Instituto Tecnológico y de Estudios Superiores de Monterrey

Valuación por Múltiplos y Flujos descontados

Tomás Estrada Ferreira

Capitulo 1-3

Chapter 1

Comparable Company Analysis

Called also as Trading Comps, is a method that gives a valuation using a focus group or business division. So is useful to benchmark private companies.

Trading comps is based on the idea that similar companies can provide highly relevant references due to the sharing of financial characteristics and key business.

The methodology of this analysis is based in selecting a universe of comparable companies for the target. Once made the selection the companies are compared against the target based on financial statistics and ratios.

By then the comparable analysis method is this:

Imagen 1Investment Banking, Rosenbaum, Pearson

Step I

The selection of a universe for comparison is the foundation for performing the trading comps. For this step the characteristics of the target must be known and understood from the analyst. For this step the banker usually consults a broad net to review as many of potential companies as possible. Then is narrowed and defined once the analsysis is set

Step II

Once the Universe is set, the banker must locate the financial information necessary to analyze the comparable companies and calculate financial ratios and multiples.

Step III

Once the Financial info is located, the key ratios, multiples, statistics must be calculated for the comparable companies such as the enterprise values and equity values.

In this steps financial concepts must be applied for the correct valuation, like LTM, calendarization, and adj for non-recurring items.

Step IV

Benchmarking is the core business of this step, so the banker must analyze and compare closely the Universe vs the target company, this step serves for two reasons, to measure the rank of the target, and also to throw away companies from the universe that are not on the same characteristics from the Universe vs target.

Step V

The valuation is set in this step, where the information related to ratios, and substantial multiples are set on and compared with the target, so then the use of means and medians is known usually for extrapolating ranges and the highests and lowest multiples as the ceilings and floors, but then the careful selection for the companies that get closer to the target is mere art.

Apendix

Key financial statistics and ratios:

Size: Market valuation: equity value and EV ; financial data: sales gross profit, EBIT; etc. Profitability: gross profit, EBIT, EBITDA, and net income margins Growth profile: historical and estimated growth rates ROI: ROIC ROE ROA Credit: leverage ratios, coverage ratios

Transaction comps

This Method is likely to be considered as a Comparable company analysis, but with a multiple-based approach. Must used when M&A transactions and helpful to determine price value for the target. It is determined on multiples paid for comparable companies in prior M&A transactions.

As the trading comps, this method involves the selection of a Universe of comparable companies, and for this selection the importance of the characteristics must be focused on the fundamental issues.

Under normal market conditions transaction comps tend to give higher multiples than trading comps because of two reasons:

1. Buyers generally pay a control premium 2. Strategies buyers tend to realize synergies , which supports the ability to pay higher

prices.

Ilustración 1Investment Banking , Rosenbaum, valuation pg72.

As seen the steps between the first and second method are the same but one focuses on the market vision whereas the other focuses

But the cons are visible because of the main fact of this valuation: Time, and is because precedent transactions may not be truly reflective of the prevailing market conditions.

Discounted Cash Flow Analysis

This valuation method is a fundamental analysis whit the idea that the value of the “target can be derived from the present value of its projected “Free cash Flows”

The valuation implied for a target by a DCF is also known as its intrinsic value, as opposed to its market value, which serves as an important alternative to market based valuation techniques. Is often used when are public companies.

Its projected typically for a period of five years , but can be determined for larger cycles, this is because there are difficulties to project accurately for extended periods, mainly because of economic cycles; to fix this, is used a “terminal Value”.

Ilustración 2Investment Banking, Rossenbaum, Valuation pg 110.

Step I

The first step here is to learn and get rid of all possible data about the target to be analyzed

Step II

The projection of the unlevered FCF is the Core DCF. Unlevered FCF is the cash generated by a company after paying all cash operating expenses and taxes. As said before, the DCF is often projected for no more than five years

Step III

The WACC is calculated, that represents the weighted average of the required return on the invested capital. Also known as the discount rate or cost of capital.

Step IV

The calculation of the terminal value is important because allows to know and quantify the remaining value of the target after the projection period.

There are two methods:

Exit multiple Method Perpetuity Growth Method

Step V

Calculate Present value and valuate

References

Rosenbaum, J., & Pearl, J. (2009). Valuation. In Investment banking. Wiley Finance.