The Art and Science of Valuation by Rebecca Pang

Valuation – an Art or a Science Rebecca Pang, CFA, CBV

November 2015

CCFA Lunch & Learn Speaker Series

Valuation – an Art or a Science

Why it Matters

Valuation – a

Science

Valuation – an Art

Career Option

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Why it Matters?

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Corp Strat

Planning Risk Mgt

Tax Mergers & Acquisitions

Strategic Planning

Business Case

Investment Decision

Fairness Opinion

Litigation

Formal Valuation

Why it Matters

Valuation – a

Science


Career Option


Why it Matters? Myth-Busting

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Good valuation is to

determine an “Objective and true” value

All oranges are equal and

should cost the same.

Valuation is Timeless DCF is the best approach

Only the numbers, not process, matters

Valuation does not matter!

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Why it Matters

Valuation – a

Science


Career Option


Source: A. Damodaran, “Investment Valuation: Tools and Techniques for Determining The Value of Any Asset”

Valuation – the Art and Science of it

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• Definition of Fair Market Value

• Key Valuation Methodologies

• Comparable

• Precedent

• DCF

• Discount rate/WACC

• Terminal Value

• Weighting of approaches

• Industry differences

• Historical F/S adjustments

• Public vs. private

• No perfect comps or

precedents

• Discounts and premiums

• Inclusion of synergies

• Intangibles

Why it Matters

Valuation – a

Science


Career Option


Valuation – a Science What is Firm Value

Firm Value: The Present Value of all assets held by the firm; Say it differently, the collective value of all stakeholdings in a business

Claims

Excess Cash

Firm Value

Equity

Debt

=

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Why it Matters

Valuation – a

Science


Career Option


Valuation – a Science Various Approaches

Approaches

Market Approach

A. Publicly Traded Comparables

B. Precedent Transactions

Income Approach

C. Discounted Cash Flow Analysis (DCF)

Dividend Discount Model (DDM)

Cost Approach

Replacement Cost

Leveraged Buyout

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Why it Matters

Valuation – a

Science


Career Option


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Why it Matters

Valuation – a

Science


Career Option

Valuation – a Science A. Publicly-traded Comparables

- Pick public comparables

- Pick metrics

- Calculate multiples

- Apply multiples to Target’ metrics

- Add control premium

- Widely accepted

- Easy and ubiquitous

- Reflect current mkt

- Reflect industry trends

- Reflect growth prospect

- Mkt not always efficient

- No perfect comparables

- Choice highly subjective

- Does not account for M&A premiums

- Value drivers can be manipulated

Quick and Dirty Way to Value a company in 3 mins!


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Why it Matters

Valuation – a

Science


Career Option

Valuation – a Science B. Precedent Transactions

- Identify transactions

- Pick multiples

- Apply multiples to Target’ metrics

- Public information

- Realistic valuation since the past transactions were completed at defined multiples

- Show bidding trends

- Limited public trx

- No “pure-play”

- Wide range of value

- Past market conditions

If you believe history is a good indication of future…


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Why it Matters

Valuation – a

Science


Career Option

Valuation – a Science C. Discounted Cash Flow

- Sum of future cash flow

- Discounted to today

- Terminal Value

- Most accurate

- Capture PV of cash, capital needs, risk

- Link to fundamental drivers

- Sensitivity analysis

- Difficult to apply

- Too many assumptions

- Wide range of values

- Difficult to tie to historical value or market

Likely most robust ….. However….


Valuation – a Science C. Discounted Cash Flow

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Why it Matters

Valuation – a

Science


Career Option

More specifically, a DCF valuation can be separated into the following steps:

Planning Period Terminal Period

1. Analyze historical performance

2. Forecast Future

Performance

3. Estimate WACC

4. Estimate TV

5. Calculate value &

Interpret results


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Why it Matters

Valuation – a

Science


Career Option

Valuation – an Art Talking about Controversy


Weighting of Valuation

Approaches

Industry Differences

Adjustments to Income

Statements

Discounts & Premiums

Inclusion of Synergies

Intangibles

Public vs. Private Perfect Comps and Precedents

Valuation – an Art Industry Differences

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Why it Matters

Valuation – a

Science


Career Option


Sector Multiples Used

Financial Services

Banks • Price/Book equity; Price/Tangible Book • Marked to market Asset Managers • EV/EBITDA

Start-up • Revenue multiples

Mining • EV/Reserve metrics

Growth firms • PEG

Manufacturing • Price/earnings

Retailing • EV/EBITDAR (excluding rental and lease expenses)

Oil & Gas • EV/EBITDAX (excluding exploration expenses)

Valuation – an Art Discounts & Premiums

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Why it Matters

Valuation – a

Science


Career Option


Control Premium

Minority Discount

Illiquidity discount

Others

Valuation – an Art Intangibles

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Why it Matters

Valuation – a

Science


Career Option


• You may think about Brand… but it’s more than that

• An identifiable non-monetary asset without physical substance • An asset is a resource that is controlled by the entity as a result of past

events (for example, purchase or self-creation) and from which future economic benefits (inflows of cash or other assets) are expected

• Includes: patented technology, computer software, databases and trade secrets trademarks, trade dress, newspaper mastheads, internet domains

• video and audiovisual material (e.g. motion pictures, television programmes), customer lists, mortgage servicing rights, licensing, royalty and standstill agreements, franchise agreements, customer and supplier relationships, marketing rights

• Never double count!

The Art and Science of Valuation by Rebecca Pang

Education

Transcript of The Art and Science of Valuation by Rebecca Pang