Investment Banking Lecture 5

Investment Banking Lecture 5 - FPN1 INVESTMENTBANKING...

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FPN 1: INVESTMENT BANKING Lecture 5 – April 27 th 1
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Chapter 2 Precedent Transactions Analysis a.k.a. “Transaction Comps” 2
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Review Session Wednesdays Otterson Hall 1S113 (Rady) 12.30pm to 2.30pm Will review previous lectures 3
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Apple Inc. COMPARABLE TRANSACTIONS Hewlett-Packard ’s acquisition of 3Com Corp (2009) Cisco ’s acquisition of Starvent (2009) Emerson Electric Co. ’s acquisition of Avocent (2009) Oracle ’s acquisition of Sun Microsystems (2009) 4
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Step III: Spread Financial Statistics and Ratios o Equity Value o Enterprise Value Key Transaction Multiples o Equity Value Multiples o Enterprise Value Multiples Premiums Paid Synergies 5
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Step IV: Benchmarking Re-examine the business and financial profile of the target and its comparable transactions Benchmark key statistics and ratios for each of the acquired companies (given in “output” sheet) Best comparable transactions are identified, generally top 4 Eliminate obvious outliers 6
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Step V: Valuation Figure out industry specific multiple Use means and medians of multiples from universe to establish prelim valuation range for target Use highs and lows as reference points Narrow down to as low as 2 or 3 of closest transactions by sector and size Evaluate final valuation range Chosen multiple range is multiplied to target’s LTM financial statistics Derive valuation range for target 7
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Apple’s Valuation All deals had Enterprise Value over $1 B Use judgment to eliminate outliers Use 75 th percentile instead of median due to Apple’s performance Use multiples to determine Enterprise Value Industry wide multiple used is EV to LTM EBITDA or EV to Forward EBITDA Determine purchase price using premiums paid data 8
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Excel 9
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Apple’s Valuation 10
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Precedent Transactions : Pros Market-Based Analysis is based on actual acquisition multiples and premiums paid for similar companies Current Recent transactions tend to reflect prevailing M&A, capital markets, and general economic conditions Relativity Multiples approach provides straight forward reference points across sectors and time periods Simplicity Key multiples for a few selected transactions can anchor valuation Objectivity Precedent-based and, therefore, avoids making assumptions about a company’s future performance 11
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Precedent Transactions : Cons Market-Based
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