Professional Documents
Culture Documents
VALUATION PROJECT
WORKBOOK
SUMMER ANALYST PROGRAM 2007
Table of Contents
1 Overview of Valuation Project
2 Sample Project
If you have any questions regarding materials in this book, or the valuation project in general, dont hesitate to call us:
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Session 1 June 29 Finding public information and creating a PIB Create Knight Ridder PIB
10 am & 2 pm Creating a company profile Create Knight Ridder profile
Session 2 July 6 Equity Comps and Acquisition Comp Analysis Find Knight Ridder trading comparables
Find important average trading stats
10 am & 2 pm For given comparable acquisitions, find key
multiples
Session 3 July 13 Discounted Cash Flow Create projected Knight Ridder income
statement
Determine WACC based on comps
10 am & 2 pm
Project free cash flows and discount at WACC
Note: Due to the fact that the deal was announced on 3/13/06, for all valuations, please use all
public information available as of then (latest filing would be the 12/25/05 10-K) and stock prices
and research as of 3/10/06.
This schedule provides a set of guidelines to help you plan your final project.
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2. Sample Project
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Volume in Thousands
$37
1,500
% of 52-Week High 83.6%
Stock Price
$34
1,000 52-Week High / Low $38.80 / $27.51
$31
Diluted Shares 28.2
500
$28
Equity Market Value 916.0
$25 0 (+) Debt 250.1
2/4/04 4/5/04 6/5/04 8/5/04 10/5/04 12/5/04 2/4/05
USF Corp. Volume USF Corp. Stock Price () Cash & Equivalents 150.8
Enterprise Value $1,015.3
Enterprise Value to:
Financial Overview 2004E Revenue $2,516.9 / 0.4x
($ in millions)
December 31, 2005E Revenue $2,658.8 / 0.4x
2004A 2005E 2006E 2004E EBITDA $169.2 / 6.0x
Revenues $2,394.6 $2,516.9 $2,658.8
% Growth 4.5% 5.1% 5.6% 2005E EBITDA $253.7 / 4.0x
EBIT $112.1 $130.0 $150.1 EPS Estimates / P/E Ratio
% Margin 4.7% 5.2% 5.6%
EBITDA $169.2 $253.7 $273.1 2004E EPS $0.85 / 38.2x
% Margin 7.1% 10.1% 10.3% 2005E EPS $2.48 / 13.1x
Net Income $55.8 $66.5 $78.8
% Margin 2.3% 2.6% 3.0%
EPS $0.85 $2.48 $2.82
Capex 145.0 185.0 190.0
Source: Company filings and Wall Street equity research. Source: Company filings and Wall Street equity research.
Note: EPS projections based on I/B/E/S consensus.
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(1)
USF Corp $32.44 83.6% $916 $1,015 0.4x 0.4x 6.0x 4.0x 38.2x 13.1x 10.2% 97.3%
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ENTERPRISE
EQUITY ENTERPRISE VALUE/ TARGET
DATE TARGET TARGET DESCRIPTION ACQUIROR VALUE VALUE
(1)
EBITDA
(2) UNIONIZED
Jul-03 Roadway Corporation LTL carrier providing freight services on major Yellow Corporation $966 $1231 6.7x NA
(US) city-to-city routes in North America
Nov-01 Motor Cargo Industries Provides regional less-than truckload services Union Pacific Corp. 83 78 4.0 No
in the western U.S.
Nov-01 Arnold Industries Provides regional less-than-truckload services Roadway Corp. 558 510 5.7 Yes
in northeastern states and also provides
truckload and logistics services
Aug-01 Arnold Industries (US) N/A Roadway Corporation 539 510 5.4 No
Aug-01 G.I. Trucking Company Provides regional less-than-truckload services Investor Group (Estes) 40 40 5.0 No
in western and southwestern states
Nov-00 American Freightways Operates as a scheduled common and FedEx Corp. 934 1,196 6.3 No
Corporation contract carrier transporting primarily less-
than-truckload shipments of general
commodities.
Jun-99 Jevic Transportation Provides regional and interregional Yellow Corp. 158 197 5.9 No
Inc. transportation of general commodity freight
Jun-98 Preston Trucking Provides les-than-truckload transportation of Management Group NM NA NA Yes
general commodity freight
Oct-97 Caliber Provides transportation, logistics and related FedEx Corp. 2,489 2,681 10.3 No
System, Inc. information services through its five
subsidiaries
Jul-95 Worldway Corp. Transporter of freight throughout United Arkansas Best Corp. 82 153 9.0 Yes
States; also provides truckload services and
driver leasing services through its subsidiaries
Nov-92 Central Freight Lines Carrier of intrastate and foreign commerce Roadway Services Inc. 102 148 6.8 No
Inc. within Texas, Arizona, and New Mexico
Nov-92 Preston Trucking Provides less-than-truckload transportation of Yellow Freight Systems 24 146 5.8 Yes
general commodity freight
Jul-88 Viking Freight Inc. Provides regional carrier services in California Roadway Services Inc. 135 172 7.8 No
and 9 other Western States
Jun-88 Arkansas Best Corp. LTL and TL carriage, furniture manufacturing Kelso & Co. 317 472 6.2 Yes
and tire retreading
Median 6.1x
Average 6.5x
High 10.3x
Low 4.0x
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WACC Schedule
Industry Statistics
(in millions)
Total Mkt Debt / Tax Levering Unlevered
Company Beta (1) Debt Equity Mkt Equity Rate (2) Factor (3) Beta (4) Assumptions
Arkansas Best Corp 0.83 15 1,069 1.4% 40.1% 1.01 0.82 Target Marginal Tax Rate 38.0%
Cnf Inc 0.89 714 2,457 29.1% 41.0% 1.17 0.76 Risk Free Rate (5) 4.330%
Old Dominion Freight 0.62 81 885 9.2% 39.1% 1.06 0.59 Equity Risk Premium (6) 7.20%
Overnite Corp 0.95 127 850 14.9% 40.0% 1.09 0.87 Size Premia ("Sp") (7) 1.59%
Scs Transportation Inc 0.63 123 354 34.7% 37.6% 1.22 0.52
Yellow Roadway Corp 1.00 728 2,769 26.3% 39.1% 1.16 0.86
0.0% 0.0% 0.74 1.00 0.74 11% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2%
10.0% 11.1% 0.74 1.07 0.79 12% 10.7% 10.8% 10.9% 10.9% 11.0% 11.1%
20.0% 25.0% 0.74 1.16 0.85 12% 10.3% 10.4% 10.5% 10.6% 10.8% 10.9%
30.0% 42.9% 0.74 1.27 0.93 13% 9.8% 10.0% 10.1% 10.3% 10.5% 10.7%
40.0% 66.7% 0.74 1.41 1.04 13% 9.3% 9.5% 9.8% 10.0% 10.3% 10.5%
50.0% 100.0% 0.74 1.62 1.19 15% 8.8% 9.1% 9.4% 9.7% 10.0% 10.4%
0.0% 0.0% 1.00 0.65 10.6% 10.6% 10.6% 10.6% 10.6% 10.6%
10.0% 11.1% 1.07 0.70 10.5% 10.5% 10.6% 10.7% 10.7% 10.8%
20.0% 25.0% 1.16 0.75 10.3% 10.5% 10.6% 10.7% 10.8% 11.0%
30.0% 42.9% 1.27 0.80 10.2% 10.4% 10.5% 10.7% 10.9% 11.1%
40.0% 66.7% 1.41 0.85 10.0% 10.2% 10.5% 10.7% 11.0% 11.2%
50.0% 100.0% 1.62 0.90 9.8% 10.1% 10.4% 10.7% 11.0% 11.3%
(1) Barra US equity Book predictions (7) Cost of equity premia based on equity market capitalization.
(2) Based on marginal tax rate low-cap ($797mm - $1,167mm) = 1.59%. Amounts per 2004 Ibbotson.
(3) Levering Factor: 1 + [ ( 1 - Tax Rate ) * ( Debt / Equity ratio ) ] (8) Levered Beta: (Beta * Levering Factor)
(4) Unlevered Beta: ( Beta / Levering Factor ) (9) Cost of Equity: Rf + B * ( Rm - Rf ) + Sp, or the risk-free rate plus the beta * the eq
(5) Yield on Interpolated 20-Year US treasury Bonds which corresponds to Ibbotson's long-term equity (10) WACC: Rd = Return on Debt; Re = Return on Equity
risk premium (as of 2/04/05). Source: Bloomberg. [ Rd * (1 - tax rate) * (D / (D + E) ) ] + [ Re * (E / (D + E) ) ]
(6) The average historic period between the return on stocks and L-T bonds (2004 Ibbotson Associates).
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Financing
50% Stock 50% Cash Consideration assumed; financed by 100% bank debt at 3-Months
LIBOR plus 100 basis points
Purchase Price
Range of $1,015 $1,410 mm, corresponding to 4.0x 5.6x 2005E EBITDA
FMV Adjustments
Fair market value adjustment estimated at 12% of book value; depreciated over 20 years
Goodwill
Goodwill not amortized
Timing
Assumed to gain full 2005 earnings
Fees
M&A Fees of 0.5% of transaction value
Financing fees of 2.5% of debt raised
Synergies
None assumed; pre-tax synergies required to achieve acquiror break-even EPS inferred
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Equity Value $918 $966 $1,014 $1,062 $1,111 $1,160 $1,210 $1,259 $1,309
(1)
Net Debt 99 99 99 99 99 99 99 99 99
Enterprise Value 1,017 1,065 1,114 1,162 1,210 1,259 1,309 1,358 1,408
Enterprise Value / 2005E EBITDA 4.1x 4.2x 4.4x 4.6x 4.8x 5.0x 5.2x 5.4x 5.6x
Enterprise Value / 2006E EBITDA 3.7x 3.8x 4.0x 4.2x 4.3x 4.5x 4.7x 4.9x 5.1x
Equity Value / 2005E Net Income 13.3x 14.0x 14.7x 15.4x 16.1x 16.9x 17.6x 18.3x 19.0x
Equity Value / 2006E Net Income 11.4x 12.0x 12.6x 13.2x 13.8x 14.4x 15.0x 15.6x 16.2x
2005E Stand Alone Diluted EPS $5.25 $5.25 $5.25 $5.25 $5.25 $5.25 $5.25 $5.25 $5.25
2005E Pro Forma Diluted EPS 5.59 5.53 5.48 5.43 5.38 5.33 5.28 5.24 5.19
(2)
Pro-Forma Debt / LTM EBITDA 1.6x 1.7x 1.7x 1.7x 1.8x 1.8x 1.8x 1.9x 1.9x
Debt-to-Capitalization (at closing) 45.28% 45.36% 45.45% 45.53% 45.61% 45.69% 45.76% 45.83% 45.91%
% Shares issued as currency 14.2% 14.9% 15.5% 16.1% 16.7% 17.3% 17.9% 18.5% 19.1%
ProForma Ownership% 85.8% 85.1% 84.5% 83.9% 83.3% 82.7% 82.1% 81.5% 80.9%
Source: Wall Street Projections, Credit Suisse Estimates.
(1) Net Debt numbers as of 12/31/04.
(2) Based on LTM EBITDA of $697mm.
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Prior to the June 30th training session, please assemble a PIB on Knight Ridder
Make sure that your PIB has all the sections outlined on the next page
Insert numbered tabs between each section blue sheets between each item in the same tab, if
multiple items exist. For example, put a blue sheet between each research report
Have the Copy Center make a double-sided bound copy of your PIB
Key Takeaways
After completing this section, you should be familiar with most of the tools that are available to
access public information
Research reports are expensive!!! Purchase only those that are appropriate
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2. Prospectus
Usually follows a major event (M&A, Equity offering, Debt offering)
4. Form 10-K
Annual filing with the SEC, similar to an annual report
5. Form 10-Q
Quarterly filing with the SEC
6. Proxy Statement
Covers information about company shares and shareholders
7. Research Report CS Research & Analytics
Include CS if available
Look for longer, more recent research
8. News Run
Back two six months is standard Company Website
9. Ownership Run
Tracks ownership structure of company
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Agenda
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A successful acquisition ideas presentation delivers a focused set of ideas with a point of
view and a rationale.
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Research reports relating to the Client and its core industry group competitors
OneSource (U.S. Public, U.S. Private, and U.K. Public SIC Code Summary Analyses)
Trade publications
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The Company competes with Lockheed Martin, Raytheon, BAE Company Web site
Systems, Northrop Grumman, Matra BAe Dynamics Alenia and The
European Aeronautics Defense & Space Corporation. PIB
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Research reports
Financial Overview
($ in millions)
December 31,
2004A 2005E 2006E
You can find the historical information Revenues $2,394.6 $2,516.9 $2,658.8
from company filings % Growth 4.5% 5.1% 5.6%
EBIT $112.1 $130.0 $150.1
The projections will come from % Margin 4.7% 5.2% 5.6%
research EBITDA $169.2 $253.7 $273.1
% Margin 7.1% 10.1% 10.3%
PIB Net Income $55.8 $66.5 $78.8
% Margin 2.3% 2.6% 3.0%
EPS $0.85 $2.48 $2.82
Capex 145.0 185.0 190.0
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$40 2,000
Volume in Thousands
$37
1,500
Stock Price
$34
1,000
$31
500
$28
$25 0
2/4/04 4/5/04 6/5/04 8/5/04 10/5/04 12/5/04 2/4/05
USF Corp. Volume USF Corp. Stock Price
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Recent News
1/28/2005: USF Corporation reported fourth quarter and full
year 2004 results, missed Wall Street earnings
12/13/2004: Announced opening of two new terminals serving
Company news releases
the Southern Minnesota and Decatur, Alabama areas
Factiva
11/2/2004: Richard P. DiStasio stepped down as CEO, Paul
Liska was named interim CEO Equity research
10/22/2004: Reported third quarter 2004 results, missed Wall
Street earnings
9/9/2004: USF Holland announced the opening of eight (8)
Northeast terminals, service city includes: Baltimore, MD
Albany, NY, Allentown, PA, Harrisburg, PA, Philadelphia, PA,
Wilkes Barre, PA, Syracuse, NY, and Richmond, VA
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Proxy
finance.yahoo.com
Company Web site
Sometimes you will see profiles with a
brief biography of the directors and
officers
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Make sure to check your output and see if something looks abnormal
If so, youve likely made a mistake
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Agenda
What are Equity Comps and Why Do We Do Them?
Common Pitfalls
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More than anything else, clients want to know what their companies are
worth especially relative to their peers
One way to value companies is to infer (or compare) their value based on the public trading
values of other companies with similar characteristics
Because not all companies are the same size or have the same capital structure, we need to
establish universal metrics that can apply to all companies within a group
These metrics almost always take the form of a ratio or multiple, where the numerator is a
measure of trading value (Enterprise Value; Market Value) and the denominator is an
operating statistic (EBITDA, Net Income)
The most common metrics are Enterprise Value / EBITDA and Market Value / Net Income (or
P/E)
The calculation and interpretation of these metrics is a Comparable Company Analysis, or
Compco Analysis
Helpful Hint: The right terminology for this analysis is the Comparable Company Analysis, but
since bankers like to complicate matters, this analysis is referred to differently by each group.
Dont get confused if youre asked to do equity comps, compcos, comps, and a comparable
company analysis all in one night: They all mean the same thing!
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Note: Enterprise Value is sometimes referred to as Adjusted Market Value, Firm Value or (in
early-stage biotech) Technology Value
In broad terms, there are two types of ownership interests in a business Debt and Equity
The public market value of a business equity is referred to as its equity value, market value
or market capitalization
We calculate a business Enterprise Value by summing the public market values of its debt and
equity
Caveat: Because the trading value of debt securities is less volatile than equity securities, we
typically use the book value of debt rather than the market value to save time
Enterprise Value is an important measure because it makes companies with different capital
structures more comparable
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Enterprise Value = Value of All Business Assets = Equity Value + Net Debt(1)
Equity Value = Value of the Shareholders Equity = Current Stock Price x Shares Outstanding(2)
Liabilities and
Assets Shareholders Equity
Net Debt
Enterprise Value Enterprise
Value
Equity Value
(1) Net Debt equals long-term debt + short-term debt + out of the money convertible debt + minority interest + preferred stock + capitalized leases cash and
cash equivalents.
(2) The proper way to calculate Equity Value is to use the diluted number of shares outstanding, which includes all in the money and exercisable stock options.
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EBITDA excludes interest, taxes and depreciation and amortization because these items vary
from company to company for reasons which generally do not impact value making them
harder to compare on a consistent basis
We place emphasis on Enterprise Value / EBITDA because this metric excludes most variables
which do not affect value (or can be easily changed) making companies more comparable for
valuation purposes
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Lets Recap
The absolute value of a business is expressed by its Enterprise and Equity Value
Enterprise Value is the total value of all ownership interests in a business
Equity Value is the value of the equity in a business
The relative value of a business is expressed by a multiple of its absolute value to its operating
results
GE is trading at 22x its 2006E projected EBITDA Translation: The ratio of GEs
Enterprise Value to its forecasted 2006E EBITDA is 22
Walmarts 2006E P/E multiple is 18x Translation: The ratio of Walmarts equity value to
its forecasted 2006 net income is 18
Enterprise Value / EBITDA is an important metric because it eliminates non-value impacting
variables which otherwise make companies less comparable
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Associates and Officers most of the time they will pick them for you
Proxy Statements
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Research analysts submit their EPS FactSet (First Call, I/B/E/S) on your PC
estimates to publicly available centralized
First Call website (InfoCentral)
databases (First Call, I/B/E/S)
EPS Detailed First Call reports (6th Floor)
Forecasts The mean or consensus estimate
represents the Street view of a Companys Bloomberg terminals (Nelson's)
expected performance
We use Street view to calculate P/E multiples
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You should always select a research report Library request at x5-4000 (for older or hard
which has an EPS forecast close to the to find research reports)
consensus
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User Information
Analysis Prepared by kjackso3 It is important to fill out the user information
Preparer Phone Number 62714
Analysis Checked by T_Bushey
so that other people using your model can
Checker Phone Number 65888 call you with questions
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However, most companies have securities which represent contingent shares meaning they
are not shares today, but can become shares if certain conditions are met and as a result, we
need to make adjustments to basic shares outstanding
Options are a price right or option granted to management to purchase their companys stock
at a pre-specified or strike price
Management profits if the market price of the stock exceeds the strike price when they
exercise the options. Hence, Management is only likely to exercise his/her options under
these circumstances
Options are reported in the 10-K. Companies typically disclose the number of options that are
outstanding and exercisable
Exercisable options are vested and can be used to purchase shares today. Exercisable
options, NOT outstanding, are relevant for equity comp purposes
The method we use for calculating the impact on basic shares outstanding of options is called
the Treasury Stock Method
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Translation: 8.2 million options are in the money, meaning they are exercisable at a
lower price than the current market price. This means the owner of these
options has the right to buy stock from the Company at $14.02 and could
sell it in todays market at $17.74. If the owner of the options did this, he
would pay the Company $14.02 for each share, sell it in the market for
$17.74 and pocket the $3.72 spread.
Treasury The treasury stock method assumes the above transaction occurs and that
Method Calculations: the Company uses the $14.02 they receive to repurchase shares in the
market at $17.74, thus:
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Convertible Debt
Convertible Preferred
Convertible securities are NOT evaluated using the Treasury Stock Method
Most important thing to remember: Convertible Securities are treated as either debt or equity
for valuation purposes NOT both
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Example: A company has a convertible preferred security with a face value of $1,114 million
that pays a dividend of 6.5% and has a conversion price of $18.00
Current Price < $18.00 Treated as Debt Current Price > $18.00 Treated as Equity
Income Statement Effect Income Statement Effect
None Debt: Interest backed out
Equity Value Effect Preferred: Dividend backed out ($1,114 x 6.5%
= $72.4)
None
Equity Value Effect
Net Debt Effect
Additional shares outstanding from conversion
Should include full amount of convertibles
(add $1,114/$18 = 61.9 to shares outstanding)
($1,114)
Net Debt Effect
Debt does NOT include face value of converted
debt/preferred
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Step 2
Fill in the most current quarter and prior corresponding quarter to get to LTM
Make sure you use cumulative amounts (i.e. if the fiscal year end is 12/31 and you are looking at
9/30 10-Q, use nine months ended data)
Step 3
The model automatically calculates LTM for you. Make sure you set CS as the LTM source under
settings/options so the output picks up your hard work
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LTM is important because it shows what the companys reported performance has been over
the last year (though not necessarily a calendar year)
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It is important to remember that not all unusual or non-recurring items will be broken out on the
financial statements. This is the result of:
Accountants will not always allow companies to break-out certain charges on the financial
statements because they are not unusual in the strictest sense
Some companies may not want to highlight that they made their numbers as a result of an
extraordinary gain
Charges or gains not broken out in the financials can always be found in the MD&A thats why
you need to read it!
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It is important to make sure your projected data is presented on the same basis as your
historical data
Completing the equity comp projected data is similar to the historical / LTM data
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EPS estimates must be adjusted to a December year end to make companies with different
fiscal year ends comparable on a P/E basis
First Call and I/B/E/S generally download a CYEPS (Calendar Year EPS)
This is intuitively clear when considering two companies one with a fiscal year ending
September 30, 2005 and the other with a fiscal year ending December 31, 2005
The 2005 earnings estimates associated with the September company have a higher
degree of certainty than the December company and thus should receive a higher multiple
than an identical December company
Our objective is to eliminate this artificial valuation differential by calendarizing the estimates
If you choose not to calendarize it, please set calendarization date equal to last fiscal year end
Helpful Hint: In the top right corner of your ABACUS shell, you have the option to calendarize
manually (meaning you do all the work) or by formula (meaning FactSet generates the formula for
you). In most cases, use the Formula option, but make sure you know how it is deriving its ratio.
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CALENDAR YEAR
FISCAL YEAR ENDED SEPT. 30, FACTOR ENDED DEC. 31,
2004A 2005E 2006E 75.0% 2004A 2005E
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Take 5 minutes to look at the output when youre done the team will wait
Check your multiples against research to be sure youre in the right ballpark
If the business is showing momentum and estimated annual operating statistics are improving
over current year figures, your consecutive multiples should be declining (e.g., 16.5x 2005E P/E
vs. 14.6x 2006E P/E)
If the multiples are increasing, make sure you understand why
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Include with total capital for Enterprise Value calculation, exclude from debt for credit
statistics
Include with net income if it appears to be a normal part of business
What do I do with Equity Earnings when I am calculating Net Income?
Pro forma the event, e.g., for equity or debt offerings, use the prospectus
Make sure your forecasts (EPS and operating) reflect the event
Footnote!
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Is it really extraordinary?
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Example:
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Definitions
Equity Value (also referred to as Market Value)
The market value of a companys equity: (Number of fully diluted shares x current stock
price) - option/warrant proceeds
Net Debt =
Long-term debt (including current portion) + short-term debt + out of the money convertible
debt + minority interest + capitalized leases (cash + equivalents)
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Higher projected earnings growth implies faster stock appreciation potential and will positively
impact valuation
Higher leverage implies less financial flexibility and will negatively impact valuation
Higher profitability margins imply better expense controls and better ability to stay price
competitive and will positively impact valuation
The higher the economic cyclicality or seasonality of earnings, the riskier the stock
Dividend payments positively impact valuation. Dividends are usually paid by mature
companies that need further incentives for investors. High growth companies do not need a
dividend to get a high valuation
Higher trading multiples (e.g., price/earnings ratio) make the stock less attractive than a similar
company with lower statistics
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The Company may have done a debt offering after the balance sheet date
You can find out in the subsequent events section of the 10-K or 10-Q, from a company
news run or Bloomberg
Make sure that you check what the proceeds were used for if they were used to pay down
other debt, then you should not change anything
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The Company has issued or repurchased shares after the 10-K or 10-Q date
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You forgot to use cumulative quarterly data (i.e. three months ended 9/30 vs. nine months
ended 9/30)
You forgot to check for press releases and are not using the most up-to-date data
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Your research report currency does not match the rest of your input currency
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USF Corp(1) $32.44 83.6% $916 $1,015 0.4x 0.4x 6.0x 4.0x 38.2x 13.1x 10.2% 97.3%
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Agenda
What are M&A Comps and Why Do We Do Them?
Practical Guidelines
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As in comparable company analyses, look for acquisitions of companies with comparable operational and
financial characteristics
Recent transactions are a more accurate reflection of the values buyers are currently willing to pay than
are acquisitions completed in the distant past. This is because market fundamentals are subject to
dramatic change over periods of time. In addition, cyclical businesses will trade at widely different
valuations at the peak and ebb of a cycle
Multiples should be based on the latest public financial information available to the Acquiror at the time of the
acquisition
Helpful Hint #1: Unlike Equity Comps, which value companies off of forward looking estimates, M&A Comps are
historical looking
Helpful Hint #2: Comparable acquisition multiples include consideration which is paid for "control" of the Target.
Since this "control premium" is not reflected in the comparable company valuation, comparable acquisition
multiples tend to be higher and more indicative of the value of a company in a sale context
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News runs
Equity analysts
Colleagues
Never rely on the multiples of a schedule with an unknown author or with an author who is
not sure that the multiples are correct.
Look for recent acquisitions of companies with operational and financial characteristics
similar to those of the business being valued.
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Total
Equity Total Preferred Minority Cash and
Transaction = Value + Debt + Stock + Interest - Equivalents
Value
Fully Diluted
Equity Purchase
Value = Shares x Price
Outstanding
Helpful Hint: The major difference between a Transaction Value and an Enterprise Value lies in
the share count. In any Change of Control, all outstanding and in-the-money options, regardless
of whether they are exercisable or not , get converted at the weighted average strike price. This
differs from the Enterprise Value calculation, where only those options that are exercisable get
converted
Total Transaction Value of an M&A deal is similar to Enterprise Value used in Comparable
Companies Analysis.
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Basic Shares Outstanding are taken from the cover of the most recent 10-K or 10-Q.
Option/Warrant Shares are calculated using the treasury method, which assumes that all in-the-money
options/warrants are exercised and the proceeds are used to repurchase shares at todays market price
For example:
Helpful Hint: There are two independent concepts regarding option/warrants that tend to confuse people:
1. Outstanding versus Exercisable
2. In-the-money versus out-of-the-money
In an acquisition context, all outstanding and in-the-money options/warrants get converted. In a market value
(equity comp) context, only those options that are both exercisable and in-the-money convert
Options/warrants out-of-the-money never convert
To calculate equity value, we must always use fully diluted shares outstanding.
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Common stock issued by an acquiror is valued using the acquirors stock price on the day prior
to announcement of the transaction
Other securities are valued at market
Existing publicly traded securities should be valued at market on the day prior to
announcement
New classes of securities should be valued at market value on the first day of trading
Calculating the purchase price per share is not always as simple as it may first appear
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% Premium
Paid
=
[ Purchase Price
______________
Historical Price
-1
] * 100
Often news and rumors of a potential transaction often leak to the market and affect the stock
price prior to announcement. We also look at premiums over the stock price at other points in
time relative to announcement including:
One Day
One Week
One Month
For public companies, we often look at the percent premium paid to shareholders.
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Practical Guidelines
1) Obtain SDC run to get general information regarding announcement dates, target/acquirors,
structure of transactions, etc. When doing an SDC run, you typically search by industry SIC
codes to find M&A deals for certain industries. If a deal has just been announced, you'll need
to get a news run done on the deal
2) Make sure the announcement date is correct by checking Bloomberg
3) Retrieve appropriate documents from SEC. You will need a merger document and 10-K
and 10-Q. Make sure that the 10-K and 10-Q are for the target company financials for the
LTM period before the announcement date. M&A comps are usually done on an LTM basis.
At some point you may have to do an M&A comp on a forward basis, but this is uncommon
4) Read a summary of the terms of the transaction in the merger doc. This is especially true
for stock-for-stock transactions. Understand whether the transaction was a stock-for-stock,
cash tender offer, asset sale, minority interest investment, etc. This will help you determine
the purchase price later on
5) Scan the notes of the 10-K and the 10-Q for any significant items not reflected in the
statements. Sometimes the target has been involved in other significant mergers,
divestitures, or other consequential events. If so, then read the appropriate 8-K or other
document in order to pro forma the financials. Also, do a quick Bloomberg scan to see if
anything has happened after the filing of the last financial statement and the announcement of
the merger, which could also affect the valuation
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Serves as a registration statement if securities are to be issued as consideration (versus all cash)
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Typically gives the key terms of a transaction, with the sale/purchase contract filed as an exhibit
Financial statements and/or pro forma financials are often filed as an amendment on Form 8 as
companies are given time to include financials on the filing
10K, 10Q Annual, Quarterly Contain required financial statements and MD&A filings
Filings
Ks and Qs May also contain M&A-related disclosures which could have been made on Form 8K
13E-3 Going Private Filing Used in connection with a significant affiliated party M&A transaction (i.e., LBO or Minority Buyout)
Often contains filing of actual Board presentation by financial advisor to Special Committee
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ENTERPRISE
EQUITY ENTERPRISE VALUE/ TARGET
DATE TARGET TARGET DESCRIPTION ACQUIROR VALUE VALUE
(1)
EBITDA
(2) UNIONIZED
Jul-03 Roadway Corporation LTL carrier providing freight services on major Yellow Corporation $966 $1231 6.7x NA
(US) city-to-city routes in North America
Nov-01 Motor Cargo Industries Provides regional less-than truckload services Union Pacific Corp. 83 78 4.0 No
in the western U.S.
Nov-01 Arnold Industries Provides regional less-than-truckload services Roadway Corp. 558 510 5.7 Yes
in northeastern states and also provides
truckload and logistics services
Aug-01 Arnold Industries (US) N/A Roadway Corporation 539 510 5.4 No
Aug-01 G.I. Trucking Company Provides regional less-than-truckload services Investor Group (Estes) 40 40 5.0 No
in western and southwestern states
Nov-00 American Freightways Operates as a scheduled common and FedEx Corp. 934 1,196 6.3 No
Corporation contract carrier transporting primarily less-
than-truckload shipments of general
commodities.
Jun-99 Jevic Transportation Provides regional and interregional Yellow Corp. 158 197 5.9 No
Inc. transportation of general commodity freight
Jun-98 Preston Trucking Provides les-than-truckload transportation of Management Group NM NA NA Yes
general commodity freight
Oct-97 Caliber Provides transportation, logistics and related FedEx Corp. 2,489 2,681 10.3 No
System, Inc. information services through its five
subsidiaries
Jul-95 Worldway Corp. Transporter of freight throughout United Arkansas Best Corp. 82 153 9.0 Yes
States; also provides truckload services and
driver leasing services through its subsidiaries
Nov-92 Central Freight Lines Carrier of intrastate and foreign commerce Roadway Services Inc. 102 148 6.8 No
Inc. within Texas, Arizona, and New Mexico
Nov-92 Preston Trucking Provides less-than-truckload transportation of Yellow Freight Systems 24 146 5.8 Yes
general commodity freight
Jul-88 Viking Freight Inc. Provides regional carrier services in California Roadway Services Inc. 135 172 7.8 No
and 9 other Western States
Jun-88 Arkansas Best Corp. LTL and TL carriage, furniture manufacturing Kelso & Co. 317 472 6.2 Yes
and tire retreading
Median 6.1x
Average 6.5x
High 10.3x
Low 4.0x
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Agenda
Projections
Terminal Value
Present Value
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Fairness Opinions: Is the price offered for our company / division fair from a financial point of
view?
Public Equity Offerings: For how much could we sell our company / division in the public
market?
New Business Presentations: Various applications
Discounted Cash Flow analysis is typically the primary valuation methodology used by
CS in M&A and certain capital markets transactions.
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Methodology:
Present value of projected
Value based on market trading
Value based on multiples paid
unlevered free cash flows multiples of comparable for comparable
Inherent value companies companies/assets in sale
Best captures business in
Implied value in public securities transactions
transition markets (IPO analysis); fully-
Implied value in private market
Sensitivity analysis distributed value
Focuses mainly on multiples of
Synergies analysis
Usually focus on forward looking historical EBITDA, earnings
Buy vs. build EBITDA, earnings and cash flow and cash flow
Issues:
Financial forecasts developed
Market environment
Market environment
with management
Quality of comparables
Quality of comparables
Discount rate
Public data
Availability of data
Terminal value method
Consistent accounting treatment
Consistent accounting
Less meaningful benchmark for treatment
assets with unique cash flow
Less meaningful benchmark for
patterns assets with unique cash flow
patterns
Of the three principal valuation methodologies used on Wall Street, DCF analysis
frequently carries significant weight.
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Cost
of equity
Calculate WACC Cost of debt
Theoretical optimal capital structure
FCF
for periods 1 to n
Discount FCFs
Terminal value
Adjustment
for non-operating items (e.g., extraordinary items, cash
Enterprise Value flow from unconsolidated subsidiaries, hidden assets, contingent
liabilities, etc.)
Take
market value of financial debt, plus minority interests plus other
Less net debt non-working capital liabilities less excess cash and marketable
securities (sometimes referred to as corporate adjustments)
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Liabilities and
Net Assets Shareholders Equity
Net Debt
Enterprise
Enterprise Value
Value
Equity Value
(1) Net Debt (Corporate Adjustments) is equal to total debt + minority interest + preferred stock + capitalized leases - excess cash and cash equivalents.
We use discounted cash flow analysis to calculate the enterprise value of the firm, which
then allows us to calculate its equity value.
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Step 1: Projections
DCF analysis is an attempt to look at the companys pure operating results, free and clear of financial leverage,
extraordinary items, discontinued operations, etc.
Many times, we are given financial projections from the management of a particular company; however, there
are situations in which we must develop our own forecast for a particular company or business
It is extremely important to look at the historical performance of a company or business to understand
how future cash flows relate to past performance
A companys unlevered free cash flows represent the cash generating ability of that particular company, without
regard to its present or prospective capital structure
As a result, unlevered free cash flows are projected before subtracting interest and financing expenses or
related tax shields
DCF projections should be based on:
Historical performance
Company projections (when available)
Equity research analyst estimates
Industry data
Common sense
The forecast horizon should be long enough so that the company reaches steady state by the end of the
forecast period
Typically, forecasts of 5 - 10 years are used for DCF analyses of maturing or mature firms
The free cash flows from a business can be projected using information about the
industry in which the business operates and information specific to the business.
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Step 1: Projections
Extract historical financials
Sales
Deferred taxes
Capital expenditures
Working capital (receivables, inventories and prepaid expenses less current payables and other
current operating liabilities)
Analyze numbers
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Build a separate schedule for sales analysis which will feed through to consolidated statement
Breakdown by market segment (different prevailing market dynamics), product type/class, etc.
Research reports
Sales growth is usually an input; aggregate sales are derived from this input
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Build a CapEx schedule breaking down expenditures by type of asset (buildings, machinery and
equipment, other assets) and between new and replacement CapEx
Show beginning and ending PP&E by type of asset
At the end of forecast period, the CapEx level should be in line (equal or slightly higher) with
depreciation (i.e., assume that capital intensity is maintained going forward)
For a given year, CapEx is equal to end of year net PP&E less beginning of year net PP&E plus
depreciation expense for the year
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Deferred tax assets and liabilities arise due to differences between financial (book) accounting
and tax accounting
The most significant differences in book and tax accounting typically arise with regard to
the depreciation of assets. In the U.S., assets often can be depreciated on an accelerated
basis for tax purposes, lowering taxable income in the current period and thus lowering
actual cash taxes paid.
On a book basis, however, often times the same assets cannot be depreciated on such an
accelerated basis, thus taxable income is higher, as are book taxes per the income tax
provision. The increase in deferred tax liabilities accounts for the difference between book
taxes and the actual taxes paid to the government
Increases in deferred tax liabilities (net of deferred tax assets) are a source of a cash and
should be added in calculating free cash flow (and alternatively, decreases in deferred tax
liabilities are a use of cash and should be subtracted in calculating free cash flow)
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Step 1: Projections
Unlevered Free Cash Flow
Unlevered Free Cash Flow is the unlevered after-tax cash flow generated by the Company
(including the impact of any reinvestment)
Unlevered Free Cash Flow is available to all providers of the Companys capital, both creditors
and shareholders
Unlevered Free Cash Flow is best determined by considering sources and uses of cash:
METHOD 1 METHOD 2
Net Income EBIT
(1) (2)
(+) After-Tax Interest Expense (-) Tax Effect
(+) Increase in net Deferred Tax Liability (+) Increase in net Deferred Tax Liability
(-) Increase in Net Working Capital (-) Increase in Net Working Capital
Note: Changes in other long term assets/liabilities may affect Unlevered Free Cash Flow.
(1) After-Tax Interest Expense is defined as interest expense less the applicable interest tax shield.
(2) In most cases, amortization expense is not tax-deductible.
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Since DCF analysis is based on a limited forecast period, a terminal value must be used to capture the
value of the business at the end of the projection period
The terminal value is usually added to the free cash flow in the final year of the projections and then
discounted back to the valuation date, or it can be discounted separately to the valuation date
The terminal value typically constitutes a substantial portion of the total enterprise value. Critical
thinking about prospects of the business, and therefore the terminal value, results in a more
meaningful, accurate and defensible DCF analysis
Note that the terminal year free cash flow has to be normalized to ensure that the company has
reached a steady state
Normalized operating assumptions: sales and profitability assumptions for the final year should
reflect a steady state year, not a peak or trough in the business cycle; and depreciation and
capex should be within the same range
Terminal value is determined through either application of a valuation multiple (the terminal multiple)
or the perpetuity growth method
The terminal value captures the value of the business at the end of the projection period,
which is based on the free cash flows of the business beyond the explicit forecast period.
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Multiple is based on the most appropriate multiple for the companys industry (e.g., EBIT versus
EBITDA versus EBITDAR)
The multiple applied should reflect the long-term market valuation of the company/industry,
rather than a current multiple that may be distorted by industry or economic cycles
Terminal value based on assumed trading or acquisition multiple at the end of the
projection period.
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Unlevered FCF n+1: Unlevered free cash flow in the first year after the explicit projection
period
Note that we often estimate FCF n+1 by taking FCF n and growing it by the growth rate g,
but this is not always appropriate
r: Discount rate (based on weighted average cost of capital)
g: Perpetuity growth rate
The perpetuity growth rate used must be realistic
Reference point should be nominal GDP growth
Expected long-term growth rate of the industry (e.g., utility industry growth rate versus cable
TV industry growth rate)
Always show a range of perpetuity growth rates
Terminal value based on business operating into perpetuity, growing free cash flow at
some constant rate.
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The WACC should be thought of as the opportunity cost of capital, the long-term return an
investor expects to earn in an alternative investment of equivalent risk
The WACC to be used in a DCF analysis is specific to the business or asset being valued. It
does not necessarily depend on the buyers or sellers overall cost of capital
WACC is used by firms as the hurdle rate for a project or division, as a performance benchmark
for return on capital calculations, to determine desirability of stock repurchases or issuance, or
for valuation purposes
Mathematically, WACC is expressed as:
(1) Assumes capital structure is only debt and equity. Other sources of capital, such as preferred stock, would need to be included if present.
(2) Based on the Capital Asset Pricing Model.
(3) Assumes companys debt is risk-free. In certain limited situations, an adjustment can be made to this formula to account for the riskiness of the companys debt.
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(%)
Cost of Equity
Cost of Debt
Prior to calculating the cost of equity and debt for the company you are valuing, you need to define a target
capital structure that reflects the debt to equity ratio that is expected to prevail over the life of the business.
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To estimate the market value of equity (market capitalization), multiply the stock price by the
shares outstanding. Exercisable stock options that are in-the-money should be included in the
equity value to the extent the current stock price exceeds the exercise price. If the company is not
public, you can estimate the equity value by some alternative method.
To estimate the market value of debt, look to see if the debt is publicly traded; if so multiply the
trading price by the number of securities outstanding. If the debt is not traded, estimate the market
value by comparing with similarly rated publicly traded debt. Book value of debt is sometimes
used as an approximation if value of bonds is close to par (issue price)
Typically convertibles that are out-of-the-money are treated as debt at book value.
Convertibles that are in-the-money are converted into shares of common stock at the
conversion price and treated as equity. Theoretically, convertibles consist of both equity
and debt components, but rarely do Wall Street firms break them into separate parts for
WACC analysis
Include capital leases in the total debt calculation. Operating leases require case-specific
judgment - they are frequently converted into capital leases by applying a multiple
(typically 6x - 8x) to the annual operating lease payments
For companies with captive finance subsidiaries, we typically exclude finance company-
related debt
You can use a combination of the following three approaches to estimate the appropriate
target capital structure.
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15
M
Market
Return
10 Risk Premium
Risk-free
Rate
5
0
0.0 0.5 1.0 1.5
Beta
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The equity risk premium is a critical element of WACC and DCF analysis that is often the
subject of intense debate.
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If the company has public debt outstanding, take the weighted average of current yields to maturity or yields to
worst on all issues in the target capital structure
The yield to maturity (or for callable bonds, the yield to worst) embodies the markets expectations of
future returns on debt and should be used instead of the coupon rate
Average cost of debt (not marginal) may be more appropriate when the entire enterprise is being valued
Include short-term and medium-term debt (along with long-term debt) if it is expected to be part of the
permanent capital structure going forward
Talk to Debt Capital Markets (DCM) if debt securities are only thinly traded or if it is difficult to obtain a
market price
Risk-free rate + current corporate spread over treasuries of selected comparable credits
Must either use the bond rating given to the company by Standard & Poors or Moodys, or estimate the
companys bond rating by comparing the companys financial ratios (i.e., Debt / EBITDA, EBITDA /
Interest) to those of its peers who have such ratings
Be wary of debt securities that have options attached (e.g., convertible bonds or callable bonds) that affect the
overall yield to maturity and thus may not reflect the true cost of straight debt securities
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Foreign Stock
Size Premium
Large Cap Premium
Stocks
Corporate
Bonds
Long-Term Default
Premium
Treasury Equity Equity Equity
Bonds Risk Risk Risk
Premium Premium Premium
Long Horizon Long Horizon
Premium Premium
Treasury
Bills
Real Riskless Real Riskless Real Riskless Real Riskless Real Riskless Real Riskless
Rate Rate Rate Rate Rate Rate
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In general, WACC calculation is not a science; there are no exact answers, judgment and reality
checks are essential
Typically, discount rate ranges centered around a best estimate for WACC are used in
DCF valuations
Small differences in WACC/discount rate can have huge impacts on value
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The total present value at December 31, 2002 is equal to the sum of the present values of the
individual cash flows ($108)
Mid-year Discounting
The above example assumes end of the period discounting, that is it assumes all of the
cash flows come at the end of each period. A more accurate method may be mid-year
discounting, which assumes that the cash flows come in the middle of each period (this is
essentially equivalent to evenly spreading the cash flows throughout the period)
When performing mid-year discounting, one must still discount the terminal value from the
end of the forecast period
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The Equity Value per diluted share is equal to the Equity Value divided by the number of net
fully-diluted shares outstanding
Number of net fully diluted shares = Basic shares + net shares underlying in the money
options / warrants + net shares from the conversion of in the money convertible debt and
convertible preferred stock
Incremental common-equivalent shares are typically calculated using the treasury stock method
Note that this is a circular calculation the treasury stock calculation depends on an
assumed share repurchase price, which is dependent upon the number of net fully-diluted
shares outstanding
Outstanding vs. exercisable options
(1) Note that out of the money options, while not converted per the treasury stock method, represent a cost that is not captured in the analysis (typically this error is a small one).
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WACC Schedule
Industry Statistics
(in millions)
Total Mkt Debt / Tax Levering Unlevered
Company Beta (1) Debt Equity Mkt Equity Rate (2) Factor (3) Beta (4) Assumptions
Arkansas Best Corp 0.83 15 1,069 1.4% 40.1% 1.01 0.82 Target Marginal Tax Rate 38.0%
Cnf Inc 0.89 714 2,457 29.1% 41.0% 1.17 0.76 Risk Free Rate (5) 4.330%
Old Dominion Freight 0.62 81 885 9.2% 39.1% 1.06 0.59 Equity Risk Premium (6) 7.20%
Overnite Corp 0.95 127 850 14.9% 40.0% 1.09 0.87 Size Premia ("Sp") (7) 1.59%
Scs Transportation Inc 0.63 123 354 34.7% 37.6% 1.22 0.52
Yellow Roadway Corp 1.00 728 2,769 26.3% 39.1% 1.16 0.86
0.0% 0.0% 0.74 1.00 0.74 11% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2%
10.0% 11.1% 0.74 1.07 0.79 12% 10.7% 10.8% 10.9% 10.9% 11.0% 11.1%
20.0% 25.0% 0.74 1.16 0.85 12% 10.3% 10.4% 10.5% 10.6% 10.8% 10.9%
30.0% 42.9% 0.74 1.27 0.93 13% 9.8% 10.0% 10.1% 10.3% 10.5% 10.7%
40.0% 66.7% 0.74 1.41 1.04 13% 9.3% 9.5% 9.8% 10.0% 10.3% 10.5%
50.0% 100.0% 0.74 1.62 1.19 15% 8.8% 9.1% 9.4% 9.7% 10.0% 10.4%
0.0% 0.0% 1.00 0.65 10.6% 10.6% 10.6% 10.6% 10.6% 10.6%
10.0% 11.1% 1.07 0.70 10.5% 10.5% 10.6% 10.7% 10.7% 10.8%
20.0% 25.0% 1.16 0.75 10.3% 10.5% 10.6% 10.7% 10.8% 11.0%
30.0% 42.9% 1.27 0.80 10.2% 10.4% 10.5% 10.7% 10.9% 11.1%
40.0% 66.7% 1.41 0.85 10.0% 10.2% 10.5% 10.7% 11.0% 11.2%
50.0% 100.0% 1.62 0.90 9.8% 10.1% 10.4% 10.7% 11.0% 11.3%
(1) Barra US equity Book predictions (7) Cost of equity premia based on equity market capitalization.
(2) Based on marginal tax rate low-cap ($797mm - $1,167mm) = 1.59%. Amounts per 2004 Ibbotson.
(3) Levering Factor: 1 + [ ( 1 - Tax Rate ) * ( Debt / Equity ratio ) ] (8) Levered Beta: (Beta * Levering Factor)
(4) Unlevered Beta: ( Beta / Levering Factor ) (9) Cost of Equity: Rf + B * ( Rm - Rf ) + Sp, or the risk-free rate plus the beta * the eq
(5) Yield on Interpolated 20-Year US treasury Bonds which corresponds to Ibbotson's long-term equity (10) WACC: Rd = Return on Debt; Re = Return on Equity
risk premium (as of 2/04/05). Source: Bloomberg. [ Rd * (1 - tax rate) * (D / (D + E) ) ] + [ Re * (E / (D + E) ) ]
(6) The average historic period between the return on stocks and L-T bonds (2004 Ibbotson Associates).
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Agenda
1. Overview of Merger Consequences
USF Corporation: Sample Merger Consequences Yellow Roadway buys USF Corporation
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Accounting Treatments
Old Purchase Accounting New Purchase Accounting
Excess of purchase price over fair market value Excess of purchase price over FMV of identifiable
(FMV) of identifiable assets less liabilities is assets and liabilities is recorded as goodwill
recorded as goodwill
Goodwill not systematically amortized. Instead,
Goodwill amortized by the straight line method subject to an impairment test at least once per
over a period not exceeding 40 years year and on an interim basis as warranted
The Financial Accounting Standards Board (FASB) has modified the existing purchase
accounting rules and has eliminated the way we treat Goodwill.
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Key Information
Standalone EPS calculations - Use Options Exercisable from 10-K
Stock Price (P) = $10.00
Basic Shares (B) = 20.00 Acquisition Target - Options Outstanding from 10-K
Options (N) = 3.00 Change of Control usually leads to accelerated vesting for all
Strike Price (K) = $8.00 options
Net Income (NI) = $50.0
Max (0, P K) x N
2. Company collects strike price of 3.00 X $8.00 = $24.00
Diluted Shares = B +
P
3. Company uses $24.00 to repurchase shares at market
Max (0, 10.00 8.00) x 3.00 price of $10.00
= 20 +
10.00 Shares repurchased: $24.00 = 2.40
= 20 + 0.60
$10.00
= 20.60 shares 4. Incremental shares = Shares Issued - Shares
Repurchased
$50.0
Diluted EPS =
20.60
= $2.43 3.00 - 2.40 = 0.60
Accounting Convention
Diluted shares not ACTUALLY outstanding
Allows for consistent treatment of options
and computing EPS
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Purchase Accounting
Determine buyer
Group that receives the most voting shares of post merger company is presumed to be the
accounting acquirer; regardless of the legal acquiror
If no definitive share count, other factors are:
Board of Directors
Management
Relative size
Determine acquisition cost
Valuation of securities
Earnings contingency
Share price contingency
Closing date
Target financials combined with Acquiror financials as of the closing date
Allocation of Purchase Price
Allocate to identifiable assets acquired and liabilities assumed to reflect fair value at date of
acquisition
Include any newly identified intangible assets
Excess of cost of acquired company over the FMV is recorded as goodwill
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($ in millions)
ACCOUNTING FINANCING
ACQUIROR TARGET ADJUSTMENT ADJUSTMENT PRO FORMA
Cash $30.0 $5.0 $(5.0) $30.0
Other Assets 10.0 5.0 20.0
Goodwill 0.0 0.0 65.0 92.0
Total Assets $40.0 $10.0 $142.0
Debt 0.0 0.0 45.0 45.0
Other Liabilities 5.0 5.0 10.0
Deferred Tax Liability
Total Liabilities
0.0
$5.0
0.0
$5.0
2.0
$57.0
=
Equity 35.0 5.0 (5.0) 50.0 85.0
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ACCOUNTING FINANCING
ACQUIROR TARGET ADJUSTMENT ADJUSTMENT PRO FORMA
Sales $150.0 $100.0 $250.0
EBITDA 30.0 21.0 5.0 56.0
Depreciation 5.0 1.0 2.0 6.3
Amortization 0.0 0.0 0.0 0.0
EBIT 25.0 20.0 49.7
Net Interest Expense (Income) (1.5) (0.3) 4.8 3.0
PBT 26.5 20.3 46.7
Tax 10.6 8.1 18.7
Net Income 15.9 12.2 28.0
Tax % 40% 40% 40%
Diluted Shares 10.00 2.50 (2.50) 0.67 10.67
EPS $1.59 $2.62
EPS Accretion / (Dilution) $ $1.03
Stock Price $75.00 $40.00 ?
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ACQUIRER TARGET
Price $10.00 $5.00
Net Income $1.00 $1.00
P/E 10.0x 5.0x
# of Shares 1 1
Int. rate 10%
Tax Rate 40.0%
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+
AcquirCo Net Income
TargetCo Net Income
$50.0
20.0
} Deferred Tax Liability = $4.0
Goodwill = $14.0
Incremental D&A 0.5
Goodwill Amortization 0.0
} Tax deductible or non-deductible
After-Tax Interest Exp. 3.0
}
Asset vs. stock transaction
= PF Net Income 66.5
New Debt x int. x (1 tax)
Initial AcquirCo Diluted Shares 10.00 50.0 x 10% x (1 40%) = 3.0
Pro forma AcquirCo Diluted Shares 15.00
Stand-alone EPS (Diluted) $5.00 Per Treasury Method
Pro forma EPS (Diluted) $4.43 Shares issued = Equity issued AcquirCo
EPS Accretion (Dilution) $ $(0.57)
Stock Price
EPS Accretion (Dilution) % (11.4%)
= $50.0 / 10.00 = 5.00
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Merger Consequences:
Yellow Roadways Buys USF
For Knight Ridder project show:
3 Considerations (100% Cash, 50%/50% Cash Stock and 100% Stock)
3 Premiums (10%, 20% and 30%)
($ in millions)
50% Cash / 50% Stock Consideration
Premium to Share Price 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0%
Price Per Share $32.44 $34.06 $35.68 $37.31 $38.93 $40.55 $42.17 $43.79 $45.42
Equity Value $918 $966 $1,014 $1,062 $1,111 $1,160 $1,210 $1,259 $1,309
(1)
Net Debt 99 99 99 99 99 99 99 99 99
Enterprise Value 1,017 1,065 1,114 1,162 1,210 1,259 1,309 1,358 1,408
Enterprise Value / 2005E EBITDA 4.1x 4.2x 4.4x 4.6x 4.8x 5.0x 5.2x 5.4x 5.6x
Enterprise Value / 2006E EBITDA 3.7x 3.8x 4.0x 4.2x 4.3x 4.5x 4.7x 4.9x 5.1x
Equity Value / 2005E Net Income 13.3x 14.0x 14.7x 15.4x 16.1x 16.9x 17.6x 18.3x 19.0x
Equity Value / 2006E Net Income 11.4x 12.0x 12.6x 13.2x 13.8x 14.4x 15.0x 15.6x 16.2x
2005E Stand Alone Diluted EPS $5.25 $5.25 $5.25 $5.25 $5.25 $5.25 $5.25 $5.25 $5.25
2005E Pro Forma Diluted EPS 5.59 5.53 5.48 5.43 5.38 5.33 5.28 5.24 5.19
2005E Accretion / (Dilution)
Acc / (Dil) $ $0.34 $0.28 $0.23 $0.18 $0.13 $0.08 $0.03 ($0.01) ($0.06)
Acc / (Dil) % 6.4% 5.4% 4.4% 3.5% 2.6% 1.6% 0.7% (0.3%) (1.2%)
Pre-Tax Breakeven Synergies $1.3 $6.1
(2)
Pro-Forma Debt / LTM EBITDA 1.6x 1.7x 1.7x 1.7x 1.8x 1.8x 1.8x 1.9x 1.9x
Debt-to-Capitalization (at closing) 45.28% 45.36% 45.45% 45.53% 45.61% 45.69% 45.76% 45.83% 45.91%
% Shares issued as currency 14.2% 14.9% 15.5% 16.1% 16.7% 17.3% 17.9% 18.5% 19.1%
ProForma Ownership% 85.8% 85.1% 84.5% 83.9% 83.3% 82.7% 82.1% 81.5% 80.9%
Source: Wall Street Projections, Credit Suisse Estimates.
(1) Net Debt numbers as of 12/31/04.
(2) Based on LTM EBITDA of $697mm.
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