Advanced Corporate Finance

Lorenzo Parrini

May 2017

1
Introduction
Course structure

Course structure
3 credits – 24 h – 6 lessons

1. Corporate finance

2. Corporate valuation

3. M&A deals

4. M&A private equity

5. IPOs

6. Case discussions

2
Lesson 2 Corporate Valuation

3
Lesson 2 Summary

1 Introduction to Corporate Valuation

2 Valuation Methods

3 EVA

4 M&A most used methods: DCF and Multiple methods

5 Methods adjustments

6 From value to price

7 Valuation in particular contexts

4
Introduction to Corporate Valuation
Introduction
 Financial valuation as a tool for corporate investment decisions

Should I sell Should I acquire

some assets ? How is my competitor ?
Should I invest in
performing my
a new business ?
business(es) ?

How much is it worth ? Why? Depending on what? When? How is it

calculated? Are there different perspectives? Do others look at it differently?

5
Introduction to Corporate Valuation
Valuation features
 Corporate valuation is the combination of principles, methods and procedures that allow to measure the value of a
company, that reflects determined peculiarities universally recognized

Valuation Features

 Do not include any contingent effect of demand and offer or the involved
General players features

 Appropriate demonstrability and objectivity of hypothesis at the base of

Objective the chosen valuation method

Rational  Value construction through a logical scheme

Stable  Exclusion of elements related to extraordinary events

6
Introduction to Corporate Valuation
Valuation contexts

Corporate  Shareholders withdrawal or entrance

 Minority shareholders protection
 Legal evaluation ex art. 2465 CC

Development and  M&A deals

turnaround strategies  Initial Public Offer
 Turnaround operations

Balance sheet  IAS-IFRS accounting principles

production  Impairment
 Valuation of goodwill,
 Intangibles

Periodical evaluations  This kind of valuation meets the necessity of valuing managers
results and supplying strategic and operating guides.

7
Introduction to Corporate Valuation
Players involved
Knowing the current value of a Company is an essential item for all the players involved in companies life cycle

Shareholders
Shareholders

It assumes a
significant
importance in
Banks
Banks Managers
M&A
transactions

Analysts
Analysts and
and Investors
Investors
Advisors
Advisors

8
Lesson 2 Summary

1 Introduction to Corporate Valuation

2 Valuation Methods

3 EVA

4 M&A most used methods: DCF and Multiple methods

5 Methods adjustments

6 From value to price

7 Valuation in particular contexts

9
Valuation Methods
Methods Overview

Methods

Direct Indirect

Asset based Cash flow Combined

Market multiple
Method Method method

With
Financial Income based autonomous Peer market Transaction
Simple Complex EVA multiples multiples
Method method estimate of
goodwill

10
Valuation Methods
Methods Overview

Main Methods
These criteria consider the value of a company due to its capabilities to generate cash
Cash flow method flows in the future. On the basis of the kind of cash flows used cash flow method has
two variations:
 Financial Method (DCF): the economic value of the business is equal to the sum of the
present value of the cash flow that the company will be able to generate in future, as
discounted at the rate of return on risk capital or the weighted average cost of capital,
depending on the cash flow method used: levered (equity side) or unlevered (asset
side)
 Income based method: this approach determines the value of the business based on
revenues and costs for the period. The economic value is equal to the sum of the forecast
flow of normal profits (over a limited period or an unlimited period) as discounted at the
rate of return on risk capital or the weighted average cost of capital depending on the
method used: levered (equity side) or unlevered (asset side)

 Peer market multiples: this approach estimates the economic capital of a business
Multiples method based on the prices traded on organized markets for securities representing interests in
comparable companies.
 Transaction multiples: this method allocates a business the value identified from
transactions that have taken place in relation to controlling interests in comparable
businesses.

11
Valuation Methods
Methods Overview

Main Methods
Asset based methods are based on the assumption that a rational investor will not
Asset based method value an existing asset at more than its replacement cost (or reproduction cost). These
criteria do not make explicit consideration of matters regarding the business ability to
generate profit.
Asset based method declines in two variations:
 Simple: this approach considers the current value of tangible assets (NAV) to ascertain
the effective net capital of the business
 Complex: this approach considers ,in addition to current value of tangible assets, the
current value of intangible assets even those not included in the balance sheet

Combined criteria are based on the hypothesis that the value of an asset depends both
Combined methods on its replacement cost (or reproduction cost) and its ability to generate future
economic benefits.
 Simple asset based method with estimate of goodwill: this method estimates the value
of the economic capital as the sum of shareholders’ equity as expressed at current value
and the goodwill or badwill attributable to the ability to generate a higher or lower return
than what would normally be expected from a similar businesses.
 Economic value added (EVA): this method considers the value of a company on the basis
of the relation between cost of capital and return on capital employed.

12
Valuation Methods
Valuation Configuration
Enterprise Value (EV) Equity Value (We)

Value for Investors Value for Shareholders

Value of Net Invested Capital Value of Equity

Adoptable in transactions: Adoptable in transactions:

• related to business units • related to the acquisition of stocks/shares
• related to operative complex • related to operations on equity

Financial and Economic correlations

• Revenues
NFP
• EBITDA
• EBIT
Net Invested
Capital
• Operating Cash • Net Income
Flow Equity • Dividends (shareholders
cash flow)

13
Valuation Methods
Selection
The choice of valuation method and configuration depends on different factors

Company
business
Market
features
Available data
(dynamic,
static)

Accounting
Valuation Aim
policy
Company
status (Start
up, Growth,
Crisis)

Attention to industry-specific and case-specific valuation techniques

14
Lesson 2 Summary

1 Introduction to Corporate Valuation

2 Valuation Methods

3 EVA

4 M&A most used methods: DCF and Multiple methods

5 Methods adjustments

6 From value to price

7 Valuation in particular contexts

15
EVA
Method Overview
Combined Method

Capital Income

 Assets value  Income cash flows

 Cost of capital  Margin analysis

EVAi = NOPAT - NOICi * WACCi

where:

 Nopat Operative income after tax (adjusted)*

 NOIC Net operating invested capital (adjusted)*
 Wacc Weighted Average cost of capital

* Required adjustments are explained in the following pages 16

EVA
Method Overview
Discount rates

WACC Ke
” It corresponds to the Cost of Debt and Cost of Equity, Cost of Equity is generally defined as the average
weighed by a normal capital structure. WACC return expected by an equity investor in a company.
represents the rate of return expected by debt and
According to the Capital Asset Pricing Model
equity providers in a company. In formula
technique, Cost of Equity is the sum of the rate of
return on risk-free assets “rf” and an equity market risk
premium “s”. In formula

WACC = weKe + wdkd(1-t) Ke = rf + s = rf + β(rm - rf)

Where: Where:
WACC Weighted Average Cost of Capital Ke Cost of Equity
We Weight of Equity rf Rate of return on risk-free assets
Wd Weight of Net financial debt rm Expected market return on Equity
Ke Cost of Equity β Non-diversifiable risk coefficient “Beta”
Kd Cost of Debt
t Corporate tax rate (tax shield on interest expense)

17
EVA
Method Overview
Combined Method

Starting Point Reclassified Balance

Sheet

EVA= NOPAT – (NFP*Kd + E*Ke)

NFP Kd

Nopat NOIC*

Equity Ke

*Extraordinary items not included

18
EVA
Method Overview

n Market Value Added (MVA):

EV =NOIC +  EVAi*(1+WACC)^-i it expresses the value of
i =1 generated goodwill

Value breakdown

Evan(1+Wacc) -n

Eva2(1+Wacc)-2
MVA

Eva1(1+Wacc) -1
EV

NOIC
NOIC NOIC

MEVA highlights the real profitability of invested capital regardless accounting policies

19
EVA
Method Overview
Focus on MVA meaning
MVA represents the difference between the firm market value and the book value of Capital employed.
Changes in MVA shows how the company improves value creation

MVA= EV- Capital employed

Market cap

Equity Enterprise
value
Capital
employed
Market value
Net Financial of debt
Position

Book values Market values

20
EVA
Method Overview
Methodology

Restatements
required

NOPAT NOIC

NOPAT must be normalized to avoid NOIC must be adjusted to be

discretionary policies: expressed at current values:
 Goodwill amortization  Goodwill amortized
 Increase in employee Severance  Intangibles
indemnity  Formation and expansion expenses;
 Increase in provisions for taxation  Funds and Provisions
and allowance for doubtful debtors  LIFO Reserve;
 Capital gain/ capital loss  Present value of leasing
 LIFO reserve
 Charges on Leasing

21
Lesson 2 Summary

1 Introduction to Corporate Valuation

2 Valuation Methods

3 EVA

4 M&A most used methods: DCF and Multiple methods

DCF
Multiple Method

5 Methods Adjustments

6 From value to price

7 Valuation in particular contexts

22
M&A most used methods: DCF and Multiples
Introduction

The most used methods in M&A valuations are DCF and Multiples methods.

Multiple methods DCF methods

Market assumptions that reflect: Formulation of estimates in relation to:

 Growth expectations of financial and  Forecasts of results trend (cash flow

economical results processing)

 Risk evaluation  Company risk profile (WACC estimate)

The equity value is determined on the

base of stock market prices of peer The equity value is based on the
companies or comparable transaction present value of estimated cash flows.
prices

Relation between the market value of

peers and financial/economical
variables of the target company

23
M&A most used methods: DCF and Multiples
DCF
DCF is one the most used analytical methods because it leads to the valuation of the financial and
economical perspectives of a company

The value of a Company is reported on a «on going concern basis» as the sum of 2 parts:

Value of the plan period Terminal Value

Present value of cash flows analytically Present value of perpetual operating cash flow
estimated along the BP period. that can be kept on after the BP period

 Investments necessary to
realize the expected growth
Main aspects
 The growth on a long term basis
of the operating cash flow

24
M&A most used methods: DCF and Multiples
DCF
The value of a business is equal to the sum of the present value of cash flows expected over a
definite projection period

where:
n 
CF Present Value =  F(t) (1  r ) t  F(t) Cash flows (projection period)
 t =1  n Projection period
r Discounted Rate

CF n

Present cash flow

CF 2

CF 1

25
M&A most used methods: DCF and Multiples
DCF
The role of Terminal Value

where:


Present TV = Terminal CF(n) /(r - g) * (1  r) n
 Present TV:
Terminal CF:
Present Terminal Value
CF at the end of the analytic prevision period
r Discount rate
g Perpetual growth rate of CF
t number of period of analytic prevision

Main criticisms
Terminal CF must be WACC could be raised to
sustainable adjust terminal CF
«g» must be
«defensible»

 O,5 -1 %in steady sector

 2,5 – 3% in high growth sectors
 >3,5 % «aggressive» (before internet-bubble)

Some evidences
Business BP Period Terminal Value/Enterprise Value
Steady 5-7 years 45%-55%
In growth 4-5 years 60%-70%
In high growth / Start-up 4-5 years > 90%

(*) CF configuration depends on the chosen approach: CFE if levered (discount rate will be Ke), FCF if unlevered (discount rate will be WACC)

26
M&A most used methods: DCF and Multiples
DCF configuration
DCF links the value of a company to its capability to produce cash flows in a specific stretch of time
On the basis of adopted cash flows it declines in two variables

Levered Unlevered
: :
 using equity cash flows  using operating cash flows

n  t  n   
W =   FCE (1  Ke) tTV (1 Ke)  W =   FCF (1 WACC) t TV (1WACC) t  SA  NFP
t =1 (t)  t =1 (t) 
Enterprise Value
W = Equity value
W = Equity value
FCF(t) = unlevered cash flows (explicit projection period)
FCE(t) = levered cash flows (explicit projection period)
TV = Terminal Value (residual) of the operating activity
TV = Terminal Value (residual) of the operating activity
WACC = Weighted average cost of capital
Ke = Cost of Equity
SA = Surplus Assets
NFP = Net financial position

Alternative of Levered DCF: Dividend Discount Method

 It uses Dividend Cash Flows
 It’s used if the company valuated is an holding company or a financial company
Wps = DPS (1+ Ke)-t

27
M&A most used methods: DCF and Multiples
DCF: critical aspects

Need of determining reliable

future cash flows

Relevant role of the expert who

realizes the valuation in the
Main critical aspects of DCF estimate of the discount factor

Difficulties in the identification of

the time frame, since the
transaction date, to whom is
attributable a stable growth

28
M&A most used methods: DCF and Multiples
Multiple Method
Then multiples can be classified in base of the valuation perspective: ASSET SIDE or EQUITY SIDE

ASSET SIDE
Market appreciation concerns company’s Indirect estimate of Equity
EV/sales capability of achieving a determined turnover Value:
value

It allows to appreciate the value of a Company W = Selected Multiple x

EV/Ebitda apart from the financial structure company’s selected
economic variable (-) Net
Financial Position (NFP)
It reflects the different operative efficiency level of
EV/Ebit the peers

EQUITY SIDE
Direct estimate of Equity
Value:
P/E Immediate indicator of company’s performance
W = Selected Multiple x
company’s selected
It compares company book value to its market economic/financial
P/BV value variable

29
M&A most used methods: DCF and Multiples
Multiple Method
Before every valuation it’s necessary to realize some preparatory activities, that are essential for the
valuation process

Target Company

FOCUS
EXTERNAL INFORMATION INTERNAL INFORMATION

BUSINESS FEATURES Company structure

Past and present accounting

information
SECTOR/MARKET

Business Plan Analysis

MAIN COMPARABLES
considering:
 SWOT Analysis
 business sector
 dimensions
 reference market Qualitative information
 life cycle phase
 financial structure
 income perspective

30
M&A most used methods: DCF and Multiples
Multiple Method

Main critical aspect of

Multiples reflect market «mood»
Multiple methods

Therefore, the value will be overestimated (underestimated) if

the market overestimates (underestimates) the comparable
companies

Correct identification of the multiple to use

Correct use of Multiples

Correct definition of the “economics” of the target company
presumes

Correct definition of the “debt level” of the target company

31
M&A most used methods: DCF and Multiples
Multiple Method
Identification of the right fundamental

Comprehension of fundamentals (multiple breakdown) that determine the multiple and

Aim understanding the links between fundamentals’ variations and multiple variations (*)

 Identification of comparable companies

Hypothesis of Peer  Multiple analysis not only in the specific sector
market multiples and  Consistent multiple definition (consistency between
transaction multiples numerator and denominator) in order to have the
same construction for all the peer companies

(*) The application of multiple method can not exclude a careful analysis of fundamentals at the basis; a
summary application could led to a wrong valuation of the target company.

32
M&A most used methods: DCF and Multiples
Multiple Method
Correct definition of the «economics» of the target company

Adjustment of target company’s financials are necessary in order to eliminate potential distortions and elements
that don’t represent the real profitability of the company. The aim is to determine financials that are feasible to
be replicated forward

Adjustments
EBITDA NFP
The aim is to eliminate potential distortions
Normalization of the Net Financial Position of
and elements that don’t represent the real
the target company in order to determine the
profitability of the company. The aim is to
real debt level of the target company, without
determine an adjusted income that is feasible
any distortions
to be replicated forward

Main normalizations: Main normalizations:

 Not replicable incomes  Seasonality effects
 Management fees (outgoing shareholders)  Time gap proceeds-payments
 Leasing reclassification (IAS 17)  Leasing reclassification (IAS 17)
 Imputed interest (eg. rental)  Employee severance indemnity
 Normalization of management policies  Accounting distortion
 Non recurring extraordinary items  Reclassification of financial items
(Derivatives)

33
 M&A most used methods: DCF and multiples
Multiple Method Approach

 Multiple application

EBITDA
Elimination of distortion effects
(+/-) normalizations (contingent)

Chosen Multiple The applied multiple represents the

summary of a complex valuating process:
=  Comparable analysis
 Test of multiples comparability
Enterprise Value
 Choice of selected multiple for valuation
purpose
+
NFP
(+/-) normalizations (contingent) Elimination of distortion effects

=
Equity value Application of premium and discounts
They allow to rectify the determined value for
the purpose of considering the peculiarities
of the specific transaction

34
 M&A most used methods: DCF and multiples
Multiple Method Approach

 Multiple application

DEAL MULTIPLES STOCK MULTIPLES

Reference price  Deal price  Stock price

 Whole equity value

Transaction object  Majority/minority stocks
 Minority stocks (usually)
(perimeter)  Company assets
 Part of company assets
 Acquirer’s shares
Payment methods  Acquirer’s debt  Cash
 Cash

 Listed
Target Company status  Listed
 Not listed

 In concentrated sectors the

 Price can include control premium or
Premiums and discounts quotations of target companies can
cash discount
include a premium
 Referred to a specific transaction
 Always available
Price nature date
“Feasible” price
 “Made” price

35
Lesson 2 Summary

1 Introduction to Corporate Valuation

2 Valuation Methods

3 EVA

4 M&A most used methods: DCF and Multiples

5 Methods adjustments

6 From value to price

7 Valuation in particular contexts

36
 Method adjustments
Group Structure

Group structure

Regardless the adopted valuation method if the object of the valuation is a Group of
companies you must consider the role and value of minorities

HOLDING COMPANY

100% 80% 60%

Alfa Beta Gamma

75%

Delta TOTAL CONSOLIDATION

In case of minority interests in subsidiaries part of the results are up to third parties (they are not up to group)

Equity Value Group

Book Value (or market

Equity Value Holding - value) Minority
Interests in Equity

37
 Methods adjustments
Payment methods

Payment methods

The valuation of a company is influenced even by the way of payment used in the
transaction and the contingent application of earn-out provisions

PAYMENT METHODS EARN-OUT

 The deal price is more significant in case  During the closing phase the price can be
of cash deal related to earn-out provisions
Payment
 The price can be settled even by stock Methods  Part of the price is settled ex-post,
(share by share) or combining cash and according to the achievement of BP
shares . objectives.

The valuation result in case of stock payment

or in case of earn out could be even
significantly different than the same one but
with cash payment

38
 Methods adjustments
Premium and discounts

Premium and discounts

In relation to the acquired stock you must consider contingent majority premiums/
minority discounts

MAJORITY MINORITY
 Control premium  Minority discount (lack of control, lack of
 Control premium decreases (until zero) marketability)
% of stock
as the % acquired gets to 100% acquired  The application of discounts could be
partially balanced by the use of Drag
Along and Tag Along provisions

DRAG ALONG

Provision aimed at protecting the investor in case of

minority stakes: it concerns the right to obligate others
(minorities) to sell their shares in order to optimize
investor’s way-out.

TAG ALONG

Provision aimed at protecting minorities: it concerns

minority shareholder’s right to sell its shares under the
same conditions achieved by the majority shareholder in
case of sell of its stock at way-out moment.

39
Method adjustments
Control premium for listed companies
Premium configuration

Private benefits of control CONTROL PREMIUM

Acquisition Synergies
Premium

Internal improvements
Acquisition Price

Market
Capitalization

40
Method adjustments
Control premium for listed companies
Premium configuration

Synergies Private benefits of control

 Commercial synergies Pecuniary (Tunneling) Not Pecuniary

 Distribution synergies
 Product mix
Self Dealing Amenities

+
 Upstream-Downstream integration and control - Excessive above market - Winning the world series
 Geographical expansion compensation - Influencing public opinion
- Diversification of resources - Owning a luxury brand

Transferability
- Asset transferred at arbitrary - Physical appointments
prices
- Cheap loans and guarantees

Internal improvements Dilution Reputation

- Insider Trading - Social prestige
 Economies of scale
- Creeping acquisitions - Family tradition
 Economies of scope
 Reorganization - Freeze-out and squeeze-out - Promotion of relatives
 Cost savings - Issuance of shares at dilutive - Personal relations
(advertising, selling and marketing) prices
-

CONTROL PREMIUM

41
Lesson 2 Summary

1 Introduction to Corporate Valuation

2 Valuation Methods

3 EVA

4 M&A most used methods: DCF and Multiple methods

5 Methods adjustments

6 From value to price

7 Valuations in particular contexts

42
From value to price
From value to price
You can identify different value configurations in relation to the aim of the valuation:
 Transfer of control,
 Transfer of a minority stake
 Fair Value valuation
 Strategic/financial investment.
As an alternative it is possible to adjust the value obtained through a chosen method considering premiums and discounts.

Acquisition Synergies Strategic

premium point of
view
Strategic Value
Indivisible private
Control premium benefits
(minority discount) Control Value Financial
Strong minority (W stand point of
premium view
alone)
Cash premium
Liquid
(Cash discount) Negotiating
value
Not liquid
Negotiating
value

Value got by comparable

Value got by transactions
market multiples 43
From value to price
From value to price
In regard to the discretionary margins of every valuation method, values resulting from different estimates
can be rather different in connection with the rationale of the different counterparts

«financial» «strategic»
for financial investors for industrial players

For all these reasons the valuation usually becomes the starting point of a negotiating process
which leads to the definition of the ultimate transaction price

Starting point: BUSINESS PLAN

 Document containing strategic lines and action plan at the base of hypothesis and financial foresees.
 It’s the reference point for the evaluating process and for determining the interest of investors

T0 T1

EBITDA
150

120 10 110
15
90 20
15
60 50

30

44
From value to price
Strategic and PE prospect
However, there are some differences between strategic investors and PE investors as regards the
application of valuation techniques

Valuation techniques Strategic prospect PE prospect

 Use of Cash flow/

 Appreciation of fundamentals
 Use of Cash flow/ fundamentals projections with
vs vs existing at the moment of
fundamentals projections an approach that appreciates
valuation
feasible synergies

 Consideration of development
 Check of development  Impossibility of appreciate all
hypothesis included in the vs vs
hypothesis included in the the development hypothesis
business plan (actions that will
business plan and evaluation (too many risks and duties not
be put in practice post
of contingent synergies remunerated)
transaction)

 “Post integration” going

 “Optimal” going concern logic vs vs  “As is” (1) going concern logic
concern logic

 High Profit expectations in

 Discounted factor coherent  Discounted factor coherent
vs vs terms of IRR ( implicit
with the risk profile of cash with the risk profile of cash
discount rate of the price
flows (WACC) flows (WACC)
achievable through exit)

(1) The necessary normalization of contingent items mustn’t led to defining a value that incorporates the effect of future actions yet to realize (that will
be realized after the investor entrance).

45
From value to price
Private Equity prospect

Application of a discounted factor consistent with the

Definition of a price performance expectations of the investor:
coherent with expected
risk/performance levels
IRR ≈ 25%

This approach allows the investor to verify if the price obtainable through the exit can satisfy all
performance expectations

dove:
P
Price Present Value P1 T0 = PE Entrance
• T1 = PE Exit
P = Price
The price that the investor is PWacc
willing to pay can be estimated P1 = Price at PE Exit
defining the present value of the PWacc = P1 discounted at Wacc
price obtainable trough exit PIRR = P1 discounted at
PIRR expected IRR

= extra profit required by

the investor:

46
From value to price
Financial investor prospect
Financial Investor Prospect

Investors’ remuneration in risk capital is measured by the annual compound interest of

investment, since the moment it has been realized to the moment of stock divestiture (IRR)

IRR = [ FV / PV ] (1/n) - 1 If there is only one cash flow in entrance (way out)
n k
 [Fk /(1+IRR) ] = 0 If there are more than 2 cash flows (cash in or out)
k=1

where: n = Investment duration (number of years)

PV = Realized investment
FV = Cash in at the moment of divestment
F = Generic cash flow (cash in or cash out)

To foresee the IRR it’s necessary to evaluate n and FV: no financial investor will invest in a
company, if there isn’t the forecast of a minimum IRR.

In the practice, the reference price of the transaction is usually defined using
market multiples, in particular through the multiple EV/Ebitda

47
From value to price
Strategic investor prospect
Strategic Investor Prospect

In the strategic investor perspective contingent synergies assume very high importance .
These synergic benefits should be estimated in terms of differential expected cash flows

Market synergies Absorption of a competitor and reinforcement of «market power»

They can refer to all corporate functions (distribution, production, marketing, A&F, R&S, etc.) configuring
Operative efficiency synergies
as economies of scale and/or rationalization

Financial and fiscal synergies Ex. fiscal consolidated balance sheet, more negotiating power vs financier etc.

Expected Price limit for a

synergies strategic buyer
beyond
forecast
period
Expected
synergies
in the
forecast
period
Potential
pure value
Potential
controllable
Equity value
value
stand
alone

48
From value to price
Additional considerations

Price integration If the «potential» value of a company represents a significant part of the total
methods value, it’s better to define a flexible price

 Earn-out: further adjustments of the price in connection with the achievement of

specific plan objectives;
 Other procedures, determined in the single circumstance in relation to the specific
needs of the parts involved.

Real estate Financial investors usually don’t recognize to operative properties a value
higher than the rent cost that the company otherwise should pay:

 For the purpose of valuing real estate at current market values, it’s possible to spin
off the properties and rent them to the company instead of sell them.

49
Lesson 2 Summary

1 Introduction to Corporate Valuation

2 Valuation Methods

3 EVA

4 M&A most used methods: DCF and Multiple methods

5 Methods adjustments

6 From value to price

7 Valuation in particular contexts

50
Valuation in particular contexts
Introduction

Start up Turnaround

 Company that has not achieved a steady state

 Negative results
 They don’t produce positive cash flow, or produce
 Uncertain possibility to achieve a new equilibrium
very low cash flows yet
 Different counterparts with interests in contrast
 No projections

CF

t0 t1 t2 t3 t0 t1 t2 t3

 First years of negative results (to-t1)  t1: Ongoing crisis

 BEP (t1)  t2 :sign of recovery
 Growing results (t2)  t3 :BEP achieving : step toward economic equilibrium (reduction of
 Steady state (t3) discount factor)

Source: Guatri, “Nuovo trattato sulla valutazione delle aziende”

51
Valuation in particular contexts
Start-up
Start up

Because of the lack of historical data and trend, the starting point of start-up valuation are necessarily Business Plan’s
forecasts

Starting Point Business Plan

Valuation methods need adjustment related to the specific situation:

Cash flow adjustments (both financial and economic method)

n
Notes:
W p= * v + Ʃ (Ri - i'' * C)* vi
m
• Really high in the first years
1
(to-t1) because of the risk
Wp = Potential controllable value Discount factor related to success
R = CF in steady state • It reduces in t2 and tends to
i= discounted cash flow related to the risk connected to R normalization in t3
M= years necessary to achieve R
Ri = cash flows (negative or positive) until the achievement of R • Capitalization of losses in the
I’’= cost of capital, cost of equity Very strong first years
vm, vi = discount factors Assumptions • Reliability of BP
C = invested capital • Sector features

The estimated value is always potential and can be considered also controllable only if the assumptions are clearly individuated and estimated

Source: Guatri, “Nuovo trattato sulla valutazione delle aziende”

52
Valuation in particular contexts
Turnaround
Turnaround

Possible solutions for a company in a crisis state:

Sell Restructuring Wind up

Potential recovery of an
It would entail a badwill asset value through the Extreme solution
investment of new finance
Notes
s s

W p= *v - Ʃ (Ri - i'' * Ci ) *v -Ʃ Ii * vi
m i

1 1

Notes:
Wp = Potential controllable value
• The discount factor should
R = CF in steady state
express the risk of
i= discounted cash flow related to the risk connected to R Discount factor
investment in different period
M= years necessary to achieve R
(t1, t2, t3)
Ri = cash flows (negative or positive) until the achievement of R
I’’= cost of capital, cost of equity
vm, vi = discount factors
C = invested capital
Ii = investment i

In this case the potential value is determined adding at the formula seen for start up , the value of new necessary investments (I1, I2,..)
The estimated value is always potential and can be considered also controllable only if the assumptions are clearly individuated and estimated

Source: Guatri, “Nuovo trattato sulla valutazione delle aziende”

53