Valuation 企業評價模型 ( 估

值)

Introduction to Valuation:
The Market Approach

林家振
台灣大學管理學院商學研究所
 The Market Approach

The Basic Idea

Observe prices paid by willing buyers to willing sellers for similar assets.
Invoke the Law of One Price: identical assets must have identical prices.

In practice:
Estimate the value of the subject company by analyzing the prices paid for
similar companies relative to some benchmark (e.g. price relative to
earnings per share).

 Example: If comparable companies trade in the stock market at 12 times

earnings, and your company has earnings of $1 per share, then you might
conclude that investors would pay $12 per share for your stock if it were
publicly traded

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 The Market Approach

Using the Market Approach involves three main phases and

numerous steps.

Search & Select Adjust & Compute Apply & Conclude

1. Understand your 4. Adjust data on 7. Apply
subject company. comparable concluded
companies as multiples to
2. Search for and
necessary. subject company.
select comparable
companies and/or 5. Compute selected 8. Adjust implied
transactions. multiples. value of subject as
necessary.
3. Select 6. Conclude on point
appropriate estimates and/or 9. Conclude on
benchmarks ranges for multiples. value.
(revenue, EBITDA,
etc.).

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 The Market Approach:
Selecting Comparable Companies

 Determine characteristics of the subject company that drive its financial

performance and value. For example,
 Manufacturers and distributors of the same product exhibit very
different financial characteristics.
 The economics of manufacturing and distributing industrial products
may be different from otherwise similar consumer products.
 Identify characteristics of the guideline companies that affect (maybe
distort) their significant valuation multiples. For example,
 Greater growth opportunities generally result in higher multiples.
 Recent poor performance may result in higher multiples (if problems
are expected to be temporary).
 Strong market positioning may result in higher multiples.
 Multiples are often positively correlated with size.

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 The Market Approach
Selecting Comparable Companies
More generally, consider all key performance drivers, such as:
 Lines of business
 Basis of competition (price, performance, service, style, etc.)
 Target markets, customers
 Production strategy
 Industry position (leader, follower, etc.)
 Opportunity set
 Size
 Geography and diversification
 Financial condition
 Other risk, performance characteristics

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 Common Valuation Multiples

 Market Value of Invested Capital (MVIC) / Revenue

 MVIC / Earnings Before Interest and Taxes (EBIT)
 MVIC / Earnings Before Interest, Taxes, Depreciation & Amortiz’n
(EBITDA)
 Price / Earnings per share
 Price / Cash Flow per share
 Price / Pre-tax earnings per share
 Price / Book value

Be sure to understand whether you intend to value the assets or the equity!
Beware of mixing up levered and unlevered items in the numerator and
denominator (e.g. Price/EBIT may be misleading)!

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 Match Value with Income Stream

A Stylized Balance Sheet

Compare MVIC Market Value

with income or MVIC of Debt
cash flow before (Business
interest expense Enterprise
Value) =
Compare Equity
Market Value value (MVE) with
of Equity income or cash
flow after interest
expense

Common Multiples of MVIC: Common Multiples of MVE:

MVIC / Sales MVE / Net Income

MVIC / EBITDA MVE / Cash Flow after interest
MVIC / EBIT MVE / Book Value of Equity

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 The Market Approach: Sources of Data

 Publicly traded companies (--> Trading Multiples)

 Listed prices on stock exchange or NASDAQ
 Prices of small blocks of shares
 Financial data from public filings (e.g. 10K or Q)

 Mergers & acquisitions (-->Transaction Multiples)

 Prices paid by acquirers of entire companies
 Companies may be either public or private prior to acquisition
 Disclosures in public filings
 Press releases and news articles

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 The Market Approach: A Simple Example

Comparable
Subject
Company
Company

EBIT $15 mil $10mil

Net Income $5 mil $3 mil

Debt $30 mil $20 mil

Market Value of Equity $60 mill ?

MVIC $90 mill ?

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 Example: Calculation of Multiples

Multiple of Net Income:

MVE of comparable company $60
divide by: Net Income of comparable $5
PE Multiple 12x Net
Income

Multiple of EBIT:
MVIC of comparable company $90 mil.
divide by: EBIT of comparable $15 mil.
EBIT multiple 6x EBIT

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 Example: Estimation of Value

Net Income EBIT

Subject Company data $3 mil. $10 mil.

Valuation multiple 12 6

Indicated value $36 mil. $60 mil.

Less: debt ----- ($20 mil.)

Indicated value of equity $36 mil. $40 mil.

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 Special Industry Multiples

 Some industries have special, commonly used multiples that one

should consider. Some examples:
 Cellular: MVIC/“pops”
 Paging: MVIC/pagers
 Cable: MVIC/subscribers
 Retail stores: MVIC/square foot
 Health insurance providers: MVIC/covered members
 Early stage pharmaceutical: MVIC/average R&D spending
 Soft drink bottlers: MVIC/case

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 Adjustments to Financial Statements

Basic Idea: Make the comparison “apples to apples”

1. Financial statements of both the subject and comparable companies

should be adjusted so that results are stated using the same standards
(assuming that differences are material). Example: LIFO vs. FIFO cost
of goods sold.

2. Financial statements of both the subject and comparable companies

should be adjusted to remove any non-recurring or unusual items to
make financial data more indicative of likely future performance.
Example: Losses from discontinued operations.

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 Common Adjustments

 Inventory valuation methods (LIFO vs. FIFO)

 Capitalization of intangibles (arising from acquisitions - no reflection of
current conditions)
 Owner’s compensation, management perks, travel & entertainment
 Extraordinary and non-recurring items (flowing through income statement)
 Litigation settlements
 Restructuring charges
 Changes in accounting methods

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 Common Adjustments (cont.)

 Tax loss carryforwards (limitations, offset tax liabilities)

 Income tax considerations (C-Corp versus S-Corp, FSC, Sect. 382, etc.)
 Leases: operating versus capitalized versus owned
 Non-operating assets (such as excess cash)
 Excess/deficit net working capital
 Exclude associated income / expenses and add value to BEV
 Discontinued operations
 Partial start-ups (new stores, new manufacturing facilities, etc.)

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 Adjustments to Value of Comparable
Companies or Subject Companies

The values of the subject or comparable companies may be affected by

the presence of excess working capital, non-operating assets, or non-
operating liabilities. If material, the value of these items should be
excluded in calculating multiples of income from operations.

Example: A comparable company with $1 million in EBIT sold for $10

million (10 times EBIT). It owned $4 million in vacant land, so the buyer
really paid only 6 times EBIT for the operating assets plus $4 million
for the vacant land.

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 Adjusting for Non-operating Assets
and Excess Working Capital

 Non-operating assets (liabilities) in the comparable company:

 Subtract (add) from comparable company’s MVE and MVIC before
calculating multiples
 Non-operating assets (liabilities) in the Subject Company:
 Add (subtract) to the indicated value of the subject
 Excess (deficit) working capital:
 Treat as similar to non-operating assets (liabilities)
 Adjust income for any earnings associated with the excess/non-
operating assets

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 Making Adjustments: An Example

Comparable Subject
Company Company

EBIT $15 mil $10mil

Debt $30 mil $20 mil
MVIC $90 mill ?

Excess Working Capital $15 mil. ---

FMV non-operating assets --- $25 mil
Income from non-op. assets --- $2

What does this indicate about the value of the subject company?

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 Example: Calculation of multiple from
adjusted comparable company data

Multiple of EBIT:
MVIC of comparable $90
mil.
Less: excess Net Working Capital (15)
Adjusted MVIC of comparable $75
divide by: EBIT of comparable $15
EBIT multiple 5X
EBIT

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 Example: Estimation of value of the
Subject Company

Subject Company EBIT $10 mil.

Less: income from non-operating assets$ 2
Adjusted EBIT $8
Valuation multiple 5
Indicated Total Capital before adjustments $40 mil.
Add: FMV non-operating assets $25 mil.
Indicated value of Total Capital (MVIC) $65 mil.
Less: debt ($20 mil.)

Indicated value of equity $45 mil.

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 Valuation Multiples: LTM Convention

 Compute Market Value of Equity (MVE) or MVIC

 At specific point in time (the valuation date)

 Compute Latest Twelve Months...

 Revenue
 EBIT
 EBITDA
 Net income
 etc.

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 LTM Computation

12 months

June 30, 1995 Dec. 31, 1995 June 30, 1996 Dec. 31, 1996

6 months 6 months

June 30, 1995 Dec. 31, 1995 June 30, 1996 Dec. 31, 1996

LTM

Dec. 31, 1995 June 30, 1996 Dec. 31, 1996

Take the latest reported fiscal year (12 months) results, add the latest reported
year-to-date quarterly results and subtract the respective historical quarterly
results. Check for significant changes in accounting policies.

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 Computation of Historical Multiples
Company A - Valuation Date - January 1, 2017

6 months 6 months LTM

e nde d e nde d
6/94 6/95 6/96 12/95 12/96 12/96

Re ve nue s 40.342 56.217 64.201 33.184 36.036 67.053

% growth 39.35% 14.20%

Cost of Goods Sold 34.947 49.763 56.975 29.595 32.113 59.493

% revenues 86.6% 88.5% 88.7% 89.2% 89.1% 88.7%

Gross Margin 5.395 6.454 7.226 3.589 3.923 7.560

% revenues 13.4% 11.5% 11.3% 10.8% 10.9% 11.3%

SG&A 5.019 5.698 6.154 2.983 3.296 6.467

% revenues 12.4% 10.1% 9.6% 9.0% 9.1% 9.6%

R&D $0 $0 $0 $0 $0 $0
% revenues 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

EBIT 0.376 0.756 1.072 0.606 0.627 1.093

% revenues 0.93% 1.34% 1.67% 1.83% 1.74% 1.63%

Plus: De pr. & Amort. $0.2 $0.2 $0.3 $0.1 $0.2 $0.4

EBITDA 0.560 0.929 1.347 0.680 0.804 1.471

% revenues 1.39% 1.65% 2.10% 2.05% 2.23% 2.19%

Non-Re curring Exp (Inc) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0
Inte re st Exp (Inc) ($0.02) $0.06 $0.11 $0.08 ($0.01) $0.02
Othe r Exp (Inc) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Pre tax Income 0.394 0.692 0.964 0.526 0.637 1.075

% revenues $0.01 $0.01 $0.02 $0.02 $0.02 $0.02

Income Taxe s $0.00 ($0.19) ($0.04) $0.00 $0.00 ($0.04)

eff tax rate 0.00% -27.46% -3.94% 0.00% 0.00% -3.53%

Ne t Inc. Be f. Extra. 0.394 0.882 1.002 0.526 0.637 1.113

% revenues 0.98% 1.57% 1.56% 1.59% 1.77% 1.66%
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 Computation of Historical Multiples
Company A - Valuation Date - January 1, 2017

Book Value of Stockholders Equity $11.30

Common Shares Oustanding 5.216
Price as of 12/31/96 $3.06
FMV of Equity $15.97

Total Debt 0.000

Preferred Stock 0.000

MVIC Total Capitalization $15.97

Less: Cash & Marketable Securities 2.101
Less: Other Non-Operating Assets XX
Adjusted MVIC Adjusted Total Capitalization $13.87

Ratios:
Adj. Total Cap. / Revenues 0.21
Adj. Total Cap. / EBITDA 9.43
Adj. Total Cap. / EBIT 12.69
Price / Earnings Per Share 14.35
Price / Book Value Per Share 1.41

FY Revenue Growth 6/94 to 6/96 26.2%

LTM Gross Margin 11.3%
LTM EBITDA Margin 2.2%
LTM EBIT Margin 1.6%
LTM Pretax Margin 1.6%
LTM Net Margin 1.7%

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 Computation of Historical Multiples
Company E - Valuation Date - January 1, 2017
LTM LTM
e nde d
12/96 11/94 11/95 11/96 11/96

Re ve nue s $486 $501 $598 $598

% growth 2.9% 19.4%

Cost of Goods Sold $402 $430 $501 501

% revenues 82.5% 85.9% 83.8% 83.8%

Gross Margin 85 71 97 97
% revenues 17.5% 14.1% 16.2% 16.2%

SG&A $74 $80 $83 83

% revenues 15.3% 16.1% 13.9% 13.9%

R&D $0 $0 $0 0
% revenues 0.0% 0.0% 0.0% 0.0%

EBIT 10 (10) 13 13
% revenues 2.2% -1.9% 2.2% 2.2%

Plus: De pr. & Amort. $4 $4 $3 3

EBITDA 15 (6) 17 17
% revenues 3.0% -1.1% 2.8% 2.8%

Non-Re curring Exp (Inc) $26 26

Inte re st Exp (Inc) $7 $10 $8 8
Othe r Exp (Inc) ($43) ($7) ($2) (2)

Pre tax Income 47 (12) (20) (20)

% revenues 9.6% -2.4% -3.3% -3.3%

Income Taxe s $20 ($3) $6 6

eff tax rate 43.7% 23.2% -29.8% -29.8%

Ne t Inc. Be f. Extra. 26 (9) (25) (25)

% revenues 5.4% -1.8% -4.3% -4.3%
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 Computation of Historical Multiples
Company E - Valuation Date - January 1, 2017

Book Value of Stockholders Equity $131

Common Shares Oustanding 16
Price as of $5.69
FMV of Equity $91

Total Debt 67
Preferred Stock 3

MVIC Total Capitalization $161

Less: Cash & Marketable Securities 12
Less: Other Non-Operating Assets XX
Adjusted MVIC Adjusted Total Capitalization $149

Ratios:
Adj. Total Cap. / Revenues 0.2
Adj. Total Cap. / EBITDA 8.9
Adj. Total Cap. / EBIT 11.1
Price / Earnings Per Share (3.6)
Price / Book Value Per Share 0.7

FY Revenue Growth 10.9%

LTM Gross Margin 16.2%
LTM EBITDA Margin 2.8%
LTM EBIT Margin 2.2%
LTM Pretax Margin -3.3%
LTM Net Margin -4.3%

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 Interpreting Multiples

Market Comparable Analysis - Financial Ratios & Multiples

January 1, 1997

Ratios: A B C D E F G H T arg e t
Adj. Total Cap. / Revenues 0.2 0.2 0.5 0.9 0.4 0.4 0.7 0.2 NA
Adj. Total Cap. / EBITDA 9.4 8.9 12.4 21.5 10.7 33.1 12.3 8.5 NA
Adj. Total Cap. / EBIT 12.7 11.1 15.1 22.4 12.8 36.4 13.7 9.4 NA
Price / Earnings Per Share 14.4 (3.6) 28.6 40.0 (54.3) 38.8 21.8 12.9 NA
Price / Book Value Per Share 1.4 0.7 1.7 5.4 3.3 3.7 4.2 2.0 NA

FY 94-96 Revenue Growth 26.2% 10.9% 18.7% 38.1% 35.2% 20.0% 30.3% 25.7% 25.0%
LTM Gross Margin 11.3% 16.2% 30.6% 7.8% 14.5% 4.5% 15.4% 6.1% 6.0%
LTM EBITDA Margin 2.2% 2.8% 4.0% 4.4% 3.8% 1.2% 5.3% 2.5% 2.0%
LTM EBIT Margin 1.6% 2.2% 3.3% 4.2% 3.2% 1.1% 4.8% 2.2% 1.5%
LTM Pretax Margin 1.6% -3.3% 3.3% 3.4% -0.7% 0.7% 4.7% 2.0% 1.4%
LTM Net Margin 1.7% -4.3% 2.0% 2.2% -0.7% 1.0% 3.1% 1.2% 0.8%

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 More Adjustments:
Growth rates and P/E Multiples

5Y CF Expected P/E to Expected Growth

Growth
30

25

20

15

10

0
Avon Helene Curtis Noxell Minnetonka Neutrogena

P/E Expected Growth

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 Adjustments for Size and Growth

 High growth companies generally trade at higher multiples

 Larger companies generally trade at higher multiples
 We have conducted research to quantify the relationship
between size, growth, and PE multiples, using I/B/E/S data.

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 Multiples and (Non-) Controlling Interests
Be explicit about whether your multiples are yielding value for
controlling or minority interests in the enterprise or the equity.

 MULTIPLE
 x INDICATOR (e.g. EBIT)
 ENTERPRISE VALUE ON A MINORITY BASIS

 LESS DEBT
 PLUS CONTROL PREMIUM

 PLUS EXCESS CASH

 PLUS OTHER NON-OPERATING ASSETS
 EQUITY VALUE ON A CONTROLLING BASIS

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Multiples Are Related to Capitalization Rates

 Multiples of economic income variables are generally the reciprocals of the

capitalization rates applicable to those variables.
Example: For a growing perpetuity with growth, the capitalization rate is
k-g where k is the discount rate (say 10%) and g is the growth rate (say 3%).
The corresponding multiple of cash flow is 1/(k-g), or 1/(.1-.05) = 1/.05 =
14.3 times.

 Implied Multiples in DCF - you can use market multiples to check the
reasonableness of key elements in a DCF analysis.
– Total PV of DCF/EBIT
– Total PV of DCF/EBITDA
– Gross Terminal Value of DCF/Terminal year EBIT
– Gross Terminal Value of DCF/Terminal year EBITDA

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 Market Approach : Challenges
 Sometimes difficult to find similar companies that are actively
traded “pure plays.”
 Difficult to assess impact of inconsistent performance on market
multiples. Requires experience & judgement.
 Judgement is required to assess degree of “comparability” in the
face of differences in:
 Size (both revenue and asset base)
 Diversity (geographic, product mix, etc.)
 Growth expectations
 Other risk factors
 Some “market” prices may be unreliable (bubbles, thin trading,
regulations, short interest, etc.)
 Analysis and interpretation of stock market data is time-consuming

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