Investment Banking Module
Investment Banking Module
Table of Content
Introduction to Investment Banking
3
Valuation Methodologies
14
A. Valuation Techniques
18
B. Comparable Company Analysis
21
C. Comparable Transaction Analysis
95
C. Comparable Transaction Analysis
95
D. DCF Valuation
112
Pitch book Building
150
A. Profiles
154
B. Case Studies
175
C. Industry overview
187
Is it investing? Is it banking? In reality, it is neither!
Investment banking, or I-Banking, as it is often called, is the term used to describe the business of advising
corporates around their financial needs and raising capital for companies
Buy & Sell securities for their clients and provide stock advice
Facilitate buying and selling of stocks, bonds, options, currencies, derivatives and other financial products (Flow & Exotic)
Clients include Institutional Investors like pension funds, mutual funds, private clients/
Sales and Trading
Equity Research
Follow stocks and make recommendations on whether to buy, sell or hold securities
Prepare Initiation Reports, Sector Reports and also Market Reports
Provide investment ideas for the Sales & Trading Group
Analyze and forecast economic trends, interest rate movements and other industry level parameters and perform valuations on companies within industry sectors they follow
Clients include Institutional Investors like pension funds, mutual funds, private clients/ HNI’s and individual investors, investment arms of non-finance companies
Corporate Finance / Advisory
Work with clients in determining financing needs and structuring specific financial strategies
Provide underwriting services on issue of equity or debt securities
Financing
Corporate Finance Prospectus, Placement memorandums, Valuation,M & A
Corporate Finance M&A valuation, Deal structuring, Restructuring, Asset sales andCorporates
Analyst Presentation Coverage Report Valuation, Underwriting Equity Research Initiation reports Coverage report Road showsSales & Trading
Market making Proprietary Trading
Asset sales and purchase, Synergy analyses Equity Research Coverage report Event Report Deal notes
Sales & Trading
Market making Proprietary Trading
Title Experience Education Role
Managing Director 8+ Years
Top Undergraduate Universities,
Usually Top-Tier MBA
Managing Directors primarily pitch ideas to clients to source deals.
Managing Directors spend most of their time in bringing business to the banks, executing transactions for clients and maintaining existing client relationships.
Top Undergraduate Vice Presidents are also responsible for finding new clients and servicing existing clients. VPs Vice President 3- 8 Years
Top Undergraduate Universities,
Usually Top-Tier MBA
new clients and servicing existing clients. VPs however spend more time managing Analysts and Associates and in the pitch book creation process
Associate 0-3 Years
Top Undergraduate Universities,
Usually Top-Tier MBA
Associates manage analysts’ work and are primarily responsible for financial models and pitch book creation. In addition, they may be involved in dealing with the MDs and going over details of potential deals or discussing numbers (commercial and financial DD)
Analyst 0-1 Years Top Undergraduate University
Analysts perform all research and analysis, build financial models and put together the pitch book (deal coordination, commercial and financial due diligence)
Investment banks perform the following major functions:
Corporate Finance & Advisory services, for which they receive fees
– Underwrite securities and provide advisory services
– Provide M&A advisory
– Provide financial advisory services to companies, governments and other agencies
Sales & Trading activities, for which they earn spreads
– Trade securities and commodities
– Trade securities and commodities
– Manage individual and institutional investor’s funds
– Provide brokerage services, invest own resources, make loans
Equity Research, they make money from two sources, primarily from investors / readers of the reports and secondly, from firms they are covering for which they are paid a set annual fee in cash; they do not accept any form of equity, which may cause conflicts of interest
– Provide information on market
– Conduct financial statement analysis and build financial models to derive a company's proper valuation
Investment banking activities tend to be more profitable than commercial banking activities; based on the fees rather than interest rate differentials
Legal and physical separation between investment banking and trading activities is termed as Chinese Walls.
Chinese walls are necessary to separate different departments within large financial institutions such as investment banks that serve clients in different capacities simultaneously, leading to conflict of interest.
All investors in the market should play on a level field, where no one has access to privileged field, where no one has access to privileged information leading to an undue advantage, due to their favorable position.
For example, the corporate finance department of an investment bank may know of takeover bids that are being considered, but for the bank's trading or fund management operations to act on this information would constitute insider trading. This makes it necessary that such information is restricted to the departments actually involved, so that other departments can function normally. This wall is not a physical boundary, but rather an ethical and legal one that financial institutions are A brief history: The Chinese wall concept in
investing originated from the Glass-Steagall Act, when the separation of investment banking from brokerage operations was embraced by the securities industry regulators.
Glass-Steagall Act: This Act was enacted during the Great Depression in 1933, after the1929 stock market crash, to restrict the securities activities and affiliations of banks. The act was intended to protect banks, prevent conflicts of interest and other abuses and safeguard the financial system.
To make it convenient, from now onwards by Investment Banking we would mean Corporate Finance
Corporate Finance
Financings
Includes:
Initial Public Offerings (IPO)
Client Advisory
Includes: Acquisitions
Private Company Sale Initial Public Offerings (IPO)
Secondary Offerings Debt Syndication
Equity Private Placements
Private Company Sale Public Company Sale Corporate Restructuring Corporate Divestitures Joint-Ventures
Bankers generally generate business through pitching transaction ideas to clients. “Pitch Books” - presentations the bankers use for their clients, contain general information and include a wide variety of selling points they make to potential clients. Pitch books almost always include valuation and research analysis on a number of companies and/or industries
Pitch books again can be categorized as follows:
General : Usually, general pitch books include an overview of the I-bank and detail its specific capabilities in research, corporate finance, sales and trading, primarily used to showcase credentials.
Deal-specific. Deal-specific pitch books are highly customized and are prepared specifically for the transactions that bankers are proposing to their clients
There are broadly two types of groups within a typical investment bank (or investment banking division):
Product groups: The three most well known product groups are mergers and acquisitions (M&A), leveraged finance and restructuring.
The products of an Investment Bank, are basically advisory for M&A, Financing, Restructuring, etc., hence a Group covering any of the above activities would be a Product group
Bankers in Product groups have product knowledge and tend to execute transactions (respectively M&A transactions, leveraged buyouts (LBO’s) and restructuring transactions/bankruptcies).
transactions, leveraged buyouts (LBO’s) and restructuring transactions/bankruptcies).
For e.g. an M&A banker would be a specialist in deal structuring (equity or cash etc.), types of deal structures, takeover codes (legalities, regulation) in a particular country etc .
Industry groups (also called sector groups or domains): Bankers in industry groups cover specific industries and develop expertise in a particular sector. They tend to do more marketing activity (pitching).
Examples of common industry groups include FIG (Financial Institutions Group), Healthcare, Consumer/Retail, Industrials, Natural Resources, TMT (Telecom, Media and Technology.. Often subgroups exist within the broader group. For example, a Healthcare group may be segregated into biotechnology, medical devices, pharmaceuticals, etc.
Bulge Bracket Banks: The term “bulge bracket” generally refers to the large investment banks that cover most or all industries and offer most or all of the various types of investment banking services. While there is no official list of bulge bracket banks, some examples are BAML, JP Morgan, Credit Suisse, Deutsche Bank etc.
Corporate Finance Boutiques: These are small in size, ranging from a few professionals to hundreds or even thousands of professionals; can generally be categorized into three types:
– specializing in one or more products
– specializing in one or more industries and
– specializing in small or mid-sized deals & clients (generally less than $500 million)
Boutiques known for M&A, often compete with the bulge bracket banks for M&A transactions. A few examples include Lazard, Greenhill, Evercore
Other boutiques offer many different products but specialize in one or more industries. Such boutiques often compete with the bulge bracket banks on the basis of their industry knowledge and expertise. A few examples include Cowen & Co. (healthcare), Allen & Co. (media) and Thomas Weisel Partners (technology), Avendus (technology in India)
The third type of boutique, those that offer many products and cover many industries but compete only for “middle market” or smaller deals include Jefferies & Co., Piper Jaffray, Raymond James. Many of these middle market boutiques are regionally focused.
Some of the Indian boutiques are Equirus, O3, Edelweiss, Mape Advisory, Pears Capital , Numinous Consulting, Viedea Capital
Financial Advisor Deal Value (in $mn) Freeman Fees (in $mn) Number of Deals
Goldman Sachs & Co 425,164 1,952.8 325
Morgan Stanley 346,039 1,421.7 331 JP Morgan 330,835 1,400.3 280 Credit Suisse 327,179 1,046.4 249 Citi 299,167 729.4 185 Barclays Capital 265,094 715.6 133 Deutsche Bank AG 242,883 831.5 224
Bank of America Merrill Lynch 236,383 906.6 204
UBS 231,960 850.9 230
Worldwide Announced deals - 2010
UBS 231,960 850.9 230 Lazard 188,637 845.0 259 Rothschild 127,830 746.5 245 HSBC Holdings PLC 98,194 212.0 79 Nomura 87,404 320.6 171 Evercore Partners 79,257 209.4 35 BNP Paribas SA 78,350 300.1 110
Jefferies & Co Inc 72,904 354.3 114
Greenhill & Co, LLC 70,551 202.3 47
Houlihan Lokey 61,464 349.6 167 Blackstone Group LP 54,777 169.6 41 Santander 51,225 – 47 Centerview Partners LLC 50,161 – 13 RBC Capital Markets 48,909 344.0 133 KPMG 44,578 – 327
Date Effective/Unconditional Deal Value (in $mn) Number of Deals 2008 1,924,659 24,890 2009 1,848,453 30,431 2010 1,893,852 32,114 2011 824,484 8,762 Industry Total 6,491,448 96,197
Completed Deals Worldwide: Annual Transaction Volume
Excludes Equity Carveout, Exchange offers and Open Market Purchases Excludes Equity Carveout, Exchange offers and Open Market Purchases
CLIENT MARKETING RESEARCH & ANALYSIS DEAL EXECUTION
Investment Banks
KPO’s
Valuation Methodologies
Valuation Methodologies
Valuation Methodologies can be categorized as under:
A. Fundamental valuation: A stand-alone valuation methodology to compute the intrinsic value of an asset B. Relative valuation: Valuing an asset relative to its peers
A. Fundamental Valuation:
The DCF (WACC, FTE, APV) model of valuation is a fundamental method.
Value of firm (equity) is the PV of future cash flows.
Value of firm (equity) is the PV of future cash flows.
Ignores the current level of the stock market (industry).
Appropriate for comparing investments across different asset classes (stocks vs. bond vs. real estate, etc).
B. Relative Valuation:
Comparable company analysis and comparable transaction analysis are relative valuation methods
Relative valuation is based on P/E ratios and a host of other “multiples”.
Can not compare value across different asset classes (stocks vs. bond vs. real estate, etc).
Can not answer the question “is the stock market over valued?”
Can answer the question, “I want to buy a tech stock, which one should I buy?”
Fundamental analysis is a technique that attempts to determine a security’s value by focusing on underlying factors that affect a company's actual business and its future prospects.
On a broader scope, one can perform fundamental analysis on industries or the economy as a whole. The term simply refers to the analysis of the economic well-being of a financial entity as opposed to only its price
movements.
The various fundamental factors can be grouped into two categories: quantitative and qualitative.
– Quantitative – capable of being measured or expressed in numerical terms.
– Qualitative – related to or based on the quality or character of something, often as opposed to its size or
– Qualitative – related to or based on the quality or character of something, often as opposed to its size or quantity.
Fundamental analysis serves to answer questions, such as:
– Is the company’s revenue growing?
– Is it actually making a profit?
– Is it in a strong-enough position to beat out its competitors in the future?
– Is it able to repay its debts?
Relative valuation answers the question “How does the value of an asset compare with the values assessed by the market for similar or comparable assets”
Absolute values of comparable assets are standardized for the purpose of comparison. Friendly – The Board recommends the offer
– How would you compare a pencil priced at Rs.10 with another pencil priced at Rs. 20?
Standardized values – values with a common numerator – are called price multiples
Comparing the price multiples of comparable assets can give an indication of whether an asset is under or over valued.
valued.
– If Rs.10 pencil lasts 10 days and Rs. 20 pencil lasts 16 days, is Rs. 10 pencil over or under valued compared to the Rs. 20 pencil?
Valuation Techniques
Valuation Techniques
Valuation is the process of determining the current worth of an asset. Valuation answers the question “How much will it cost to acquire the asset?”
Further Valuation analysis is done to answer questions like:
– “How much should Acquirer pay to buy the target?”
– “Is the price offered for the company fair to shareholders?”
– “Is company undervalued / overvalued in the industry?”
– “What is the underlying value of the business against which debt is being issued?”
– “What is the underlying value of the business against which debt is being issued?”
– “Should we buy/sell/hold positions in a given security?”
Thus, Investment banks perform valuation on firms, or parts of firms for several reasons:
– Contribution into a Join Venture or Mergers & Acquisitions (Buy side or sell side engagements)
– Recommended bid for an acquiring firm
– Assess Public equity offerings IPO etc
– Floatation of debt or equity or credit
Valuations are not scientific. It is highly dependent on a strong set of assumptions and inputs. A valuation is only as good as the quality of inputs. Analyst look at a variety of valuation methods to quantify value.
There are three primary methods of valuing a company:
Comparable Company Analysis (Trading Comps) – Trading Comps analyze key valuation ratios of comparable companies that are trading in the market to give an indication of what fair value is and compares firm’s financial performance to its market value.
Comparable Transactions Analysis (Transaction Comps) – Transaction Comps analyze value based on historical takeout multiples of comparable targets to give an indication of what one would have to pay to acquire historical takeout multiples of comparable targets to give an indication of what one would have to pay to acquire the company. It also includes control premium.
Discounted Cash Flow (DCF) – Discounted cash flow analysis is based on cash flow generation potential of business. It uses projected cash flows in the future to determine the value of company at the present time. It involves discounting levered / unlevered cash flows by equity cost of capital or weighted average cost of capital.
Comparable Company Analysis
Comparable Company Analysis
Table of Content
Overview
23
Key Definitions
24
Source of Information
29
Selection of Comparable Companies
31
Equity and equity linked information
32
Market Capitalization
41
Balance Sheet
47
Enterprise Value
58
Income Statement
61
LTM & Calendarization
74
Understanding Multiples
78
Comparable Company Analysis (‘comps’) is the most basic and effective valuation tool used by investment bankers for the analysis of publicly listed companies across various industries.
This technique is used in private market valuation, IPO valuation, comparative analyses, identifying potential targets for M&A etc
Comps establishes value of a company and measures its performance vis-à-vis the operating and trading statistics of the company’s peer group (“comparable companies”)
Valuation metrics and financial ratios used/ analyzed vary from project to project, depending on the industry and information available
Trading Comps define the concept – “comparison of apples-to-apples”
A standard comp contains operational statistics containing:
– Financial performance parameters such as Revenue, EBIT, EBITDA and EPS
– Share price performance parameters such as current & 52 week high/low share price, margin and long term growth rate
These inputs define the output Multiple sheet (the comps) containing various Enterprise Value (EV) multiples. Common valuation multiples used are EV/Sales, EV/EBITDA, EV/EBIT, P/E, P/B
Since the comps provide multiples prevailing at a given point of time, they provide a static view of comparable companies and can change over a period of time depending on the company’s financial performance and market performance (stock performance)
Represents the market value of all outstanding shares
Calculated as Total number of shares outstanding x current share price Market capitalization
A privilege, in which the underlier is the common stock of a corporation, that gives the buyer the right, but not the obligation, to buy or sell a stock at an agreed-upon price during a certain period of time or on a specific date
A right granted to employees of a company to buy a certain amount of shares in the company at a predetermined price. Employees typically must wait a specified vesting period before being allowed to exercise the option
Stock Options
A derivative security or certificate that gives the holder/ bearer the right to purchase securities (usually equity) from the issuer at a specific price within a certain time frame
Warrants
Securities, usually bonds or preferred shares, that can be converted into common stock at a specified conversion price
Represents the number of shares that would result if all stock options, warrants and convertible debts were traded in for stock.
Treasury stock method is used in determining the number of shares outstanding
Results in an increased number of shares outstanding and decreased earnings per share
Fully Diluted shares
Treasury stock method The purpose of the Treasury method is to account for the cash generated by the exercise of options and/or warrants
Treasury stock method assumes that the options and/or warrants are exercised at the beginning of the year (or issue date if later) and such proceeds are used to repurchase outstanding shares of common stock
Example
Current share price $ 50
Shares outstanding 400 mn
Options/ warrants outstanding 10 mn
Exercise price $ 25
Proceeds from conversion of in the money options 10 x $ 25 = $ 250mn Stock buyback (at premium) $ 250 / $ 50 = 5 mn
Includes all interest bearing obligations both long-term and short-term such as loans, credit facilities etc
Excludes in-the-money convertible debt Total debt
Represents portion of equity not owned by the majority shareholder - a significant but non-controlling interest of less than 50%
Minority Interest
Represents class of stock carrying preference over equity stake holders to receive dividend and repayments in the event of liquidation
Preferred equity
A lease that transfers substantially all risks and rewards of ownership to the lessee
Capital lease
Represents cash, marketable securities and short-term investments that can easily be converted to cash
Cash and cash equivalents
Example 2. Which of the following statement is correct:
a) Restricted cash is always excluded from cash for calculation of net debt b) Restricted cash, if related to debt, include in cash for calculation of net debt
c) Restricted cash, if related to Letter of credit and Bank Guarantees, include in cash for calculation of net debt d) Restricted cash is always included in cash for calculation of net debt
Example 3. Calculate the fully diluted shares outstanding:
Shares o/s 470 mn Current price $30.00
Options o/s 10 mn Exercise price $20.00
Warrants o/s 5 mn Exercise price $40.00
a) 470 mn b) 485 mn c) 473.3 mn d) 471.6 mn
The correct answer is (c)!!!!!!!!
Current stock price $30.00
Exercise price of options $20.00
Since, the exercise price of options is less than the current stock price, the options are “In the money”
However, the exercise price of warrants is more than the current stock price, the warrants are “Out of the money”
Dilution effect of Options can be calculated as:
Amount raised from exercise of options = Number of Options X Exercise price of options = 10 X 20 = $ 200 mn
Shares bought back at current market price = Amount raised from exercise of options / Current stock price = 200 / 30 = 6.67 mn shares
Dilution effect of Options = Number of Options - Shares bought back at current market price = 10 – 6.67 = 3.3 mn shares
Source all data from the Company’s official latest financial filings Check Company Website, Investor Relation Section, look out for latest:
Annual Report (AR)
Quarterly / Interim / Half Yearly Report ( Q1, Q2, Q3, Q4 or IR )
Press Releases and Announcements For US companies
Annual report - SEC filing - 10K (From 10kwizard.com or www.sec.gov)
Quarterly report (SEC – 10Q)
Press releases, pro forma filings, M&A announcements (SEC filing – 8K)
Prospectus (SEC filing – 424B series)
Prospectus (SEC filing – 424B series)
For Non-US companies listed in US stock exchange
Annual report (SEC filing – 20F, 40F )
Quarterly/ Half-yearly report (SEC – 6K )
Press releases and Announcements (SEC – 6K )
Research Reports (For Forward Estimates)
Note: (i) Always use most recent filings for EV calculation as we are looking for the current and most recent financial position of the company
(ii) Always use the pro-forma financials in case the company has completed a major acquisition or divestiture
(iii) Where the company has made restatements and filed restated financials, always use such restated financials.
Stock Exchange where Company is listed
Stock exchange is a very important source and provides lot of useful information such as latest shares outstanding, latest financials filed by the Companies, recent press releases or announcements.
Apart from Company Website and Stock Exchange, bankers also use various databases for their cross references such as:
– Bloomberg
– FactSet
– Thomson Reuters
– Thomson One Banker
– Thomson One Banker
– Capital IQ – Merger Market – Factiva – Hoovers – One Source – DataStream
Note: There are many more databases apart from the names mentioned above used by companies for their analysis. Since these are all paid data sources, companies subscribe them according to their work requirement.
Peer Group Analysis means identifying a list of comparable companies for valuation.
The following criteria should be borne while doing the preliminary search for selecting the companies to form a peer set:
– Similar Industry, featuring into the same sub-sector, having product categories which are related
– Same size of companies, can be identified with similar operating margins, growth rate, cash flow, number of employees etc
– Having similar customer segmentation
– Ideally should belong to same region/country/geography
– Ideally should belong to same region/country/geography
– Should not be undergoing any unusual or major strategic changes, such as an M&A, divestiture
There are various sources available for Peer Analysis such as Thomson One Banker, Bloomberg, Reuters, OneSource, Research Report, Google Finance, Company Websites (for Description), broker reports etc.
Source Shares Outstanding from the most recent financials
Number of shares should exclude the treasury shares or own shares. Treasury shares are shares repurchased by the company and do not have the right to dividends, have no voting rights, and should not be included in shares outstanding calculations.
In case of companies filing with SEC, outstanding shares can generally be found on the cover page of the 10K, 10Q, 20F report. In case of Non US companies search out for filings on various sources including Company Website, Latest Filings and Stock Exchanges of the respective country.
Where a Company has more than one class of share, with all classes being listed, input the total of all classes of shares in shares outstanding and calculate weighted average share price
In case, one class of share is listed and the other class of shares are unlisted, input the total of listed and unlisted shares in shares outstanding and assume the share price of unlisted shares to be equal to that of listed shares
In the given example of Novell Inc, the number of shares outstanding is 353.053202 mn. This is obtained from the cover page of 10Q Jan 2011 filing
Annotation
10Q Jan 11, cover page,
Example 4. Calculate the Market cap of ABC Co. with the available information Particulars Details Par Value Market price
Class A Shares o/s 200 mn $10.00 $500.00 Class B Shares o/s 10 mn $100.00 Unlisted
a. $ 100,000 mn b. $ 100,500 mn c. $ 105,000 mn d. $ 150,000 mn d. $ 150,000 mn
The market cap in this case is $150,000 mn
Market Cap for Class A shares = 200 X 500 = $100, 000 mn
Since Class B shares are unlisted, we will calculate the price of class B shares as follows: Price of Class A shares / Par value of Class A shares X Par value of Class B shares $500.00 / $10 X $100 = $5,000.00
Market Cap for Class B Shares = 10 X 5,000 = $50,000 mn
Example 5. Calculate the latest shares outstanding with below mentioned data:
Particulars Date Details
Shares O/S 31-Dec-10 350 mn
Stock split 30-Jun-10 2:1
Share buyback 15-Mar-11 10 mn
Stock dividend 20-Feb-11 2:1
The correct answer is (a)!!!!!!!!
Since the stock split has been effected on June 30, 2010, we will not adjust the Shares outstanding Shares Outstanding as on Dec 31 = 350 mn Stock dividend = 350 X 2/1
= 700 mn Stock dividend 20-Feb-11 2:1
a) 1,040 mn b) 1,360 mn c) 690 mn d) 1,380 mn
Share buyback (March 15) = 10 mn
Latest Shares Outstanding as on March 15, 2011= Shares Outstanding as on Dec 31 + Stock dividend - Share buyback
Input information on Options (and Warrants) from latest financials. 10K or annual filings are usually the best source
Notes to the financials should provide detailed information on total number of Options & warrants outstanding, traunche-wise details and the weighted average strike price on them. Ensure that the equivalent number of shares and not “number of options or warrants” are entered
Input the ‘Options Outstanding’ and weighted average exercise price of such outstanding options and NOT the ‘Options Exercisable’
Depending on the space available in the template, input options/ warrants outstanding and weighted average exercise price tranche-wise or in aggregate.
In case options/warrants have a range of exercise price, take the average or lower of the range for maximum dilution effect.
Read Management Discussion & Analysis and Notes to Financial statements closely and ensure all option plans/ warrants are incorporated
In the given example of Novell Inc, the total options (equivalent shares) outstanding are 30.933 mn, with a weighted average exercise price of USD 3.96
Input information on Convertible debt (value) from latest financials. Latest financials should provide price of Conversion or at least the conversion ratio from where the conversion price can be deduced. If not, revert to the previous annual report for conversion price
If convertible price of the convertible debt is not given, read the relevant notes and MD&A to figure out the conversion ratio i.e. the number of shares into which the debt will be converted. Only “in the money” debt are considered for weighted average exercise price of the convertible debt
While convertible debt is in the money, it will be treated as equity, once it falls out of the money it will be added back to debt
back to debt
Depending on the space available in the template, input convertible debt and conversion price tranche-wise or in aggregate.
Equity and equity linked information – Convertible debt Example 6
Current share price $ 50
Book value of Convertible debt $ 200 mn
Conversion price per share $ 40
Equivalent shares on conversion of in-the-money 200/ 40 = 50 shares convertible debt
Example 7
Current share price $ 50
Book value of convertible debt (par value $1000 each) $ 100 mn
Conversion ratio 16
Conversion price per share of convertible debt $ 1000/ 16 = $ 62.5 (out of money and hence added to debt)
Example 8. If a company has convertible debt of US$100 mn with a conversion price of US$ 50.00, the company's current price is US$ 51.00, which of the following treatment is correct:
a) Include US$ 100 mn in net debt b) Include US$ 100 mn in Market Cap
c) Include equivalent number of shares in shares outstanding
d) Include equivalent number of shares in shares outstanding and do not include US$100 mn in net debt
When the convertible debt is converted into equity shares, the liability for the debt is eliminated and the number of common equity shares is increased
Dual Listing
When a security is registered for trading on more than one exchange. The treatment of dual listed companies
depends upon the specifications of the end user . However, the two common treatments of dual listed companies are as follows:
Treatment 1 : In certain cases, weighted average market capitalization is calculated by adding the product of share prices prevailing on both the exchanges & shares outstanding for respective classes of shares
Treatment 2 : Output for both the classes of securities is shown separately. Market Capitalization is calculated using the share price on each exchange. For example, in case of Chinese companies which are also listed on Hong Kong stock exchange, will have inflated prices on Chinese stock exchange, so it is better to analyze them using both the classes of shares separately.
Market Cap, EV and multiples for different class of shares are calculated as:
Market Capitalization: Market Capitalization to be calculated for both class of shares using share outstanding for each class and their respective share price
Net Debt : Bifurcate total net debt into two classes of shares based on proportion of market cap
Enterprise Value: Calculate EV (Market cap + Net debt for respective class) and EV per share for each class Multiples: Calculate per share value of relevant financial metrics (Revenue, EBIT, EBITDA, EPS)
Calculate multiples for each class separately using EV per share for each class and per share financials as calculated
A Company XYZ Inc. has two Class of shares A & H.
As at 30 Apr 11 Class A Class H
Share Price (April 30, 2011) CNY 50.00 HKD 35.00
Shares outstanding 16,500 mn 3,400 mn
HKD - CNY Exchange rate 0.8955
As at 31 Mar 11 Example 11
As at 31 Mar 11
Net Debt CNY 4,250 mn
Minority Interest CNY 20,500 mn
LTM Revenue CNY 82,000 mn
LTM EBIT CNY 33,000 mn
LTM EBITDA CNY 41,500 mn
LTM EPS CNY 1.04
Step 1. Calculation of Market Cap, EV and Multiples for both the class of shares
Class A Class H
Share Price CNY 50.00 HKD 35.00
Shares outstanding 16,500 mn 3,400 mn
Market Cap CNY825,000 mn HKD 11,9000 mn
Market Cap (CNY) CNY825,000 mn CNY 106,565 mn (approx.)
Proportion of Market Cap 88.56% 11.44%
Net Debt (In proportion of Market Cap) CNY 3,763.8 mn CNY 486.1 mn
Minority Interest CNY 18,154.9 mn CNY 2,345.1 mn
Minority Interest CNY 18,154.9 mn CNY 2,345.1 mn
Enterprise Value CNY 846,919 mn (approx.) CNY 109,396 mn (approx.)
EV / Share CNY 51.33 CNY 32.18
Multiples Class A Class H Revenue 12.46x 7.81x
EBIT 30.95x 19.40x
EBITDA 24.61x 15.43x
P/E 48.08x 30.14x
Step 2. Calculation of financials per share
Revenue / share CNY 82,000 / 19,900 (16,500+3,400) CNY 4.12
LTM EBIT / share CNY 33,000 mn / 19,900 CNY 1.66
LTM EBITDA CNY 41,500 mn / 19,900 CNY 2.09
Shares / Depositary Receipts
A negotiable financial instrument issued by a bank to represent a foreign company's publicly traded securities. The depositary receipt trades on a local stock exchange.
When the depositary bank is in the U.S., the instruments are known as American Depositary Receipts (ADRs). European banks issue European depositary receipts, and other banks issue global depositary receipts (GDRs).
Treatment of shares / DR’s
Generally, the companies which have depository receipts, are analyzed on the basis of the stock price of the Generally, the companies which have depository receipts, are analyzed on the basis of the stock price of the company. In that case, all the shares related information is calculated on the basis of stock price.
However, in certain cases, two individual tabs are created for the same company – in one tab, all the shares and price related information is calculated on the basis of DR’s using the Shares-DR ratio with the price of DR’s and in the other, on the basis of stock price. Also, in this case, the company is presented twice, once on the basis of stock price and second, on the basis of DR.
Example 12.
XYZ Inc. has 250 mn shares outstanding as at 31 Dec 2010. The company’s also has its ADRs listed at NYSE
Following information is available from company’s AR Dec 10
Shares outstanding 250 mn
Price per ADR as on 25 Apr 2011 $20.00
Company made following fresh issues during the month of March:
On 10 Mar 2011 25 mn shares
On 25 Mar 2011 10 mn ADR
On 30 Mar 2011, company announced bonus issue of 1 share for every 4 shares held. 1 ADR represents 4 ordinary shares of the company
Calculate the Market cap of company as on 25 Apr 2011 a) $ 1,968.8 mn
b) $ 5,700 mn c) $ 6,300 mn d) $7,875 mn
The correct answer is (a) !!!!!
Shares outstanding as on 31 Dec 10 = 250 mn
Add Shares issued on 10 Mar 11 = 25 mn
Add ADR issued on 25 Mar 11 = 10 mn
Equivalent number of shares* = 10 X 4
= 40 mn
Shares outstanding as on 25 Mar 11 = 315 mn
Adjusted for Bonus issue (1:4) = 315*1.25 = 393.8 mn
ADR Price per share = $20.00
Market Capitalization = 393.8 X 20 / 4
= $ 1,968.8 mn
Balance Sheet Information - Source data in this section from the latest financials
Consolidated Balance sheet as at 31 Jan 2011 Novell Inc
(amounts in thousands)
Cash and Cash Equivalents
Includes cash and bank balances
Includes cash equivalents & marketable securities
Includes short-term investments
Cash equivalents are highly liquid short-term investments that can be easily converted to cash
Short term investments aren't as liquid as money in a bank account, but provide added cushion if some a bank account, but provide added cushion if some immediate need arises
Cash and cash equivalents should generally
exclude restricted cash. Restricted cash represents that portion of cash or equivalents that are
earmarked for specific purposes or restricted for the purpose of intended use. However, if cash is
earmarked for a particular debt fund, that has been included in total debt, then such restricted cash is included in the calculation of EV
Strategic investments are not taken into consideration
Check end user requirements for changes in In the above case of Novell, cash and cash equivalents
shall be:
Balance Sheet Information - Source data in this section from the latest financials
Total DebtDebt includes all interest bearing liabilities (long term and short term) of the Company i.e. obligations that have a financing cost to the company (such as Bank overdrafts / Current portion of long term borrowings / short term and long term loans / Convertible debts)
Include preferred equity, minority interest and capital leases in debt.
Consider Capital lease obligation ONLY if it is stated in the Balance Sheet. Do not confuse capital lease obligations with the operating lease obligations. The latter is an expense item in the income statement
Read the MD&A and Notes to financial statements closely as sometimes ‘Minority Interest’ is not represented in the Balance Sheet as a separate item but is given in the ‘Other Liabilities’
Include pension liabilities (deficit) in debt, only if specific guidelines have been given to that effect. Pension deficit is the value of all pension obligations minus the market value of any pension assets
– In case of a US Company: US GAAP has the requirement for the company to give a separate note for Pension assets and pension liabilities. Pension deficit is = Pension Liabilities Less Pension Assets
– For a company in UK: FRS 17 gives the accounting policy for a separate disclosure of pension deficit
– For other companies: Read the MD&A and Notes to financial statements and determine accordingly
– Always consider Net Pension Liability recognized in the balance sheet or Unfunded or Deficit in Pension Fund. In case company reports surplus ie Pension Assets are more than Liabilities, ignore it.
Balance Sheet Information - Source data in this section from the latest financials
Consolidated Balance sheet as on 31 Jan 2011 Novell Inc
(amounts in thousands)
In the given example, the total debt for EV calculation shall be:
Senior Convertible Debenture (Add minority interest if reported separately)
Shareholders’ equity
Balance Sheet Information - Source data in this section from the latest financials
Long Term InvestmentsRead the note for Long term investment and check whether company has invested in private unquoted company or in Quoted/ Listed/ Traded company or in mutual funds or government stocks.
Consider the long term investment in public company, mutual funds and government stocks as their market value can be assessed easily. Ignore any invest done in private or unquoted company.
Remember for the ultimate effect, long term investment is treated as a part of cash and cash equivalents and gets excluded from EV.
Equity Investments
Includes Investment in Affiliates / Subsidiaries / Joint Ventures / Associated Company / Equity Affiliates
Mostly Company reports equity investments as a separate line item in their balance sheet.
Consider all equity investments irrespective of short term or long term or quoted or unquoted.
Remember for the ultimate effect, long term investment is treated as a part of cash and cash equivalents and gets excluded from EV.
Check the note for Non Current Investment – Long Term and consider only the portion invested in Quoted/ Listed/ Traded company or in mutual funds or government stocks.
Add Current Investment in Marketable Securities in Cash and Cash Equivalents
Balance Sheet Information – Adjustments
The latest financial publication is used to determine Enterprise value. However, there are certain corporate actions, which if they occur subsequent to the date of the latest filing, have to be given effect as these have an impact on the Enterprise value. A few of these adjustments include:
Stock Split : A stock split is a corporate action involving the dividing of company’s existing stock into multiple shares. This is effected by reducing the par value of shares and increasing the number of shares. The Shareholders’ equity remains the same. Adjustments to be effected include:.
Increase the number of outstanding shares
Check that the stock price is split-adjusted
Increase the number of equivalent shares on conversion of options and reduce (in the same ratio) the exercise
Increase the number of equivalent shares on conversion of options and reduce (in the same ratio) the exercise price
Similar effect on warrants and convertible debt (exercise price)
Equity issue : In case a company makes a fresh additional equity issue, the following adjustments have to be made:
Increase the number of shares outstanding by the fresh number of shares issued
Increase shareholders’ equity by issue value
Increase cash by the “net proceeds” of the issue
Check for pro forma filings
Stock Buyback : When a company repurchases the shares it had previously issued, it is called a ‘Stock buyback’. This reduces the number of shares outstanding in the market. Adjustments to be effected include:
Decrease the number of shares outstanding by the number of shares repurchased
Decrease cash by the amount used to repurchase shares
Balance Sheet Information – Adjustments
Debt Issue : A Company when in need of funds, can raise Debt as a source of funds. It may be preferable than issue of shares as debt issue leads to no dilution of control of company. Adjustments include:
Add the ‘Net proceeds’ to Cash. Net Proceeds means proceeds received, net of any discount and expenses of issue.
Add the face value of the debt to the Total debt
Debt Redemption or repayment of a Debt outstanding in the books.
Deduct the ‘Net outflow’ from Cash. Net Outflow means net outflow of cash including discount or premium on redemption
redemption
Deduct the face/ book value of the debt from the Total debt outstanding before such redemption
Rights Issue: If the company decides to issue additional shares (equity) as a source of raising additional capital, it may be obliged to first offer such shares (or rights) to the existing shareholders. In effect , the number of shares outstanding increases. Adjustments similar to equity issue.
Bonus Issue: In the case of a bonus issue, equity shares are issued to existing shareholders for no additional
consideration. It is also called a capitalization issue. There is no effect on shareholders’ equity. Adjustments are to be made to outstanding shares, options/ warrants and corresponding exercise prices with respect to bonus factor.
Stock Dividend: A dividend is the distribution of profits to a company's shareholders. Such distribution can be in the form of cash or issue of stock ( i.e. Stock Dividend). In the case of stock dividend additional shares are issued to existing shareholders without any receipt of cash from them. There is no effect on shareholders’ equity. Adjustments are to be made to outstanding shares, options/ warrants and corresponding exercise prices
Example 9. A company announced a two for one stock split and a stock dividend of 25% on 10 May 2011 ( i.e. after the release of results for Q1 Mar 2011):
Following information is available from company’s IR Mar 11
Shares outstanding 465.52 mn
Share price as on 15 May 2011 $12.00
Company bought back shares from open market as follows: Company bought back shares from open market as follows:
On 15 April 2011 25 mn shares
On 12 May 2011 55 mn shares
What is the share outstanding and market cap as on 15 May 2011? a) 963.8 mn shares and Market cap $11,565.6 mn
b) 1,083.8 mn shares and Market cap $13,005.6 mn c) 1,046.3 mn shares and Market cap $12,555.6 mn d) 1,163.8 mn shares and Market cap $13,965.6 mn
The correct answer is (c) !!!!!
Shares outstanding as on 31 Mar 11 = 465.52 mn Less Shares bought back on 15 Apr 2011 = 25.00 mn Shares outstanding as on 15 Apr 2011 = 440.52 mn
Adjustment for Stock Split:
Shares o/s adjusted for Stock split of 2:1 = 440.52*2 = 881.04 mn Shares o/s adjusted for Stock dividend of 25% = 881.04*1.25
Shares o/s as on 10 May 2011 = 1,101.30 mn
Less: Shares bought back on 12 May 2011 = 55 mn
Latest shares outstanding = 1,046.30 mn
Share price as on 15 May 2011 $ 12.00
Example 10. Following information is available from company’s AR Dec 10
Short-term debt $ 50mn
Long-term debt $ 200mn
Cash and cash equivalents$ 150mn
(Convertible notes included in Long term debt $ 50mn, conversion price $20 per share) Company did following transactions during the March 2011:
Company did following transactions during the March 2011:
On 5 Mar 2011 Issued debentures worth $100mn (debt issue expenses $ 9mn) On 15 Mar 2011 Redeemed senior notes of face value of $20mn
On 18 Mar 2011 Holders of convertible debt worth $ 25mn exercised their option of conversion
Calculate adjusted total debt and cash and cash equivalents a) Cash $230mn, Debt $305mn
b) Cash $221mn, Debt $305mn c) Cash $205mn, Debt $305mn d) Cash $230mn, Debt $330mn
(in USD mn) Particulars Cash Short term debt Long Term Debt Total Debt Balance as on 31 Dec 10 150 50 200 250
5 Mar 11 Issue of debentures 91 - 100 100
The correct answer is (b)
15 Mar 11 Redemption of senior notes (20) (20) - (20) 18 Mar 11 Conversion of convertible debt - - (25) (25) Adjusted balance 221 30 275 305
Market Capitalization
Total Debt
Minority Interest +
+
Formula to calculate Enterprise Value Total Enterprise Value (TEV or EV) is the term bankers use when they refer to the total value of a company (also referred to as Aggregate Value)
Enterprise value is a measure of the actual economic value of a
company at a given point of time. It reflects what it would actually cost to purchase the entire company
One could believe that a possible way to calculate the value of a company would be to look at the value of the assets in the company’s
Enterprise Value or “EV”
Preferred Stock
Capital Leases
Cash & Cash Equivalents +
+
-=
company would be to look at the value of the assets in the company’s balance sheet. This is a common misconception because the assets in the balance sheet are recorded using the historical value and thus it is not the value the company has today
Generally for public companies TEV = market value of the equity + total debt (short and long term) + minority interest + preferred stock + capital leases – cash and cash equivalents
The method and assumptions for calculation of enterprise value varies with every financial institution, banker and industry
Enterprise value
is a measure of the actual economic value of a company at a given point of time
reflects the actual purchase price anyone acquiring the company would have to pay
indicator of how the market attributes value to a firm as a whole
many investors use the current value of all of a company's outstanding shares or market capitalization, as a proxy for its economic value
Why doesn't market capitalization properly represent a firm's value?
Although market capitalization is the key component of the actual economic value of a company, it is not the only one. In order to calculate a more ‘Accurate value’ we need to consider the other things which come as a baggage along with the company when it is acquired. We have to take into account all the obligations which are now to be discharged by the acquirer
Role of Debt and Cash
In the event of a buyout, the buyer has to pay the equity value and would have to assume/ repay the company’s debt. Of course, the buyer gets to keep the cash available with the firm, which is why cash needs to be deducted from the firm's price
Example 1. What is the Market Cap & EV for the company: B/S as on 31 Dec 2010 (in CNY mn):
Cash 200 Share Price (in HK$) 5.00
Debt 175 Shares outstanding (in '000) 5,000
Minority Interest 50
Current exchange rate for HK$ to CNY is 1.1 a) Market Cap is CNY 25 mn & EV is CNY 50 mn.
b) Market Cap is HK$ 25,000 mn & EV is CNY 25,025 mn. c) Market Cap is HK$ 27.5 mn & EV is CNY 52.5 mn. c) Market Cap is HK$ 27.5 mn & EV is CNY 52.5 mn. d) Market Cap is CNY 27.5 mn & EV is CNY 52.5 mn.
The correct answer is (d)!!!!!!!! Share Price (HK$) 5.00
Share Price (CNY) = SP(HK$) X HKD – CNY Exchange Rate Share Price (CNY) = 5.00 X 1.10 = CNY 5.50
Market Cap (CNY mn) = 5.50 X 5,000 / 1,000 = CNY 27.5 mn
Enterprise Value (CNY mn) = Market Cap + Debt + Minority Interest – Cash Enterprise Value (CNY mn) = 27.5 + 175 + 50 – 200 = CNY 52.5 mn
Income Statement Information
Revenue/ Net Sales: Income from sales of goods and services, minus the cost associated with elements such as returned or undeliverable merchandise, discounts, and allowances. Also called ‘sales revenue’, ‘net sales’, ‘net revenue’, and ‘sales’
Other revenues: The total revenues which the company has earned may include other revenues incidental to business. These are revenues derived from activities not directly related to the operations of the Company and therefore should not be included in turnover. For instance, Rental income should not be included in turnover. However, revenues of real estate companies will primarily consist of rental income. Therefore, identify the However, revenues of real estate companies will primarily consist of rental income. Therefore, identify the Company’s business and decide the composition of revenues accordingly
EBITDA: EBITDA means earnings before interest, taxes, depreciation and amortization. It is an indicator of the cash earnings that a company generates from its on going and recurrent operations regardless of its capital structure. EBITDA can be used to analyze the profitability between companies and industries, because it
eliminates the effects of financing and accounting decisions. (EBITDA is often used as an indicator of unlevered cash flow in case of scarce information).
EBIT: EBIT means earnings before interest and taxes. It measures the income that a company generates from its on going and recurrent operations. Also called Operating Income or Income from Operations
Net Income: Net Income represents total earnings available to common shareholders. Net Income is derived by subtracting all costs of doing business, depreciation, interest and taxes from revenues. Share of minorities for the period and preferred stock dividends, must also be deducted to arrive at Net Income.
Income Statement Information - Normalization
Normalization refers to the process of adjusting/ removing the effect of extraordinary and one-time items from components of Income Statement (revenues, EBITDA, EBITA, EBIT & Net Income)
For the purpose of Comps, companies have to be evaluated and compared on basis of trading / valuation metrics and thereby it is imperative that any exceptional and non-recurring items impacting the operating results of a company be removed and cleaned, so as to make its results comparable within its peer group
Some examples of exceptional / non-recurring items include restructuring charges, impairment, gain on sale of fixed assets, income from divested business etc
Always read through the Notes to Financial Statements and MD&A closely to identify extraordinary items. Details of exceptional items are generally found in the Notes to financial statements and MD&A
Rule for making adjustments
– ADD Exceptional charge, non-recurring expense or loss
– REDUCE Exceptional or non-recurring gain, one-time gains
– For adjusted net income, make appropriate tax adjustments for the tax impact of such extraordinary items. Read the MD&A closely for actual tax impact of exceptionals, if available. If not, use the marginal tax rate for making tax adjustments. Marginal Tax rate should be effective or statutory tax rate.
Income Statement Information
Let us consider the case of Novell Inc.
Example: Normalized Revenue If you look at the Consolidated Statement of Operations you would say that the company’s revenue for FY 2010 would be USD 811.871 mn. But it is equally important to check the
Management Discussions & Analysis (MD&A) section of the Annual 10K, where you will find the breakup of the total net revenue figure. There you might find any exceptional item which There you might find any exceptional item which shall not be included as a part of core revenue of company.
This is the reason why it is very important to carefully review the notes to the financial statements and the MD&A section. Also, always consider Net revenue after deducting sales tax and not the Gross Revenue!!
Income Statement Information
Example: Normalized EBIT
The Company states that its operating income was USD 84.437 mn Is this equal to EBIT? No! Look carefully at the line items above the operating income. These include the following expenses which are non-recurring and not directly related to the operation of the business : Restructuring expenses, impairment of goodwill, impairment of intangible assets, purchased in process research & development, gain on sale process research & development, gain on sale of property, plant and equipment, gain on sale of subsidiaries.
These items should not be included in the EBIT calculation. We need to adjust for these “one time” expenses or gains to get the correct EBIT
Company has not reported any amount except restructuring expenses, hence we will adjust EBIT for the latter.
Income Statement Information
Example: Normalized EBITDA
EBITDA is one of the most commonly used terms by investment banker because it is an efficient way to understand the efficiency and profitability of a company
EBITDA is calculated as
Normalized EBIT + Depreciation and Amortization
Amortization
Always remember to take Depreciation & Amortization from the cash flow statement
Income Statement Information
Example: Normalized Net Income
In the Consolidated Statement of Operations, the Company reports a net income of USD 377.366 mn
We need to adjust the reported Net income figure to get the normalized net income like we did for the previous EBIT calculation. The company has a couple of non-recurrent and company has a couple of non-recurrent and extraordinary items which also have to be adjusted to get the accurate net income. One of such items is the Impairment / write down of Investments
Now is net Income equal to:
= 377.366 -7.413+2.774= $ 372.727 mn. Wrong!
Income Statement Information
Example: Normalized Net Income
Adjust for Tax : Always remember that when you are dealing with net income you have to account for the tax implications of an increase or decrease in profits. Net income is always calculated after taxes, and in a way expenses act as a tax shield, as the higher expenses you have the less taxes you pay.
Thus, One time and extraordinary charges have to be adjusted for tax. Here, we shall use the statutory tax rate of the country of incorporation of the Company (which is 40% in case of Novell Inc. as it is a US company )
There are certain cases we need to remember when we charge Net Income for tax such as –
1. Always charge Exceptional or one off items for tax whenever company is reporting net profit in its books. 1. Always charge Exceptional or one off items for tax whenever company is reporting net profit in its books. 2. In case company is reporting net loss, tax adjustment is done only if loss turns into profit after adjusting for
exceptional items and than tax is charged on the whole figure including net loss.
3. If the resulting figure for net loss remains negative even after adjusting exceptional items, there will be no tax adjustment at all.
4. Remember to tax-effect all adjustments to net income, if items relate to an after-tax financial statistic and are tax-deductible. Do not tax adjust a net loss or non-tax deductible items such as goodwill
Income Statement Information Example: Normalized EPS
Earnings per share (EPS) represents the portion of a company's earnings, net of taxes and preferred stock dividends, but before equity dividends allocated to each share of the company’s common stock
Basic EPS = Normalized Net income Weighted average basic shares outstanding
Basic EPS = $ 374.582 / 349.741 = $ 1.071
Diluted EPS = Normalized Net income Weighted average
diluted shares outstanding
Diluted EPS = $ 374.582 / 353.447 = $ 1.059
Companies may acquire or divest businesses during the year
Pro-forma financials means restated financials of the company adjusted to give effect to any corporate actions so as to reflect the continuing financials position of the company going forward
Reasons for calculating Pro-forma financials:
– Acquisitions – Mergers – Mergers – Divestitures – Spin offs – Capital Restructuring
Checking corporate actions (Source: Company Press Releases, Announcements, Stock Exchange press releases)
Comparing historical financials vis-à-vis forward estimates
Table 1 FY10A FY11E FY12E
Revenues 1400 3000 3500
How to identify whether Pro-forma financials to be done
– Exceptionally high increasing trend in forward financials as compared to
reported financials reflect the possibility of a major acquisition (Table 1)
– Similarly very steep decline in forward financials as compared to reported financials reflect the possibility of a divestiture/ hive off/ spin-off, etc (Table 2)
EBITDA 750 2300 2450
EBIT 600 2050 2180
Table 2
FY10A FY11E FY12E
Revenues 1400 550 610
EBITDA 750 350 390
1. In case the pro forma financials
are reported by the company –
use them for your analysis to
know the current position of the
2. If pro-forma financials are not reported by the company, calculate it by adding financials of the acquired company in case of acquisition and exclude the financials of the divested business in case of a divestiture
Question.
On 15 Dec 10, ABC Ltd announced the acquisition of XYZ plc. The acquisition was completed on 12 February 2011. Now, in case ABC does not release proforma financials adjusted for the acquisition of XYZ for its Fiscal year ended 31 Dec 10, then we may calculate the proforma financials of the combined entity by adding the financials of ABC and XYZ for the fiscal year ended 31 Dec 10
S. No. Line item Add Back Tax adjustment Comment
1 Joint Venture Y Y Different treatment for different purposes
2 Discontinued operations Y Y No tax adjustment if net of tax
3 Restructuring cost / expenses Y Y
4 Expenses related to merger and acquisition transactions Y Y
5 Write down / Impairment of assets (both tangibles and intangibles
including goodwill) Y Y No tax adjustment on Goodwill
6 Impairment of leasehold expenses Y Y
7 Loss / Gain on sale of tangible & intangible assets Y Y
8 Loss / Gain on sale of investments, other than marketable Y/N Y Loss/ Gain on strategic investment is exceptional
9 Amortization of deferred compensation Y Y
10 Equity based compensation expense- stock options or warrants Y Y
11 Writing back of any provisions or reserves Y/N Y Provision is exceptional or not
12 Gain/Loss on sale of marketable securities N
12 Gain/Loss on sale of marketable securities N
13 Income from associates / affiliates Y Y
14 Litigation settlement Y Y
15 Loss / Gain on sale or termination of an operation Y Y No tax adjustment if net of tax
16 Foreign currency exchange gain / loss Y Y
17 Accounting changes Y/N Cumulative effect relating to exceptions is exceptional
18 Tax benefit from exercise of options Y N
19 Provision for doubtful accounts N N
20 Amortization of debt issuance costs Y Y
21 Expenses associated with the Sarbanes Oxley Act Y Y
22 Rental income N N To be excluded from EBIT calculations
23 Government grants or subsidies Y Y
24 Severance costs Y Y
25 Facilities consolidation Y Y Restructuring expense
26 Gain / Loss on early extinguishment of debt Y Y
27 Early retirement costs Y
28 Redundancy costs Y Y
Trailing Twelve Months (TTM / LTM) A Graphical Representation
Reported Fiscal Year- annual report LTM Results
There will be times when the most recent company financial statement is a quarterly report or a half-year report. In such cases the results for the last twelve months/ trailing twelve months are derived.
LTM is calculated as under:
Input financial results of the latest complete fiscal year
Q1
Q2
Q3
Q4
Q1
Q2
Reported previous year accumulated 6 month results Reported accumulated current year 6 month resultsFiscal year results Results of current stub period Results of corresponding prior stub period
+ -LTM =
year
Add financial results for the accumulated current partial year result (stub period)
Deduct financial results for the corresponding stub period (partial year) of the previous year (i.e. for the same period but for the previous year
Remember to follow all the guidelines previously discussed for income statement when inputting the figures
Example 13: If LTM Sales need to be calculated (for a company with Dec FYE) as in March‘11, calculate the LTM sales from the below mentioned data:
Dec 09 1,200 Dec 10 1,300 Dec 11E 1,400
Mar 11 850 Mar 10 900
a) 1,200 b)1,300 c) 1,250 d) 1,350
The correct answer is (c) !!!!! LTM Sales as on Mar’11 as:
Sales for Fiscal Year = 1300 mn Add: Current Stub ending Mar 11 = 850 mn Less: Prior Stub ending Mar 10 = 900 mn
Forward Information – Estimates
Valuation multiple can be calculated on both a latest twelve months (“LTM”) and a forecasted basis. Companies trade most typically off expected future performance (analysts’ estimates)
Earnings estimates are obtained from various broker research reports or databases such as Bloomberg, Capital IQ, Factset estimates. Adjust the earnings estimates for any exceptionals
For the purpose of deriving trading multiples, estimates are determined on a calendar year basis. This is done to ensure consistency and enhance comparability within comps
In case of companies with fiscal year end other than December, the forecasted estimates are “calendarized”. Calendarization is the process of prorating estimates that are available on fiscal year basis, to derive estimates on a calendar year basis.
Consider the following example
Fiscal year end of company XYZ 30 September
Forecasted revenues for FY 2011 $ 1,200 mn
Forecasted revenues for FY 2012 $ 1,440 mn
Revenues for calendar year 2011 shall be determined as under:
Forecasted revenues for FY 2011 pro rated for 9 months $ 1200 x 9/12 = $ 900 mn Add Forecasted revenues for FY 2012 pro rated for 3 months $ 1440 x 3/12 = $ 360 mn Forecasted revenues for calendar year 2011 (Jan – Dec 11) $ 900 + $ 360 = $ 1,260 mn
