Webinar 3: Script Generator:

1. READ - ORDER?
2. BRIEF PLAN NB: Dont make the real exam the 1st time you use this approach.
3. THINK OBJECTIVE
4. TIME
5. STRUCTURE.

Task – SCS Mini Mock Exam 1 Walkthrough – Webinar 4

You run into CEO Mei Yee in the corridor and she has this to say: Don't rush your 1st read
through - slow down. Stay calm
Acquisitions - common topic in SCS Exam
“I believe Geo Pataros, CFO was speaking with you about the upcoming offer for Gorman. The Board
has been having heated discussions in recent days about putting an appropriate value on Gorman.
The figures have varied widely depending on the person offering an opinion. There has been mention
of asset based valuations and profit-based valuations but I really am not an expert in this area and
require your help. Examiner prompt - cover these areas in your answer.
I am nervous that Runnabout might end up over-paying for Gorman. The following are some of the
relevant points discussed by the Board:
• Geo believes Gorman could be worth G$750 million based on cash flow data from the last set of
published accounts using Net Present Value (NPV),
• Gorman has shared its budget for the next two years and estimates profits of G$90 million and
Ensure you revenues of G$450 million,
refer to each You must use these numbers!! All SCS numbers are given for a reason.
point • There are two similar-sized, publicly listed micromobility companies in the United States and their
in your answer!average P/E ratio is 11. As you’re aware, Gorman isn’t a listed entity.

• Runnabout would need to spend G$150 million on restructuring and making some of Gorman’s
current workforce redundant,
• Patrick Chiu, one of our non-executive directors, believes we should consider the non-current assets 2nd area -
figure on Gorman’s latest financial statements as a basis for valuation. This figure stands at G$450 note mark
million. split below.

What I’m concerned about is how to set a value on Gorman and, ahead of the offer to buy Gorman,
can you advise on the issues to consider relating to informing the stock market?
I need you to drop me an email within the next hour regarding the two matters below so that I can
discuss them with the board. Email format - simpler than Report.
1
2 Firstly, what are our options on the valuation of Gorman, given the information above. Please do
include some numbers.
(sub task (b) = 80%)
1 2 80/20 split = be
Secondly, what issues do you think we should consider in terms of informing the stock market of our careful. Watch
intentions? the clock.
Make sure each DISCIPLINE?
part is answered (sub task (b) = 20%)
- in full.

REMEMBER:
You are replying to an email in real life. This is a role
play exam. Ensure that you communicate clearly,
precisely and professionally. Above all, try to answer
the question you are asked.
(Even when you are stuck).
 Task – ANSWER SCS Mini Mock 1 Walkthrough – Webinar 4

From: Senior Manager

To: Mei Yee, CEO
Clear layout and intro
Aug 2020
Date: May - as in office
Subject: Gorman Valuation and related Stock Market issue
Hi Mei,
Good/ Regarding our discussion today, I’ve addressed each of the points that you raised as follows:
professional
s
tart. 1. Our options in respect of the valuation of Gorman, including estimated.
2. Consideration of the issues for in respect of informing the Stock Market.

1. Gorman Valuation:
Clear headings help the marker. And YOU!

There are many ways to value a proposed target company for acquisition, but it is not an exact science.
Keep It would be appropriate to point out that valuation models are generally based on quite significant
initials
ectionsbr assumptions and that they should not be applied in a mechanical manner.
ief. Butinc
lude them.
a) Earnings Based Valuation:

Profit-based models effectively assume that the entity will generate profits, from which dividends may
be paid. The wealth created from making profits will tend to be returned to the shareholders and so
it makes sense to relate the company’s value to a multiple of earnings.
Use ALL the number you were given.

In this case, the problem is that we are relying on Gorman’s estimations of its future profit which they
Easy to
follow -s may well have inflated with the intention of getting a higher sales price. Projections of future profits
hort para-gr are always open to challenge, even when there is no reason to believe that either party has a vested
aphs.Try interest.
to score
mark
s ineach The multiplier is also very relevant. Share prices of established businesses are observable, and the
para.Add va
lue. markets have had the opportunity to incorporate all available information, including reported
earnings, into the share price. Because Gorman is an unlisted company, we may apply some fraction
of the typical P/E ratio e.g. 2/3.

So, using this kind of valuation model we might value Gorman at around G$990 million i.e. G$90
million (estimated earnings) x 11 - (P/E ratio of similar listed companies) x 2/3.
Provide estimates asked for.
In each section.
b) Asset Based Valuation:

In the same vein, the asset basis for valuing a business effectively sets a baseline for the price because
the entity can be broken up and the assets realised. In this case, Patrick Chiu has valued Gorman’s
non-current assets at G$450 million. Of course, much of Gorman’s value will reside in its business

Again - refer to numbers given in question.

 We must know the basics this is not OT Exam level knowledge.

relationships in the micromobility industry and the know-how and expertise of its workforce, as well
as the value of intangible assets such as patents. For this reason, an asset based valuation would
seriously undervalue the company and Gorman’s current owners will be well aware of that.

This value represents only the original value of the assets less cumulative depreciation reserves. The
Short valuation is not relevant except that this is the lowest figure that could be paid, as this represents the
paragraphs
a value that we could sell the assets of the company for, if the company were to close.
re markerfr
iendly.
However, what we’re interested in is buying the company as a going concern and not just buying the
assets to dispose of.

c) Value based on forecast NPV Simple use of clearing headings. The marker knows whats coming
here. GET ONSIDE.

Geo Pataros, our CFO, has provided his forecast of future cash flows and this generates an NPV of
Refer to the G$750 million. However, this forecast may be overstated and may not be achievable without further
question. S investment. Therefore, this forecast suggests that the top value that we should pay would be G$750
imple.
million. However, Runnabout will need to invest G$150 million on restructuring and making staff
redundant, so a lower figure should be negotiated.
Most SCS tasks are augmented with a short conclusion
Conclusion:

Obviously, it is in our interests to apply the asset based valuation model but Gorman is likely to dismiss
such an offer. In principle, we should not pay more than the NPV of the forecast future cash flows.
However, it is difficult to accurately forecast what those cash flows could be.

We should bear in mind that G$150 million needs to be spent on restructuring/redundancies and this
should certainly enter into discussions on a fair acquisition price. A good practical point.

Ultimately, the final acquisition fee will largely depend on the negotiating skills of both companies but
the valuation model we choose to apply will help in establishing a baseline figure from which both
parties can commence negotiations.
Clear switch to 2nd section. Remember only 20% of time here.
2. Informing the Stock Market:

There are a number of issues for us to consider, as follows:

Common topic in SCS Exam.
Efficient Market Hypothesis

There is an argument that the stock market is efficient, which means that it will process all of the
information that is available to it and correctly price our shares. In the long term, the proposed
acquisition’s impact will become apparent from our published results and will have its effect on the
share price no matter what we announce or how we announce it.

Short Term Reaction

Having said that, in the short term the stock market cannot react to information that it does not have.
Good/
practical There are industry experts who devote their working lives to gathering information about our industry
a and who will study our behaviour as closely as they can. It is probably in our interests to brief those
dvice
analysts so that any uncertainty can be minimised, otherwise the share price may be artificially
depressed until the market sees evidence of success.

One way to reassure the market is to provide as much information as possible in the initial briefing.
That has the advantage of reducing the uncertainty, but creates the risk of alerting competitors to our
change of strategy. However, we can probably afford to publicise the acquisition quite extensively
because we are not likely to provide our competitors with information that could be used against us.

I hope that the above is sufficient for your purposes, Mei, but do feel free to come back to me with
any queries.

Kind regards, Always TOP and TAIL - again as in office

Senior Manager