Corporate M&A: Valuation Tool

Contacts: Duccio Vitali, Catherine

Lemire
December 2002
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Introduction

This module: • The objective of this module is to provide ACs and

Consultants with a valuation tool to be used in the
context of Corporate M&A transactions, with a focus on
synergy valuation
• Companions to this module include:
- Exercise on synergy valuation
- Excel valuation model

Related • Related training materials can be found in the following

materials: BVU/Training modules:
- Investment Appraisal
- Valuation Methodologies
- Private Equity Valuation Methods & Model Building
- Advance Valuation and Investment Appraisal

GXC

CorporateMAValuat
ionTool
2
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Agenda

 Bain’s valuation approach

 Valuation methodologies
-Discounted cash flow
-Comparables

 Synergy valuation
 Investment decision
-Payback period
-NPV
-IRR

 Example of valuation model GXC

CorporateMAValuat
ionTool
3
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Valuation is a key step in the M&A process
Key questions

• What is the strategic rationale for the acquisition?

Strategy development
• What are the required assets and competencies?

• Based on attractiveness and availability, which is

Sourcing and screening the best candidate?

• Are the target’s performances and projections

Due diligence credible?

Valuation • What is the right price?

Integration • How can the full value be captured?

GXC

CorporateMAValuat
ionTool
4
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Bain's valuation approach

• Quantify the full strategic value of an

Objective:
acquisition candidate

• Quantify:
Main activities:
- Current operating value
- Value of stand-alone operating improvements
- Value of potential synergies
• Use multiple valuation methodologies to
arrive at the “best estimate” of value
- DCF
- Multiples
• Reality check market valuations
• Run sensitivities for key value drivers
GXC

CorporateMAValuat
ionTool
5
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Bain’s approach to valuation encompasses
three different components
Bain focus

% of 200%
• Investment banking focus
current  Leverage/gearing
Financial deal
market 180 structure  Type of financial products used
value
Value creation 3. Integration opportunities and risks
160 opportunity
 Expanded distribution/cross-selling
3. Synergies  Plant consolidation
 Purchasing leverage
140  SG&A optimization
2. Stand-alone 2. Better management of assets
120 Acquisition operating  Plant best demonstrated practices
Premium improvements  Reduced manufacturing complexity
 Outsourcing/move off shore
100  Reduced working capital

80
1. Current/forecast cash flows
Market value 1. Current
60  Current market size/projected growth
of debt and operating  Current market share
equity value  Price per unit
40  Variable cost per unit
 Fixed costs
 Capital expenditures/working capital
20

0
Current market Full potential
value value
GXC

CorporateMAValuat
ionTool
6
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
The valuation process must follow a series of
key steps

Develop core business Value target as stand- Value operating Value potential
expectation alone business improvements synergies

• Five year cash • Detailed financial • Cost reduction • Overall fit with
flow forecast due diligence and revenue strategy
- Historical enhancement • Cost reduction and
• Critical areas of analysis opportunities revenue
sensitivity
- Future enhancement
- Market growth projections • Non-recurring
- Market share costs synergies
trends • Negative synergies
- Key customers/ - Customer and
products Other potential buyers competition
- Cost reduction (strategic, financial) response
- Capital - Employee turnover
expenditures
• Non-recurring costs
Other options
(spin-off, liquidation)

How much is the target How much is the target

worth to the seller? worth
GXC to the client?

CorporateMAValuat
ionTool
7
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Identifying and quantifying revenue and cost
synergies is critical in Corporate M&A valuation

Cost reduction Revenue enhancement

Negative synergies
(“hard” synergies) (“soft” synergies)

• Product cross- • Loss of customers/

Variable Fixed selling revenues
• Purchasing • Channel • Loss of key
• Manufacturing distribution
scale employees
• Sales & enhancement
• Labor Marketing • Competitors take
productivity • Portfolio action
• Distribution strengthening
• Manufacturing
efficiency • G&A • Geographic
benefits expansion

• Consumer and • New business

trade spending development
efficiencies
• Transportation
efficiency
Integration costs

• Costs such as severance, plant shut-downs, relocations, etc. GXC

• Typically non-recurring (one-time)

CorporateMAValuat
ionTool
8
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Value considerations vary by M&A rationale,
hence valuation focus must be adapted

Play by the rules Transform the rules

Buyouts/
Corporations
Private Equity

Active Adjacency Redefining Redefining

Value Scale Scope
investing expansion business models industries
considerations

Stand-alone
cash flow:

Cost of
integration:

Scale
economies:

Revenue and
customer
synergies:

Value of GXC
options:
Source: Bain M&A Brief #2; “Getting The Price Right”
CorporateMAValuat
ionTool
9
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Bain works side-by-side with investment
banks in the valuation process
Percent of professional time
100%

Investment
80% Banks
Bain

60%

40%
Lawyers

20%

Accountant
0%
Identify Due Valuation Approach Offer & Negotiate Board Execute/ Integr-
candidate Diligence deal approvals
GXC close ation
structure

CorporateMAValuat
ionTool
10
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Bain’s role is complementary to the role and
approach of an investment bank

Investment bank Bain

Approach: • Financial oriented • Business oriented

Primary • Comparables (multiples based • Discounted cash flow

methodology: valuation)

Key question: • What can we buy/sell the • What is the target company
target company for? really worth?

Roles: • Determine value based on • Develop DCF model that

prices/multiples of comparable values current business,
business stand-alone operating
• Develop financing options and improvements and potential
deal structure/tactics synergies

• Flesh out regulatory issues • Provide a reality check on

market valuations

Motivation: • Execute transaction • Maximize value for client

GXC

CorporateMAValuat
ionTool
11
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Example of I-bank and Bain material for a
CEO meeting

Investment Bank Bain

C o m p a r a b le a n d P r e c e d e n t s V a lu a t io n S u m m a r y D C F an alysis show s a p ositive $9 21M N PV

($ in M illio n s )
Ye a r 0 Ye a r 1 F Ye ar 2 F Yea r 3 F Yea r 4 F Ye a r 5 F As su mp tio ns
V A L U A T IO N S U M M A R Y - A N A L Y S IS O F P U B B L IC L Y T R A D E D C O M P A R A B L E C O M P A N IE S M ark et 12,500 13, 750 15, 125 16,638 18,301 20, 131
M ark et Grow th 10% 10% 10% 10% 10%
M ark et Share 8% 8% 8% 8% 8% 8% As s um e c ons t ant - revenue grows at m ark et

BBC M u l ti p l e R a n g e Im p lie d F irm V a lu e In com e Statem en t

Revenue 1,000 1, 100 1, 210 1,331 1,464 1, 611
D a ta Low H ig h Low H ig h
Contribution % 50% 50% 50% 50% 50% 50% As s um e c ons t ant
CO Gs 500 550 605 666 732 805
F irm V a lu e / 2 0 0 0 A N e t S a le s $ 1 ,7 8 2 .3 (1) 0 .6 x 0 .7 x $ 1 ,0 6 9 .4 $ 1 ,2 4 7 .6 SG &A - fix ed 111 111 111 111 111 111 As s um e 30% fix ed, 70% variable, grow ing w ith s ales
- variable 259 285 313 345 379 417
To ta l S G& A 370 396 424 456 490 528
F irm V a lu e / 2 0 0 0 A E B IT D A 9 5 7 .2 (1) 6 .0 7 .0 1 ,1 7 4 .3 0 1 ,3 7 0 .0 Deprec iation 30 33 36 40 44 48 As s um e c ons t ant as a % of s ales
EB IT 100 121 144 170 198 229
Im p lie d R a n g e $ 1 ,1 0 0 .0 $ 1 ,3 0 0 .0
Tax Rat e (ex interes t s hield) 30% 30% 30% 30% 30% 30% As s um e c ons t ant
Tax (ex interes t s hield) 30 36 43 51 59 69
Op er atin g In co m e a fter ta x 70 85 101 119 139 160
V A L U A T IO N S U M M A R Y - A N A L Y S IS O F B A K E R Y P R E C E D E N T T R A N S A C T IO N S
Ba la n ce Sh e e t
AR 100 110 121 133 146 161 Us e c ons t ant ratio of AR /R evenue
Inventory 150 165 182 200 220 242 Us e c ons t ant ratio of Inventory /C OGs
BBC M u l ti p l e R a n g e Im p lie d F irm V a lu e AP 100 110 121 133 146 161 Us e c ons t ant ratio of AP /C OG s
W ork ing C apit al 150 165 182 200 220 242 AR + Invent ory -A P
D a ta Low H ig h Low H ig h Change in W ork ing Capital (10) (15) (17) (18) (20) (22)

F irm V a lu e / 2 0 0 0 A N e t S a le s $ 1 ,7 8 2 .3 (1) 1 .0 x 1 .2 x $ 1 ,7 8 2 .3 $ 2 ,1 3 8 .8 Capex 40 44 48 53 59 64 As s um e c ons t ant as % of s ales

Operat ing Inc om e after tax + Deprec iation+ C hange in

F irm V a lu e / 2 0 0 0 A E B IT D A 9 5 7 .2 (1) 7 .5 9 .0 1 ,4 6 7 .9 0 1 ,7 6 1 .5 Fr ee C a sh F lo w 50 59 72 87 104 122 W ork ing Capital-Capex
NP V of F re e C ash Fl ow s 283 Us e Dis c ount R ate of 15%
Im p lie d R a n g e $ 1 ,6 0 0 .0 $ 1 ,9 5 0 .0 Term inal V alue- Perpetuit y
M ethod 0 0 0 0 1, 282 As s um e F CF grow at 5% per annum in future
NP V of T e rm in a l Va lu e 637 Us e Dis c ount R ate of 15%

( 1 ) S o u r c e : B e s tfo o d s B a k in g C o m p a n y , In c . a u d ite d f in a n c ia l s t a te m e n ts To ta l N PV 921

G
DXACL 02 11 12-D V I-G 4C -M & A Va luatio n To olkit
74

T his inform ation is co nfid e ntial and w as prep ared b y B ain & C o m p any solely for the use o f our client; it is n ot to b e relied o n b y any 3rd party w itho ut B ain's p rior w ritten consent.

Comparables valuation Bottom-up DCF valuation

GXC

CorporateMAValuat
ionTool
12
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Common watchouts when working alongside
an I-bank

Possible tensions in
Motivation Tactics used
Bain/I-bank interactions

• Banks primarily • Optimistic valuations • Conflict over company

generate fees from - Favorable multiples value due to
closing transactions - Low cost of capital optimistic I-bank
- “Never a bad time to - High growth rates assumptions
close a deal”
• Focus on earnings • Clients often hire Bain
accretion vs. value for “sanity check” on
creation I-bank’s
recommendations

•Be aware of differences in motivation

•Never let the I-bank control the model
GXC

CorporateMAValuat
ionTool
13
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Agenda

 Bain’s valuation approach

 Valuation methodologies
-Discounted cash flow
-Comparables

 Synergy valuation
 Investment decision
-Payback period
-NPV
-IRR

 Example of valuation model GXC

CorporateMAValuat
ionTool
14
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Valuing a company’s equity is comprised of
two steps

Determine the Enterprise Allocate the EV to the

Value (EV) of the company company’s claimants

Key •What is the total value of •How much of the company

question: the company? belongs to different
claimants?
- Shareholders
- Debtholders

Method: •DCF •Market value analysis

•Comparables •Black-Scholes
- Convertibles
- Warrants

GXC

CorporateMAValuat
ionTool
15
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
There are 2 main valuation methodologies
used by Bain in corporate M&A projects
Discounted Cash Flow Comparables

Description: • Calculates the net present • Calculate ratio of value to key

value of all projected future financial indicators for
cash flows plus the terminal comparable companies or
value recent transactions
- Using the cost of capital to - Revenue, EBITDA, EBIT,
discount to present earnings, book value

Pros: • Measures value of firm’s • Most common and easiest to

projected cash flows over apply
extended period
• Theoretically/academically best
measure of value

Cons: • Depends on extensive financial • Difficult to choose accurate

projections comparison group
• Requires accurate discount rate • Can be difficult to tease all
(cost-of-capital) key drivers of earnings
• More time consuming than • Uses earnings, not cash flow
other methods • Only indicates the value
GXC
• Easy to be “precisely wrong”! relative to peers
- Dot-com bubble
CorporateMAValuat
ionTool
16
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Prudent valuations use both methodologies

Discounted Cash Flow Comparables

When to • Most common valuation • Typically used in price

use: method used at Bain negotiations
• When case time line allows • As a quick reference point
to determine existing
market price
• As a “sanity check” for DCF
calculations

Use DCF as primary methodology and

Comparables as “sanity check”

GXC

CorporateMAValuat
ionTool
17
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Other valuation methodologies…

Valuation technique Description

• LBO • Determine valuation given

target equity returns and
maximum debt permissible

• Liquidation value • Determine value according to

what we could liquidate the
firm’s assets for

• Real options • Determine overall firm’s

valuation by evaluating the
options that managers have in
influencing business decisions

GXC

CorporateMAValuat
ionTool
18
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Agenda

 Bain’s valuation approach

 Valuation methodologies
-Discounted cash flow
-Comparables

 Synergy valuation
 Investment decision
-Payback period
-NPV
-IRR

 Example of valuation model GXC

CorporateMAValuat
ionTool
19
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
The DCF calculation is based upon a series of
steps

Estimate Calculate
Forecast Calculate Discount Analyze
cost of terminal
performance cash flow FCF and TV sensitivities
capital value

• Estimate • Analyze • Use EBIT as • Calculate the • Discount all • Test key
cost of non- historical starting terminal free cash assumptions
equity performance point value (TV) flows, to assess the
financing using key • Calculate using including range of
• Estimate ratios actual Bain appropriate terminal possible
cost of • Understand operating method(s): value back to valuations
equity strategic cash flow,  Growing present using • Develop
financing position also known perpetuity appropriate valuation
 P/E ratio cost of capital
• Calculate • Develop as Free Cash scenarios
 Book value (WACC)
WACC performance Flow (FCF)
 Liquidation  Net present
• Occasionally scenarios value value (NPV)
the client • Forecast • Add terminal • Test results
has an individual line value (not yet • Interpret
established items (P&L and discounted
discount balance sheet) results within
back to decision
rate that • Check overall present) to
can be used context
forecast for forecasted
reasonableness final year’s
FCF GXC

CorporateMAValuat
ionTool
20
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
The first step consists of calculating the
company’s cost of capital

Estimate Calculate Discount

Forecast Calculate Analyze
cost of terminal FCF and
performance cash flow sensitivities
capital value TV

• Estimate
cost of non-
equity
financing
• Estimate
cost of
equity
financing
• Calculate
WACC
• Occasionally
the client
has an
established
discount
rate that
can be used
GXC

CorporateMAValuat
ionTool
21
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Cost of capital overview

• You can think of the cost of capital as the expected rate of return
offered by other assets (that are equivalent in risk) to the project being
evaluated

• It is often referred to simply as the discount rate

• The most common method to determine the cost of capital is the

weighted average cost of capital (WACC)
- As the name implies, WACC is the weighted average of the cost of equity and
the cost of debt

• NPV tends to be highly sensitive to WACC

 Sound analysis calculates a range for WACC

• WACC is not always appropriate; it may make sense to use a project

specific cost of capital

• Occasionally the client has an established discount rate that can be used
- Review the client’s discount rate carefully

• If the target firm’s capital structure changes substantially over time,

may be necessary to use different WACC GXC

CorporateMAValuat
ionTool
22
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Cost of capital calculation (1/2)
E D
Formula: WACC = D+E * Ke + D+E * Kd * 1-t
Where
E = Market value of equity
D = Market value of debt
Ke = Cost of equity
Kd = Cost of debt
t = Marginal corporate tax rate

Ke Kd D, E, t

Determine appropriate Determine appropriate Determine debt,

cost of equity cost of debt equity and tax rate

• Use CAPM formula: • Kd is not necessarily • Book value of debt

Ke = Rf + L [E(Rm) - equal to coupon rate can generally be used
Rf] of bond
• Market value of equity
• Must calculate or = share price
obtain yield on multiplied by # of
outstanding debt shares outstanding
• If not available, use • Divide income tax
Kd of firms with payable by net
similar rating from earnings to get the
agencies such as effective tax
GXC
rate
Moody’s or S&P

CorporateMAValuat
ionTool
23
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Cost of capital calculation (2/2)
Ke Kd D, E, t

Determine appropriate Determine appropriate Determine debt,

cost of equity cost of debt equity and tax rate

• Use CAPM formula: Ke = Rf + L [E(Rm) - Rf]


1. Estimate
Rf E(Rm) - Rf
for a set of
Determine similar
Determine companies
appropriate
appropriate risk-
market risk
free rate
premium •BARRA and Datastream
can be used as sources
• Generally the • Use long-term
10 year T-Bond average of
can be used difference
between u L
• International
Financial expected market 2. Calculate
Statistics can rate of return 3. Re-lever reflect
industry
be used as and risk-free target firm’s
average for
source of rate: E(Rm) - Rf capital structure
unlevered 
government • Ibbotson can be
bond yields of used as source
specific • Unlever  • Use target
• For US, leverage in
countries based on
Copeland, Koller formula* to
formula*
and Murrin calculate L
recommend 5% • Use average GXC
to 6% of u of
comparable
L = u + D/E (u - debt), typically assume debt = 0 firms
CorporateMAValuat
ionTool
24
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
The next step requires forecasting the
company’s performance

Estimate Calculate Discount

Forecast Calculate Analyze
cost of terminal FCF and
performance cash flow sensitivities
capital value TV

• Analyze
historical
performance
using key
ratios
• Understand
strategic
position
• Develop
performance
scenarios
• Forecast
individual line
items (P&L and
balance sheet)
• Check overall
forecast for
reasonableness
GXC

CorporateMAValuat
ionTool
25
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Forecasting pro-formas

• Pro-formas are comprehensive financial models used to

forecast future financial performance
- Used as basis for company valuation
- Assumptions may differ based on industry being analyzed

• Forecasting complexity and sophistication is often balanced by

simplicity
- Data availability
- Time/resource availability
- Importance of precision (range of possible values)

• Industry dynamics and competitors impact play an important

role in forecasting pro-formas

• Business judgment will direct you to focus more effort on

variables/assumptions that drive the answer
GXC

CorporateMAValuat
ionTool
26
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Several elements have to be considered
when forecasting

Current
market size
Projected
market (vol)
Projected
growth
Projected
volume
Historical
market share
Projected
market share Projected
Projected 
revenues
in share

Historical
price/unit
Projected
price/unit Projected
Projected 
in price EBIT

Historical
COGS

Historical
SG&A
Projected
costs
Historical
depreciation

Projected 
in margins GXC

CorporateMAValuat
ionTool
27
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
A combination of internal and external data
is used to project performance

Example of logic structure

Year 0 Year 1 Year 2 Year 3 Year 4 Exit Year Year 0 Source/Logic Years 1-5 Source/Logic
Industry Data
Market Units Sold (Millions) 10.45 10.55 10.83 11.15 11.60 12.18 Management; Market Research = Market Units x Annual Growth Rate
Annual Growth Rate 1.0% 2.6% 3.0% 4.0% 5.0% Market Research

Company Market Share 10.0% 11.0% 12.0% 13.0% 14.0% 15.0% = Company Units / Market Units Historical Performance; Competitive Position

Company Data
Company Units Sold (Millions) 1.05 1.16 1.30 1.45 1.62 1.83 Management Reports = Market Units x Market Share

Revenues per Unit 350.00 353.50 357.04 360.61 364.18 367.82 Company Financials = Units x Annual Growth Rate
Annual Price Change 1.0% 1.0% 1.0% 1.0% 1.0% Historical Performance; Industry Dynamics

Total Revenues ($MM) 365.8 410.4 464.0 522.9 591.4 672.0 Company Financials = Company Units x Revenues per Unit

Operating Costs per Unit 250.00 255.00 260.10 265.30 270.61 276.02 Management Reports = Costs per Unit x Annual Cost Increase
Annual Cost Increase 2.0% 2.0% 2.0% 2.0% 2.0% Historical Performance; Inflation

Total Operating Costs ($MM) 261.3 296.1 338.0 384.7 439.5 504.3 Company Financials = Company Units x Operating Cost per Unit
Total Gross Profit 104.5 114.4 126.0 138.2 152.0 167.7 = Revenues - Operting Costs = Revenues - Operting Costs

SG&A Expense 4.5 4.4 4.9 5.2 5.9 6.7 Company Financials = Revenues x SG&A as a % of Revenues
SG&A as % of Revenues 1.2% 1.1% 1.1% 1.0% 1.0% 1.0% = SG&A Expense / Revenues x 100% Historicals; Management; Scale Analysis

Total EBITDA ($MM) 100.0 110.0 121.0 133.0 146.0 161.0 = Gross Profit - SG&A = Gross Profit - SG&A
EBITDA as % of Revenues 27.3% 26.8% 26.1% 25.4% 24.7% 24.0%

GXC

CorporateMAValuat
ionTool
28
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Different forecast methodologies can be used
for revenue and cost estimates

Forecast methodology Analytic caveats

• 80/20 estimate • Low accuracy, but quick

Quick,
high-level
• Management forecast • Must test management
assumptions, biases

• Historic corporate or • Check if company

industry operating could/should be
benchmarks/ratios operating at these
levels

• Cost: • Check correlation

- Regression analysis coefficients
of cost elements and (regression)
cost drivers
Long, • Sanity check all results
- E-curve analysis
detailed
analysis • Revenues:
- S-curve analysis
GXC
- E-curve analysis

CorporateMAValuat
ionTool
29
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
At this point, it is possible to calculate the
free cash flow (FCF)

Estimate Calculate Discount

Forecast Calculate Analyze
cost of terminal FCF and
performance cash flow sensitivities
capital value TV

• Use EBIT as
starting
point
• Calculate
actual Bain
operating
cash flow,
also known
as Free Cash
Flow (FCF)

GXC

CorporateMAValuat
ionTool
30
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Free cash flow start with EBIT and adjusts
for non-cash elements
Current
market size
Projected
market (vol)
Projected
growth
Projected
volume
Historical
market share
Projected
market share Projected
Projected 
revenues
in share

Historical
price/unit
Projected
price/unit Projected
Projected 
in price EBIT

Historical
COGS

Historical Projected
SG&A costs Projected
CAPEX Free cash flow
Historical
depreciation Projected
depreciation
Projected 
in margins Projected
 in WC
GXC

Projected
tax rate
CorporateMAValuat
ionTool
31
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 Free cash flow calculation

EBIT (operating income)

- Taxes ¹

= EBIAT

+ Depreciation ²

- Capital Expenditures

- Increase in Working Capital ³

= Free Cash Flow

Note: GXC
1. Be careful here: use cash taxes instead of accounting taxes
2. Depreciation is a non-cash expense and must therefore be added back
3. Remember, increase in working capital is a cash outflow and must therefore be subtracted
CorporateMAValuat
ionTool
32
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
The fourth step consists in calculating the
terminal value

Estimate Calculate Discount

Forecast Calculate Analyze
cost of terminal FCF and
performance cash flow sensitivities
capital value TV

• Calculate the
terminal
value using
appropriate
method(s):
 Growing
perpetuity
 P/E ratio
 Book value
 Liquidation
value
• Add terminal
value (not yet
discounted
back to
present) to
forecasted
final year’s
FCF GXC

CorporateMAValuat
ionTool
33
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
A significant part of the total value is within
the terminal value

• Terminal value is a method of estimating the present value of

cash flows in the distant future, beyond the period in which
forecasts are reasonable

Years
0 1 2 3 4 5 6 7 8 ...n

FCF projections Terminal Value

Reasonable Cash extending

forecast into future

• Significant portion of the total NPV is within the terminal value

• Thus, NPV tends to be highly sensitive to terminal value
assumptions and calculations
• Therefore carefully examining the assumptions is extremely
important
GXC

CorporateMAValuat
ionTool
34
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
How is terminal value calculated?

• Terminal value is treated like any other cash flow and is

added to the last year’s cash flow

• Determine appropriate year in which to do terminal value:

- Push as far into the future as practical (in order to minimize the
impact on NPV)
- Make sure project has stabilized by then (minimal new CAPEX,
etc.) so that fixed assumptions of growth are reasonable

• Approximate the present value of the cash flows in year

(n+1) and beyond
- If forecast to year 5, then n=5
- Estimate present value of cash flow in years 6 to infinity
- After calculations, terminal value will be present value in year n,
so it must be discounted back to year 0. This is often done by
adding the terminal value to the cash flow forecast for year n
(year 5 in this case) before discounting back to year 0
GXC

CorporateMAValuat
ionTool
35
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Different methods can be used to calculate
the terminal value…

Growing Perpetuity P/E Ratio Book Value Liquidation Value

Concepts: • Project keeps • It’s worth what we • It’s worth the value • It’s worth what we
growing indefinitely could sell it for in of its assets in year n could liquidate it
year n for in year n

Use of • Aggressive • Relatively aggressive • Conservative • Ultraconservative

method: estimate for estimate for estimate for estimate for
continuing project continuing project continuing project continuing project
• Strong growth (depends on how • Reasonable estimate • Reasonable for
prospects high P/E ratio is) for project that is terminating project
• Do not use if • Strong growth winding down
growth rate, g, is prospects
too high • Use if g is high

Examples: • High tech start-up • Fashion athletic • Baby food • Old steel mills
after initial growth shoe manufacturer manufacturer

• Choice of method depends on type of project

• The growing perpetuity and P/E ratio methods are most commonly used to value firms,
because they implicitly assume that the firms will continue operations indefinitely
• Given potential for large differences in terminal value calculations based on assumptions
GXC
used, use of multiple methods provides ‘sanity check’ on results
• Use average of different methods to account for differences
CorporateMAValuat
ionTool
36
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 …based on different assumptions and
resulting in different calculations
Growing Liquidation
Perpetuity P/E Ratio* Book Value Value
Assumptions: • Cash flow settles • P/E rates for • Book value of • Percentages vary
down by year n industry, not assets, not equity by industry, i.e.,
• Reasonable parent company inventory for
expectation that • P/E ratio likely to perishable foods
cash flow growth be lower in year n vs. precious metals
will continue at g% than today
per year
• Growth rate
significantly less
than discount rate

(FCFn)(1 + g) TV = Earnings * PE TV = net PPEN TV = 100% of cash

Calculation: TV =
(i - g) + current +90% of A/R
assets +70% of invent.
- current +50% of net PPE
if termi- liabilities - current
nating - PV non-
project cancelable liabilities
leases -PV non-
- intangible cancelable
= value in year n leases leases
of cash flows in
years n+1 = sale value in = book net asset value = asset liquidation
through infinity year n at end of year n value

GXC

*EBITDA multiples are commonly used instead, as they provide a closer approximation of the firm’s operating cash flows
Note: g is the growth rate forecasted for firm’s cash flows from year n to infinity (typically inflation),
i is the discount rate CorporateMAValuat
37
ionTool
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Then we calculate the total value by
discounting the FCF

Estimate Calculate Discount

Forecast Calculate Analyze
cost of terminal FCF and
performance cash flow sensitivities
capital value TV

• Discount all
free cash
flows,
including
terminal
value back to
present using
appropriate
cost of capital
(WACC)
 Net present
value (NPV)
• Test results
• Interpret
results within
decision
context

GXC

CorporateMAValuat
ionTool
38
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
How to discount FCF: NPV method
FCF1 FCF2 FCFn + TVn

Year 0 Year 1 Year 2 … Year n Year n+1 … 

NPV
=
FCF1
(1+i) ¹

+
FCF2
(1+i) ²

+
…
+
FCFn + TVn
(1+i) ⁿ

GXC

CorporateMAValuat
ionTool
39
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
The last step consists of analyzing
sensitivities

Estimate Calculate Discount

Forecast Calculate Analyze
cost of terminal FCF and
performance cash flow sensitivities
capital value TV

• Test key
assumptions
to assess the
range of
possible
valuations
• Develop
valuation
scenarios

GXC

CorporateMAValuat
ionTool
40
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Sensitivity analysis is essential in assessing
the range of possible valuations

• Sensitivity analysis allows managers to gauge the impact of their

assumptions on the valuation
- Different variables/elements will have different impacts on the final
valuation
- Each variable can have a range of input assumptions that will drive a
range of valuations

• Use business judgment to select which variables are more

important and what is a reasonable range of assumptions

• We can improve the precision of our valuation by

refining assumptions which drive sensitivity
- Revise assumption methodology
- Analyse further, to confirm smaller range of possible inputs is
actually narrower GXC

CorporateMAValuat
ionTool
41
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
All key value drivers must be tested in order
to determine valuation ranges

Sensitivities Valuation

•Over 50% of NPV could be in • Significant

terminal value; thus methodology judgment required
and perpetuity growth rates must Synergies to quantify cash
be carefully selected impact

• Requires rigorous due-

•Small changes in WACC could Stand-alone diligence and judgment
substantially change the overall operating about probability of
valuation, improvements success and timing of
- Consider ranges cash flows

Current
•Important to understand how operating • Requires detailed
much individual operating 4Cs analysis
value
variables impact NPV

GXC

CorporateMAValuat
ionTool
42
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Example of sensitivity matrix

Perpetual growth rate for TV (g)

NPV 3.0% 4.0% 5.0% 6.0%

12.0% $147.4 $155.9 $166.8 $181.4

12.5% 139.4 146.7 155.8 167.8

WACC

13.0% 132.3 138.5 146.2 156.2

13.5% 125.8 131.2 137.8 146.2

14.0% 119.9 124.6 133.3 137.4

GXC

CorporateMAValuat
ionTool
43
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 Summary DCF methodology
Current
market size
Projected Earnings in
Projected market (vol.) year n
growth
Projected P/E Terminal
volume (industry) Value*
Historical
market share
Projected
market share P/E
Projected  Projected
discount
revenues
in share
Historical
price/unit
Projected Projected
price/unit EBIT
Projected 
in price Projected
Historical CAPEX
COGS Free Cash
Projected DCF
Flow
Historical Projected depreciation
SG&A costs
Projected
Historical  in WC
depreciation
Projected
tax rate
Projected 
in margins

Debt
Avg. yield
on debt O/S
Kd
WACC
Tax rate

Equity
Rf
Ke GXC
E(Rm)


* Assuming to use the P/E ratio methodology CorporateMAValuat
ionTool
44
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
DCF takes into account both the ability of a firm to
generate cash and the risk associated to it

• Ability of operating
activities to generate
cash over time (FCF,
TV)

FCF1 FCF1 FCFn + TVn

DCF = + +… +
(1+WACC)¹ (1+WACC)² (1+WACC)ⁿ

• Timing (¹ ,² ,³ , etc.)
• Capital structure
(E/D in WACC)
• Risk (KD, KE in
WACC)

GXC

CorporateMAValuat
ionTool
45
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Leverage affects a firm’s cash flows

Unlevered Firm Levered Firm

Revenue $100M $100M

COGS, SG&A (76) (76)
Interests (4) • $40M @ 10% interest rate

Pre-tax Income 24 20
Tax @50% (12) (10)

Net Income 12 10

• Interests are not included in FCF

Free Cash Flow 12 14
and create a $2M tax shield

Leverage increases cash flows and must

be taken into account
GXC

CorporateMAValuat
ionTool
46
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Additionally, leverage increases the cost of
financial distress
Firm Value

Optimal
capital structure

Financial
distress
costs

Unlevered
firm value
Benefits from interest
tax shield

0
D/EV

• Bain typically ignores financial distress costs

• Still, be aware of the combined effects of leverage
GXC

CorporateMAValuat
ionTool
47
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Agenda

 Bain’s valuation approach

 Valuation methodologies
-Discounted cash flow
-Comparables

 Synergy valuation
 Investment decision
-Payback period
-NPV
-IRR

 Example of valuation model GXC

CorporateMAValuat
ionTool
48
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Introduction

• Comparables represent the primary alternative valuation

method to DCF

• Valuation by multiples is quick and convenient

• Many uncertainties anyway affect comparables valuation:

- Subject to transitory events
- Does not reflect future trends
- Hardly reflects risk differences
- Requires considerable judgment to decide on correct multiples

• Comparables should never be the only valuation method

and preferably not even the primary focus

Use comparables as “sanity check” toGXC

more detailed DCF calculation
CorporateMAValuat
ionTool
49
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Equation for comparable multiples

Market Cap + Debt

Comparable Multiple =
Performance Indicator

Where:
• Market Cap is the firm’s equity value, defined as the number of shares
outstanding multiply by the current share price
• Debt market value is represented, as a proxy, by its book value.
• Adding up Market Cap to Debt we obtain the Enterprise Value
• Most common Performance Indicators are Revenue, EBIT, EBITDA and
Earnings GXC

CorporateMAValuat
ionTool
50
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
What performance indicator should you use?

Equity Value (P) Enterprise Value (EV)

• Data are readily available • Takes into consideration

• Assumes similar leverage different leverage
across comparison firms profiles

Sales Earnings EBITDA Book value

• Useful when • Takes into • Closest proxy • Useful in capital-

little consideration to cash intensive
information is profitability • Ignores industries
available • Earnings are working capital • Addresses worst-
• Ignores not always a changes and case ‘sell-off’
profitability good proxy for investing cash issue
cash flows flows

When available, EV/EBITDA is preferable

GXC

CorporateMAValuat
ionTool
51
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Comparables methodology consists of five
steps
Select Choose indicator Calculate Average
Value the
comparable for comparable across
firm
companies multiples ranges industry

• Companies and/ • Earnings based • Publicly traded • Average the • Multiply the
or recent multiples: companies multiples average
transactions - EBITDA - Revenue, EBIT, - Show as multiples by
• Similar profiles - EBIT EBITDA and range the target’s
- Industry - Earnings (P/E) earnings will be value indicator
- Technology • Other trading available - Show as
- Size multiples: • Recent transactions range
- Growth - Revenue - Publicly traded
 Revenue - Net book value companies
 Earnings  Info is readily
- Returns available (bid
 ROE price, revenues,
- Risks EBITDA,…)
 Leverage - Private companies
 Use specialized
M&A sources
(SDC,
Mergerstat) GXC

CorporateMAValuat
ionTool
52
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Multiples vary widely by industry…

P/E multiples offered

(1997-2001 average)
35 34.3

30

25.9 Average = 24.4

25 24.5 24.1 24.1 24.0
22.8
21.9
20.4
20 18.8 18.5

15

10
s

di le
s

s
d.

sv er

ta al
il

n
g

ra
tie
ce

vc

ta
in

io
& esa

es Re
oa

th
cs

te
.

tu

at
ur

Re

st
ls
ur

i
til
O
Br

ul

rt
l
ct
so

ho
U

r ic

po
ci
a
&

re

W
uf

Ag

ns
m

na
an
.
at
m

a
Fi
M

Tr
N
Co

GXC

Source: Mergerstat Review, 2002

CorporateMAValuat
ionTool
53
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 … and over time

P/E multiples offered

(avg. across industries)

30
27.4
26.2
24.4 24.5 25.1 24.3
23.8 23.8
22.7
21.6
20

10

0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

GXC

Source: Mergerstat Review, 2002 CorporateMAValuat

ionTool
54
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 Multiples also vary by indicator
EBITDA Multiple
EBIT Multiple
Multiples offered (2001) Earnings Multiple

30
Avg. across
Industries

20 EBITDA: 8.2
EBIT: 10.1
Earnings: 21.6

10

0 s
r
te e l
ce
t e n s u r ic
s as te tai io
n &
a f g i o p a n G st
a
at le on
p a
os rcr er
a at om ftw tr
o & E Re t a
s ti
r i v i c C c il l or le b u
Ae A Be un So El
e O a sp o
h ri
& m Re a n W ist
m Tr D
Co
GXC

Source: Mergerstat Review, 2002 CorporateMAValuat

ionTool
55
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Example of comparables valuation

Target company data

• Sales: $3.5B • Earnings: $2.2M

• EBITDA: $5.2M • Market value of
• EBIT: $4.6M debt: $6.6M

Avg. industry Implied Implied

Multiple
multiple firm value equity value

• EV / Sales • 1x • $3.5B • $2.8B

• EV / EBITDA • 8x • $4.1B • $3.5B

• EV / EBIT • 10x • $4.6B • $4.0B

• EV / Earnings • 20x • $4.4B • $3.7B

Average $4.1B $3.5B

GXC
Range $3.5B-$4.6B $2.8B-$4.0B

CorporateMAValuat
ionTool
56
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Agenda

 Bain’s valuation approach

 Valuation methodologies
-Discounted cash flow
-Comparables

 Synergy valuation
 Investment decision
-Payback period
-NPV
-IRR

 Example of valuation model GXC

CorporateMAValuat
ionTool
57
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 Synergies are often the most difficult deal
component to estimate and achieve
Synergy estimation Synergy realization

Estimated synergies as % of combined Estimated synergies realization

entity total revenues / costs

10% 100% Achieve

estimated
8% synergies
8 80

6 60
5%
Achieve
4 40 less or no
synergies

2 20

0 0
Typical Typical cost Total company
revenue synergies sample
GXC

synergies
Sources: Bain Synergy Database 2002 CorporateMAValuat
ionTool
58
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
All potential sources of synergies have to be
considered
Cost reduction Revenue enhancement
Negative synergies
(“hard” synergies) (“soft” synergies)

• Product cross- • Loss of customers/

Variable Fixed selling revenues
• Purchasing • Channel • Loss of key
• Manufacturing distribution
scale employees
• Sales & enhancement
• Labor Marketing • Competitors take
productivity • Portfolio action
• Distribution strengthening
• Manufacturing
efficiency • G&A • Geographic
benefits expansion

• Consumer and • New business

trade spending development
efficiencies
• Transportation
efficiency
Integration costs

• Costs such as severance, plant shut-downs, relocations, etc.

• Typically non-recurring (one-time) GXC

CorporateMAValuat
ionTool
59
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 There are several sources of potential cost
synergies
IT, Finance, Legal
• Headquarters/
HR Management
overhead sharing
R&D

Inbound Outbound Marketing &

Operations Service
Logistics Logistics Sales

• Raw materials • Manufacturing • Distribution • Media • After-sale

purchasing rationalization consolidation purchasing service
consolidation - e.g. plant closure consolidation consolidation
• Process • Salesforce
reconfiguration efficiency

• Begin looking at the largest elements of the cost bar and then
search for the low hanging fruit
- High value, high ease of implementation
• Multiple sources have to be used to quantify hard synergies
- Management interviews
- Plant/facility visits
- Analysts reports GXC

- Internal company data

CorporateMAValuat
ionTool
60
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Examples of level and timing of hard cost
synergies
Materials Sales & Headquarters
Manufacturing Distribution
Purchasing Marketing Consolidation

Consolidate Increase raw Improve smaller Consolidate Reduce smaller

Sources of manufacturing material player's smaller player's player's back
integration facilities purchasing distribution cost sales & marketing office
savings dependent on leverage in overlapping in overlapping
current capacity channels channels
utilization

Target cost
5% 2% 10% 50% 80%
savings

Applied to Combined entity Combined entity Smaller entity Smaller entity Smaller entity

Timing of
3 years 1 year 1 year 3 years 3 years
realization

“Rules of thumb” as well as bottom-up quantification through

brainstorming and competitive interviews should give GXC
you a good
sense of the basic cost synergies
CorporateMAValuat
ionTool
61
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Several potential sources of revenue
enhancement exist

New • Cross-selling • New business

products development

• Complementary • New segments

Existing channels
products • Geographic
• Portfolio expansion
strengthening

Existing markets New markets

• Management and customers are great sources of growth

opportunities
• Look at how competitors have been growing successfully
- New channels
GXC
- New customer segments
- New geographies
CorporateMAValuat
ionTool
62
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 Distribution strength helps identify complementary
channels and portfolio strengthening opportunities

Existing products/markets

• Complementary channels:
- In each distribution channel
Complementary Portfolio
Strong channels strengthening the weaker player will benefit

Player 1 from the other player’s

relative distribution strength
distribution
strength • Portfolio strengthening:
No uplift Complementary - More powerful portfolio
Weak channels allows to redefine customer
relationship to
- Resist price pressure
Weak Strong
- Grow share
Player 2 relative
distribution strength

GXC

CorporateMAValuat
ionTool
63
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Examples of “soft” revenue synergies

1 Revenue 2 Revenue Revenue

Player 1 Player 2 Type of
Base Base increase
strength strength synergy
(US$ M) (US$ M) (US$ M)

Channel A None – – –

Channel
complementarity 10% 30.0 M 1.1 M 0.1 M
Channel B
uplift for smaller player

None – – –
Channel C
Portfolio strengthening
1% uplift on total 25.4 M 11.2 M 0.4 M
Channel D combined
Channel
complementarity 10% 15.0 M 1.4 M 0.1 M
Channel E uplift for smaller
players

Total $0.6 M

GXC

CorporateMAValuat
ionTool
64
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 Example of total synergy quantification
EBIT
(US$ M)
14 13 M
0.4 M 0.2 M
0.5 M
0.6 M Revenue Uplift

12 0.7 M
0.8 M Cost
10 M savings
10

6 Combined
entity

Cost Savings Revenue Uplift

4

0
Combined
EBIT

Post synergy
Production

realization EBIT
scale benefits

Headquarters

strengthening
consolidation

Portfolio

complementarity
Salesforce/distribution
consolidation
Material purchasing
scale benefits

Channel
Key Overlapping Production Salesforce OH costs for Sales in each Sales in each
drivers: materials costs for all and overlapping channel overlapping
purchasing overlapping distribution geographical increased due channel
cost reduced products costs in sales of all to product improved due
reduced overlapping products complementa- to increased
GXC
areas reduced rity market
reduced presence

CorporateMAValuat
ionTool
65
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Valuation summary
ILLUSTRATIVE

NPV

$200M

150 Synergies

Stand-alone
operating
100 improvements

Current
50 operating
value

0
Current Stand-alone Stand- Cost Revenue Integration Full
operating operating alone synergies uplift costs potential
value improvements value value

GXC

CorporateMAValuat
ionTool
66
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Agenda

 Bain’s valuation approach

 Valuation methodologies
-Discounted cash flow
-Comparables

 Synergy valuation
 Investment decision
-Payback period
-NPV
-IRR

 Example of valuation model GXC

CorporateMAValuat
ionTool
67
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
The investment decision
• Once the valuation is completed and the acquisition price determined
through a negotiation process, a “go-no go” investment decision takes place
• Several tools help determine the riskiness and the profitability of the
investment, supporting the decision to either invest or not
• The objective of this section is to analyze the most common investment
decision techniques

Pre- Primary due Preliminary Bid / funding

Strategy Deal flow
Transaction: diligence valuation indications

Investment Market
Proprietary DCF Multiples
bank assessment

Financing Commercial Final Final Acquisition

Transaction: commitments Due diligence valuation negotiation price

Market Current Investment

Equity Debt operating decision
Competitors
Stand-alone
Leave the
improvement
Customers deal

Company Synergies
Go ahead

GXC
Post-
Transaction: Integration

CorporateMAValuat
ionTool
68
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Several techniques are available to support
investment decisions

Investment
decision techniques

Cash payback Other

NPV IRR
period techniques

• As discussed in • Average return

the previous on book-value
section, Bain • Profitability index
uses the NPV as • EVA
a measure of
•…
total firm value

GXC

CorporateMAValuat
ionTool
69
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Net present value (NPV)

Description: • Sum of all the cash flows discounted back to their present
values, using a discount rate that reflects both opportunity
cost of capital and level of risk

Decision: • The NPV has to be greater than 0 to justify the investment

• In general, the bigger the NPV, the more attractive the
investment

Pros: • NPV is theoretically the best technique since it incorporates

- Amount of cash flow
- Timing of cash flow
- Opportunity cost of funds
- Certainty of cash flow (risk)

Cons: • Depends on extensive financial projections

• Requires accurate discount rate (cost of capital)
GXC

• More time consuming than other methods

CorporateMAValuat
ionTool
70
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Net present value (formula)

FCF1 FCF2 FCFn + TVn

Year 0 Year 1 Year 2 … Year n

FCF0
(acquisition FCF1 FCF2 FCFn + TVn
cost) NPV = -FCF0 + + + … +
(1+i) ¹ (1+i) ² (1+i) ⁿ

GXC

Note: If the acquisition is not 100%, pro-rata FCF should be considered

CorporateMAValuat
ionTool
71
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Cash payback period

Description: • Number of years it takes for cumulative future cash flows to

equal initial investment

Decision: • The longer, the riskier

Pros: • Easy to compute

• Recognizes advantage of having early cash flows
• Useful indicator of cash flow constraints

Cons: • Ignores cash flows after payback date

• Ignores opportunity cost of funds
- Ignores alternative use of funds

• Ignores time value of money

- Gives all cash flows before payback date equal weight

• No consideration of risk

GXC
Insufficient from economic viewpoint, since we
should quantify profit on funds invested
CorporateMAValuat
ionTool
72
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Cash payback period (example)

FCF3=$5M FCF4=$5M
FCF2=$4M

FCF1=$2M …

Year 0 Year 1 Year 2 Year 3 Year 4

2M<10M 2M+4M<10M 2M+4M+5M>10M

Payback = 3 years

Acquisition
cost = $10M

GXC

Note: If the acquisition is not 100%, pro-rata FCF should be considered

CorporateMAValuat
ionTool
73
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Internal rate of return (IRR)

Description: • IRR is the discount rate that makes NPV = 0

Decision: • IRR has to be greater than the WACC (same as NPV > 0)
to justify the investment
• In general, the higher the IRR, the more profitable the
investment

Pros: • Easy to understand and to communicate

• Give a clear comparison to the WACC

Cons: • A change in the sign (+/-) of cash flows over time can
lead to multiple IRRs
• Unreliable for ranking projects of vastly different scale
• Also unreliable for comparing projects of different
patterns of cash flows
• Requires caution of borrowing instead of investing
GXC
• Calculations can be complex
CorporateMAValuat
ionTool
74
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Internal rate of return (formula)

FCF1 FCF2 FCFn + TVn

Year 0 Year 1 Year 2 … Year n

FCF0
(acquisition FCF1 FCF2 FCFn + TVn
cost) NPV = -FCF0 + + + … +
(1+i) ¹ (1+i) ² (1+i) ⁿ

NPV = 0 i = IRR

GXC

Note: If the acquisition is not 100%, pro-rata FCF should be considered

CorporateMAValuat
ionTool
75
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Agenda

 Bain’s valuation approach

 Valuation methodologies
-Discounted cash flow
-Comparables

 Synergy valuation
 Investment decision
-Payback period
-NPV
-IRR

 Example of valuation model GXC

CorporateMAValuat
ionTool
76
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Introduction

• The Excel model described in this section is intended to show how to integrate
the concepts so far outlined in a real working spreadsheet

• The actual Excel model is “attached” to this module, and can be found in the
Corporate M&A GXC toolkit

• We start with forecasting the firm’s P&L

- First, we use market information to forecast revenues
- The P&L considers the “current” operating environment, but also takes into account
stand-alone operating improvements and synergies

• We then forecast the balance sheet to calculate the Free Cash Flows (FCF)

• Using the firm’s WACC, we discount the FCFs to calculate the total value
- And, by subtracting debt, the value of the firm’s equity

• Finally, in order to provide a ‘sanity check’ for the analysis, premium paid and
key ratios are calculated

• The model is intended to be used as a learning tool, not as a complete model. If

it is used in a case, modifications will almost certainly be necessary in order to
provide the appropriate level of detail GXC

CorporateMAValuat
ionTool
77
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Pro-forma calculation structure

Market Data &

Trends

Pro-forma
Profit & Loss

Net income Pro-forma

Balance Sheet

WC, Capex
Pro-forma
EBIAT
Cash Flow

GXC

CorporateMAValuat
ionTool
78
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
The first step in building the model is to
forecast revenues using market data

GXC

Note: shaded areas represent information to be input CorporateMAValuat

ionTool
79
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Then we forecast the “current operating”
P&L, leveraging historical cost levels

GXC

Note: shaded areas represent information to be input CorporateMAValuat

ionTool
80
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Next comes the forecasting of the B/S

GXC

CorporateMAValuat
Note: shaded areas represent information to be input 81
ionTool
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
With a P&L and a B/S, we can now forecast
the Free Cash Flows

GXC

Note: shaded areas represent information to be input CorporateMAValuat

ionTool
82
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
In order to calculate the NPV, we need to
determine the firm’s cost of capital (WACC)

GXC

Note: shaded areas represent information to be input CorporateMAValuat

ionTool
83
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
“Current operating” value is the sum of the
NPV of the FCFs and the TV

GXC

Note: shaded areas represent information to be input CorporateMAValuat

ionTool
84
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Total value must account for potential
operating improvement and synergies

Stand-alone
Base case operating Synergies
improvements

• Price per unit growth 4.0% 4.0% 4.2%

• Market share 10% 10% 10.5%

• COGS as % of sales 70% 68% 65%

• SG&A as % of sales 10% 9.5% 8%

• R&D as % of sales 5% 5% 4.5%

GXC

CorporateMAValuat
ionTool
85
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
EBIT is “re-forecasted” with the impact of the
stand-alone operating improvements and synergies

EBIT

$100M Synergies

80
Operating
improvement
60
Base

40

20

0
99 00 01 02 03 04 05 06 07 08
GXC 09

CorporateMAValuat
ionTool
86
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
The value of operating improvements and synergies is then
incorporated to determine the “full potential” value

GXC

CorporateMAValuat
ionTool
87
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
The difference between current value and full
potential value is the negotiation range

NPV
$118M $300M
300 Assumptions:
WACC = 13.5%
Perpetual growth rate for TV = 4.0%

Negotiation
range
200 $51M $182M

$131M

100

0 Current Stand-alone Stand-alone Synergies Full

operating operating operating potential
value improvements value value
GXC

CorporateMAValuat
ionTool
88
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
The equity value is the difference between
total firm value and market value of debt

GXC

Note: shaded areas represent information to be input CorporateMAValuat

ionTool
89
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Premium paid and key ratios are then
calculated to provide a “sanity check”

GXC

Note: shaded areas represent information to be input CorporateMAValuat

ionTool
90
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.