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MANAGEMENT: How to Evaluate a Public Company You Care To Acquire
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How to Evaluate a Public Company You Care To Acquire
By Mr. Marwan Emile Faddoul (Managing Partner Qadisha Consulting) & Mr. Alessio Falcone (Senior consultant Qadisha Consulting)

BT 201710 MANAGEMENT 01
      中国经济增长放缓,发展进入新常态,这一趋势对中国企业跨出国门,通过海外并购进行扩张起到了推动作用。同时,由于国内资金与市场的支持,中国企业海外收购已经进入了一个蓬勃发展的时期。以海航为例,在过去的两年时间内,海航集团就先后以100亿美元和数十亿美元不等的价格陆续收购了CIT商业航空公司(CIT Commercial Air)、希尔顿酒店集团25%股权、美国八个高尔夫球场、瑞士航空服务公司佳美集团(Gategroup)、英国外币兑换运营商International Currency Exchange (ICE)、美国科技公司英迈(Ingram Micro)、飞机租赁公司Avolon Holdings Ltd的100%股权以及地勤服务集团瑞士空港(Swissport)。进行如此大手笔收购案的并非只有海航一家。在收购越发频繁的同时,如何评估一个企业价值就成为了收购活动的关键步骤。我们可以相对简单地用这样一个公式来大致了解一个公司的价值情况:企业价值=股权价值+(债务 - 超额现金)+ 优先股 - 非控股权益。其次,深入分析公司所在市场领域,了解其竞争力,了解有关资产负债的预期,可以更好地定位公司,而且还可以考虑可能威胁公司市场增长的产品。对于不同业态的公司,我们可以采用不同的评估范畴,如对于网络公司,要看技术平台用户数量;炼油厂要看吞吐量;房地产公司要看可租用面积等。如果是你已经熟悉的行业,那就更为方便。相信读过下文后,对于收购公司的注意事项你可以做到胸有成竹。

It happened during a discussion in a business club where entrepreneurs were talking about ways to grow their business. During the session, one point that came to everyone’s attention dwelled on the possibility of acquiring another company. A young business man sitting in the back stood up and asked: how to evaluate a company once the decision for an acquisition has been made? After a few attempts I took charge and started putting order to their thoughts, explaining what the value of a company represents. This concept lays the foundation of valuation. …. a bit technical, but worth exploring.
 

Value of a company in the market is represented by the Enterprise Value (EV) that contains the claims of both equity and debt on interests and assets of the firm. It represents what a potential acquirer needs to pay to buy out equity holders and acquire the outstanding debt of the firm. This concept can be broken down into a simpler formula as:
 

Enterprise Value =
Market Value of Equity + (Debt – Excess Cash) + Preferred Stock – Non-controlling Interests

- Market Value of Equity (MVE), as the name suggests, represents the market value of outstanding shares in the market, which need to be bought from their owners by the potential acquirer. It can be calculated in its simpler form as:

BT 201710 MANAGEMENT 05MVE = Share Price × Number of Shares Outstanding

If there is any convertible instrument issued by the company it is taken into account while calculating the number of shares outstanding.
 

- Debt represents the sum of all types of outstanding debt the company holds, while Excess Cash represents the cash not needed by the company to run its daily operations. In the EV, debt is netted of excess cash because, if there is any, the acquirer can use it to pay off debt.
 

- Preferred Stock is a particular instrument with characteristics in-between equity and debt and so it is accounted for separately.
 

- Non-controlling Interests is a necessary plug when dealing with consolidated financial statements. Netting non-controlling interests helps when dealing with valuation multiples.

BT 201710 MANAGEMENT 02I still had the attention of the crowd, thanks to the white board I was using to note down all concepts. I was then able to move towards valuation techniques used to price a company.
 

There are multiple ways and methodologies to determine the Enterprise Value. Moreover, the outcome of each methodology is a range of values. According to the type of company you are evaluating and the industry in which it operates there could be methodologies that are more suited than others, but each range is only a data point. In the end, valuation is not science, but a beautiful art.
 

The first analysis that anyone interested in putting a number on an interesting company must do is an in-depth market study in order to have a clear understanding of the boundaries of the market and of the forces that govern it. During the due diligence, I suggest starting from analysing the competition faced by the target company, as direct competitors are easily identifiable. Where applicable, evaluate the bargaining power that suppliers and customers can exercise on the target company, which gives an idea of what to expect on certain items of the balance sheet, specifically current assets and liabilities. Additional analysis could be conducted about the barriers that new entrants have to overcome in order to establish themselves in the specific market, but also about substitutes that can threaten market growth. It goes without saying that if you plan to acquire a company in the same industry as yours the analysis is very quick, but if you plan to integrate vertically (backward or forward) it may take a little longer.

BT 201710 MANAGEMENT 04Once we have a deeper understanding of the market of interest, it is possible to jump to valuation. There are mainly four valuation methodologies:
 

- Comparable companies
- Precedent transactions
- Discounted Cash Flow (DCF)
- Leverage Buy-Out (LBO)
 

Comparable companies and precedent transactions are the fastest ones to perform and they mainly require to scan the market to find data. DCF and LBO are intrinsic valuations and require intricate modelling of the company (along with zillions of assumptions) to get to a result.
 

I was explaining to my audience that we could already get some estimation with the first two methodologies and for this reason I would only describe the first two more in depth.
 

For comparable companies, the exercise is similar to value a house we like, but of which we don’t know the market price. Let us imagine that process. We would start by identifying the house we love in the area we prefer. Following that, we look for similar houses in the same area for which the price is known to us. Finally, we define the most useful parameter to prorate the price of the house, such as number of rooms, number of bathrooms or size of the house in square meters. To evaluate a company, we need to change key parameters to categorize comparables and multiples to prorate the price. We can use:

BT 201710 MANAGEMENT 06While approaching the task, it appears clearly that two identical companies do not exist and it turns out that compiling a list is somewhat subjective. A more structured way to approach the task is to create different tiers based on percentage of similarity. Next step is identifying the best parameter to evaluate the target company because we all agree that number of bathrooms is not that relevant.
 

These parameters are called multiples because that is what they are, a fraction that correlates the EV with either an operational driver or a financial driver of the target company.
 

For operational drivers, we can use items such as: number of users for tech platforms, throughput for Refineries or rentable surface for real estate.
 

BT 201710 MANAGEMENT 03For financial drivers, we can use EBIT, EBITDA or net income (NI). Using different financial drivers (i.e. EV/EBITDA and EV/NI) has massive differences, in fact between the two line items of the P&L there are two stakeholders, the debt holders and the government.
 

If companies we deem comparable to our target have very different capital structure then we cannot use an EV/NI. The final step requires evaluating an average multiple for the set of comparable companies and using it to calculate the EV of the target company. Et voilà we get the first data point of our valuation.
 

The next step is to evaluate a second data point through precedent transactions. This requires searching for similar transactions (e.g. acquisition, merger) that happened in recent past. Once we get some values for the prices paid by acquirers in the acquisition of similar companies we have the outcome of the second valuation exercise. There are two caveats coming along with this methodology: on one side it is difficult to find similar transactions, on the other side transactions data include a control premium in the price and so the valuation is higher than comparable companies. At this point in time it is possible to create a visual representation of our work by plotting the two data points found in the typical football field graph.
 

During my presentation, I saw people taking pictures at the whiteboard and so decided that it was time to stop and continue in a separate setting. DCF and LBO are pure financial beauties but are also more technical and would require even more space on the whiteboard.
 

My final message to the audience is that anyone interested in getting involved in a financial transaction, such as an acquisition, should be able to estimate the value of the target company easily and in few simple steps. Also, there is no need to feel scared by the technicality of other valuation methodologies because, as always in business, it is mostly common sense and with the help of external resources it becomes easier.
 

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