding each past transaction to ensure its relevance.
Need to factor out the specific circumstances surrounding each past transaction to ensure its relevance.
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SummaryTransaction Approach
The Transaction Approach represents a range of actual, recent market prices paid by acquirers andaccepted by target companies (that are similar to the subject company).
Be cautious, as the Transaction Approach is based on historical data from past transactions.
In reality, transactions are often times completed using projected information which is often notdisclosed to the public at the time of the acquisition.
Implied Enterprise Value (based on price paid) as a multiple of cash flow (EBITDA) and/or operatingprofit (EBIT) is typically the most useful for a broad range of companies because enterprise valuerepresents value for all stakeholders, and is independent of capital structure.
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Discounted Cash Flow Approach
Overview of Discounted Cash Flow (DCF) ApproachDiscounted Cash Flow Approach
D l hi i l i
The DCF Approach values a company based on its ability to generate “free cash flow.”
Develop historical perspective.
Identify components of free cash flow.
Project operating results and free cash flows out 3-5 years using a fully integrated financial model.
Analyze forecast assumptions and scenarios.
Step 1Building
Projections
Step 2 Develop target capital structureStep 2Estimating
Cost of Capital
Step 3
Develop target capital structure.
Estimate cost of equity using the capital asset pricing model (“CAPM”).
Estimate cost of non-equity sources of capital (including cost of debt and cost of preferred stock).
Calculate weighted average cost of capital (“WACC”).
Step 3Estimating
Terminal Value
Step 4
Determine value of business in terminal year (final projected year) by using the Gordon Growthand/or terminal multiple methods.
Discount projected free cash flows and terminal value to the present using the WACC as a discounttPresent
Value
Step 5Interpreting
rate.
Determine a range of enterprise values.
Perform sensitivity analyses on discount rate and terminal value assumptions.
Interpret results within decision context.
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Interpreting Results
Interpret results within decision context.
Adjust for all non-operating assets and liabilities.
Free Cash FlowDiscounted Cash Flow Approach
Using unlevered free cash flows as the basis for your DCF approach yields a debt-free or
enterprise value. This approach concludes a value based on the cash flow available to all
providers of capital, regardless of the particular capital structure selected. Start your
calculation with EBIT.
Free Cash Flow Calculation Comments
EBIT (from the projected income statement)
Less: Taxes
Equals: Debt-Free Earnings
EBIT (from the projected income statement)
Less: Taxes
Equals: Debt-Free Earnings
Use EBIT adjusted for extraneous or non-recurring items.
Multiply EBIT by the company’s tax rate.
Add: Depreciation & Amortization (andother non-cash charges)
Less: Capital Expenditures
Add: Depreciation & Amortization (andother non-cash charges)
Less: Capital Expenditures
From the statement of cash flows.
Going forward, should include one-time, non-recurring expenditures that are necessary to achieve projected revenue.
Less: Working Capital Requirements
Equals: Net Debt-Free Cash Flow
Less: Working Capital Requirements
Equals: Net Debt-Free Cash Flow
p y p j Includes changes in A/R, inventory, prepaid expenses, A/P,
accrued liabilities, etc. Does not include changes in cash or debt.May also need to adjust for changes in certain non-current assets and liabilities.
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Forecasted Free Cash FlowsDiscounted Cash Flow Approach
Key assumptions in the projections should include additional support.
Projected capital expenditures and working capital requirements should be sufficient to support the forecasted growth of the company.
Consideration should be given to the overall risk profile of the projections.
Key factors to consider when assembling projections include the following:
Compare the company’s historical performance to the projections (including growth and margins).
Continue to track the company’s ability to achieve past budgeted/forecasted results.
Below are the free cash flow projections for ABC Company.
Projected FYE December 31($ millions) Projected FYE December 31,2008E (1) 2009E 2010E 2011E 2012E
Revenue $100.6 $187.2 $195.8 $211.5 $228.3Revenue Growth % NA 7.6% 4.6% 8.1% 7.9%
Less: Cost of Goods Sold 84.1 156.0 161.9 174.8 188.9Less: Selling, General & Administrative 10.7 18.9 19.7 20.4 21.3Less: Other Operating E penses 0 0 0 2 0 7 0 2 0 2
($ millions)
Less: Other Operating Expenses 0.0 0.2 0.7 0.2 0.2Add: Total Adjustments 0.7 0.4 0.9 0.3 0.2Add: Depreciation and Amortization 1.3 2.6 3.2 4.4 4.6
Adjusted EBITDA $7.7 $15.2 $17.6 $20.9 $22.8EBITDA Margin % 7.7% 8.1% 9.0% 9.9% 10.0%Less: Depreciation and Amortization 1.3 2.6 3.2 4.4 4.6
Adjusted EBIT $6.4 $12.5 $14.4 $16.4 $18.2Adjusted EBIT $6.4 $12.5 $14.4 $16.4 $18.2
Less: Taxes 2.4 4.8 5.5 6.2 6.9Unlevered Earnings $4.0 $7.8 $8.9 $10.2 $11.3
Add: Depreciation and Amortization 1.3 2.6 3.2 4.4 4.6Less: Capital Expenditures 3.2 4.0 5.4 1.3 2.3Less: Increase in Net Working Capital 0.8 1.9 1.2 2.2 2.4
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Footnote:
(1) Represents a 7-month sub period.
Source: Subject company management.
Unlevered Free Cash Flows $1.4 $4.5 $5.5 $11.1 $11.2
Cost of Capital Discounted Cash Flow Approach
WACC is the after-tax weighted average cost of capital (including debt, equity and
preferred stock) weighted by the relative market value of each.
WACC is used to discount the after-tax unlevered free cash flows and terminal value
WACC = KE(E/V) + KD(1-T) (D/V) + KP(P/V)
KE = Cost of common equity capital1
E/V = Ratio of market value of common equity to total enterprise value
KD = Cost of Debt capital
D/V = Ratio of market value of debt to enterprise value
T = Corporate tax rate2
KP = Cost of preferred equity capital
P/V = Ratio of market value of preferred equity to enterprise value
V = Market value of debt plus market value of preferred equity plus market value of
common equity
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1. Cost of equity determined by applying the CAPM (model that attempts to relate risk of an investment with expected return of investors).2. Consideration should be given to the likelihood of tax payments based on forecasted cash flows.
Terminal Value CalculationDiscounted Cash Flow Approach
The terminal value is an estimate of the value of the enterprise at the end of the final period for which
cash flow projections have been provided. This value is typically determined in one of two ways, as
shown below.
Two DCF Methods
Gordon Growth Rate Terminal Multiple
A h h b d bl k Assumes that the free cash flows continue to grow at a constant rate into perpetuity after the projection period.
Terminal Value =NDFCF * (1+g)
Assumes that the business trades in public market or is sold at the end of the projection period.
Terminal Value = Operating Metric1 x MultipleTerminal Value =
(r-g)
NDFCF = Net Debt-Free Cash Flow of the final forecast periodG = growth rate into perpetuityR = WACC
1. Typical operating metrics include Revenue, EBITDA or EBIT.
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Sample DCF with Gordon GrowthDiscounted Cash Flow Approach
In the Gordon Growth method, the cash flow from the final projected year is used to determine the
terminal value of the cash flows.
($ millions)
Present Value PV of Terminal Valueof Cash Flows Based on Perpetual Growth Rate for Implied Enterprise Value
Discount Rate 2008 - 2012 2012 Unlevered Free Cash Flow$24.0 3.0% 4.0% 5.0% 3.0% 4.0% 5.0% 3.0% 4.0% 5.0%
12 50% 12 5% $24 3 $59 2 $66 8 $76 4 $83 5 $91 1 $100 7 70 9% 73 3% 75 9%
PV of Terminal Value as a % of Enterprise Value
A B+ = C1
12.50% 12.5% $24.3 $59.2 $66.8 $76.4 $83.5 $91.1 $100.7 70.9% 73.3% 75.9%12.75% 12.8% $24.1 $57.1 $64.3 $73.3 $81.3 $88.4 $97.4 70.3% 72.7% 75.2%13.00% 13.0% $24.0 $55.2 $61.9 $70.4 $79.2 $85.9 $94.4 69.7% 72.1% 74.6%13.25% 13.3% $23.8 $53.4 $59.7 $67.6 $77.2 $83.6 $91.5 69.1% 71.5% 73.9%13.50% 13.5% $23.7 $51.6 $57.6 $65.0 $75.4 $81.3 $88.7 68.5% 70.9% 73.3%
D- = EImplied Total Equity Value Implied Equity Value Per Share
3.0% 4.0% 5.0% 3.0% 4.0% 5.0% 3.0% 4.0% 5.0%$7.2 $76.2 $83.8 $93.5 $4.76 $5.24 $5.84 4.2x 4.7x 5.4x$7.2 $74.1 $81.2 $90.2 $4.63 $5.08 $5.64 4.1x 4.6x 5.3x$7.2 $72.0 $78.7 $87.1 $4.50 $4.92 $5.45 4.0x 4.5x 5.1x
Net Debt Implied 2012 EBITDA Terminal Multiple
D E2
$7.2 $70.0 $76.3 $84.2 $4.38 $4.77 $5.26 3.9x 4.4x 4.9x$7.2 $68.1 $74.1 $81.5 $4.26 $4.63 $5.09 3.8x 4.2x 4.8x
PV of terminal value as a % of enterprise
value and the implied EBITDA terminal1. Enterprise Value = Equity Market Value + Debt Outstanding + Preferred Stock + Minority Interests – Cash and Cash Equivalents.
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value and the implied EBITDA terminal
multiple are both useful analyses to support
the concluded DCF value.
2. Net Debt = Debt + Capitalized Leases – Cash and Cash Equivalents. Assumes book value of debt approximates market value of debt.
Source: Subject company management.
Sample DCF with Exit MultipleDiscounted Cash Flow Approach
($ millions)
In the EBITDA exit multiple method, a multiple is applied to the final projected year’s EBITDA to determine
a terminal value in the final year. The terminal value is then discounted to a present value and added to the
present value of the free cash flows from the explicit projected periods.
A B+ = CPresent Valueof Cash Flows
Discount Rate 2008 - 2012$24.0 5.0x 5.5x 6.0x 5.0x 5.5x 6.0x 5.0x 5.5x 6.0x
12 50% 12 5% $24 3 $66 4 $73 0 $79 6 $90 6 $97 3 $103 9 73 2% 75 1% 76 7%
PV of Terminal Value as a Multiple of 2012 EBITDA Implied Enterprise Value PV of Terminal Value as a % of
Enterprise Value1
D- = E
12.50% 12.5% $24.3 $66.4 $73.0 $79.6 $90.6 $97.3 $103.9 73.2% 75.1% 76.7%12.75% 12.8% $24.1 $65.7 $72.3 $78.8 $89.8 $96.4 $103.0 73.1% 75.0% 76.6%13.00% 13.0% $24.0 $65.0 $71.5 $78.0 $89.0 $95.5 $102.0 73.1% 74.9% 76.5%13.25% 13.3% $23.8 $64.4 $70.8 $77.3 $88.2 $94.6 $101.1 73.0% 74.8% 76.4%13.50% 13.5% $23.7 $63.7 $70.1 $76.5 $87.4 $93.8 $100.2 72.9% 74.7% 76.4%
D = E
5.0x 5.5x 6.0x 5.0x 5.5x 6.0x 5.0x 5.5x 6.0x$7.2 $83.4 $90.0 $96.7 $5.21 $5.63 $6.04 2.4% 3.3% 4.0%$7.2 $82.6 $89.2 $95.7 $5.16 $5.57 $5.98 2.7% 3.5% 4.2%
Net Debt Implied Total Equity Value Implied Equity Value Per Share Implied Perpetual Growth Rate2
PV of terminal value as a % of enterprise
value and the implied perpetual growth rate1. Enterprise Value = Equity Market Value + Debt Outstanding + Preferred Stock + Minority Interests – Cash and Cash Equivalents.
$7.2 $81.8 $88.3 $94.8 $5.11 $5.52 $5.92 2.9% 3.7% 4.4%$7.2 $81.0 $87.4 $93.9 $5.06 $5.46 $5.87 3.1% 4.0% 4.7%$7.2 $80.2 $86.6 $92.9 $5.01 $5.41 $5.81 3.3% 4.2% 4.9%
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value and the implied perpetual growth rate
are both useful analyses to support the
concluded DCF value.
2. Net Debt = Debt + Capitalized Leases – Cash and Cash Equivalents. Assumes book value of debt approximates market value of debt.
Source: Subject company management.
Advantages and DisadvantagesDiscounted Cash Flow Approach
The DCF method is more flexible than other valuation approaches considering the unique
circumstances of the company, but is very sensitive to cash flow, terminal value and the
discount rate assumptions.
Advantages
Provides an objective framework for assessing a company’s risk and cash flows to estimate value.
Advantages
Provides an objective framework for assessing a company’s risk and cash flows to estimate value.
Disadvantages
Extremely sensitive to cash flow projections, which may be highly variable or uncertain, depending on the company.
Disadvantages
Extremely sensitive to cash flow projections, which may be highly variable or uncertain, depending on the company.
Requires users to think about key value drivers.
Provides more flexibility when no “pure play” comparable companies or transactions are available
Requires users to think about key value drivers.
Provides more flexibility when no “pure play” comparable companies or transactions are available
Terminal value may be distorted by incorrect estimates of either cash flow, terminal multiples or growth rates.
Validity of the discount rate depends on assumptions of beta market risk premium
Terminal value may be distorted by incorrect estimates of either cash flow, terminal multiples or growth rates.
Validity of the discount rate depends on assumptions of beta market risk premiumavailable.available. assumptions of beta, market risk premium, capital structure, financing costs, and, in certain circumstances, any company-specific risk that is not captured elsewhere.
assumptions of beta, market risk premium, capital structure, financing costs, and, in certain circumstances, any company-specific risk that is not captured elsewhere.
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SummaryDiscounted Cash Flow Approach
The DCF Approach is a fundamental valuation methodology that represents “intrinsic value.”
Three key variables:
Projection of incremental cash flows (unlevered free cash flow);
Weighted averaged cost of capital (discount rate); and
Residual value at end of the projection period (terminal value).
When preparing a DCF remember to:
Validate and test projection assumptions against industry norms;Va date a d test p oject o assu pt o s aga st dust y o s;
Determine appropriate cash flow stream;
Utilize appropriate cost of capital;
Carefully consider all variables in the calculation of the discount rate;
Consider terminal value methodology (e g a perpetual growth rate of 10% may not be logical); Consider terminal value methodology (e.g., a perpetual growth rate of 10% may not be logical);
Provide a sensitivity analysis (base projection variables, discount rates, terminal values, etc.);
Footnote your assumptions in detail; and
Think about other drivers that enhance or detract value such as net operating losses, options,warrants etcwarrants, etc.
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Disclaimer
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