Download - M&A For Catalist Companies in Singapore
M&A for Catalist Companies Valuation Issues5 March 2009
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Smaller Cap = Higher Expected Return
Long-Term Returns in Excess of CAPM Estimation for Decile Portfolios of the NYSE/AMEX/NASDAQ1926 - 2007
Decile BetaA B A - B
1 - Largest 0.91 6.10% 6.45% -0.35%2 1.03 7.95% 7.27% 0.68%3 1.10 8.51% 7.75% 0.76%4 1.12 8.86% 7.93% 0.93%5 1.16 9.64% 8.17% 1.47%6 1.18 9.93% 8.33% 1.60%7 1.24 10.26% 8.76% 1.50%8 1.30 11.38% 9.18% 2.20%9 1.35 12.07% 9.51% 2.56%10 - Smallest 1.41 15.77% 9.95% 5.82%Mid-Cap, 3 - 5 (N2) 1.12 8.81% 7.88% 0.93%Low-Cap, 6 - 8 (N3) 1.22 10.29% 8.64% 1.65%Micro-Cap, 9 -10 (N4) 1.36 13.25% 9.59% 3.66%Source: SBBI Valuation edition 2008
Notes:N1 - Theoretical equity risk premium computed based on the Capital Asset Pricing ModelN2 - Market capitalisations of US$2,411,794,001 - US$9,206,713,000N3 - Market capitalisations of US$723,258,001 - US$2,411,794,000N4 - Market capitalisations below US$723,258,000
Realised Return in Excess of Riskless Rate
Estimated Return in Excess of Riskless Rate
(N1)
Size Premium (Return in Excess
of CAPM)
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How to improve valuation?
Note: Capitalisation multiples calculated as 1/WACC-g
8% 9% 10% 11% 12% 13% 14% 15%0% 12.5x 11.1x 10.0x 9.1x 8.3x 7.7x 7.1x 6.7x1% 14.3x 12.5x 11.1x 10.0x 9.1x 8.3x 7.7x 7.1x2% 16.7x 14.3x 12.5x 11.1x 10.0x 9.1x 8.3x 7.7x3% 20.0x 16.7x 14.3x 12.5x 11.1x 10.0x 9.1x 8.3x4% 25.0x 20.0x 16.7x 14.3x 12.5x 11.1x 10.0x 9.1x5% 33.3x 25.0x 20.0x 16.7x 14.3x 12.5x 11.1x 10.0x
g
WACCCapitalisation multiples with varying WACC and g
= DIV * (1 + gn)r - gn
P0
EPS0
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How M&A Can Create New Value
Taking advantage of economies of scaleImprove target managementCombine complementary resourcesCapture tax benefitsProvide low-cost financing to a financially constrained targetCreate value through restructuringPenetrating new geographiesReducing competition
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M&A require thorough preparation
Stand alone value of target
Synergies generated
Value of target afterrealisingsynergies
Transaction costs
Taking a Disciplined Approach to Find the Right Value
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Year Average Medium Deals1986 38.2% 29.9% 3331987 38.3% 30.8% 2371988 41.9% 30.9% 4101989 41.0% 29.0% 3031990 42.0% 32.0% 1751991 35.1% 29.4% 1371992 41.0% 34.7% 1421993 38.7% 33.0% 1731994 41.9% 35.0% 2601995 44.7% 29.2% 3241996 36.6% 27.3% 3811997 35.7% 27.5% 4871998 40.7% 30.1% 5121999 43.3% 34.6% 7232000 49.2% 41.1% 5742001 57.2% 40.5% 4392002 59.7% 34.4% 4392003 62.3% 31.6% 3712004 30.7% 23.4% 3222005 34.5% 24.1% 3922006 31.5% 23.1% 454Average 42.1% 31.0% 361Median 41.0% 30.9% 366Average 5 Years 43.7% 27.3% 396S ource : Mergers tat Review
Premium offered
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M&A Valuation
Pre DealPre Deal
Financial InstrumentsFRS 32/39
Post DealPost Deal
Share Based PaymentsFRS 102
Business Combinations
FRS 12/38/103
Impairment of assetsFRS 36
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Implications of FRS 103 - Overview
PurchaseConsideration
PurchaseConsideration
Fair Value of Net Tangible AssetsFair Value of Net Tangible Assets
Identifiable Intangible Assets
Identifiable Intangible Assets
Resulting Goodwill
Resulting Goodwill
Technology
Trade Name
Customer Relationships
Copyrights
Identification Process
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Excess of purchase price over net assets acquired – formerly known entirely as “goodwill” has to be allocated to intangible assets previously not identified
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Different Types of Intangible Assets
Marketing-relatedMarketing-related Customer-relatedCustomer-related Contract-basedContract-based Technology-basedTechnology-based Artistic-relatedArtistic-related• Trademarks,
tradenames, brands• Service marks,
certification marks• Internet domains• Non-competition
agreements
• Customer lists• Order or production
backlog• Customer contracts
and related customer relationships
• Non-contractual customer relationships
• Licensing, royalty, standstill agreements
• Lease agreements• Construction permits• Franchise
agreements• Operating and
broadcasting rights• Employment contracts• Advertising,
construction, management, service or supply contracts
• Patented technology• Computer software• Unpatented
technology• Trade secrets• Registration
• Compositions, advertising jingles
• Pictures, photographs
• Video and audiovisual material
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FRS 103 – Amortisation
Intangible Assets
Amortisationover useful life
Monthly charge to Profit & Loss
M&A Considerations
Are profit guaranteed inclusive of amortisation charges?
Is the intangible Asset supportable by cashflow projections – auditors’ focus on revenue growth rate, profit margin and discount factor used.
Annual impairment
Definite useful life
Indefinite useful life
Impairment Loss charged to Profit & Loss
Financial Impact
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Methodologies
Valuation ApproachesValuation Approaches
Market ApproachMarket Approach Income ApproachIncome Approach Cost ApproachCost Approach
Value EstimateBased on multiples or
prices from market transactions involving
the sale of comparable assets
Value EstimatePresent value of
earnings attributable to the asset; or costs avoided as a result of
owning the asset
Value EstimateReproduction /
replacement cost adjusted for
depreciation & obsolescence
Decreasing hierarchy for estimating value
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FRS 103 – Resulting Goodwill
Goodwill Impairment?Any impairment Loss charged to Profit & Loss
M&A Considerations
What does the goodwill represent? Synergies? Economies of Scale?
Is the premium paid for acquisition supportable by cashflowprojections used to test for annual impairment?
Financial Impact
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Comparison of Value Concepts
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Impairment Test
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Key Points
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Smaller Capitalisation = less attention from market investors = higher expected return = lower valuation (all else equal)Acquisitions or mergers can lead to higher capitalisation, lower risk and higher valuation, but…Consider the post deal valuation issues early, i.e. in the pre deal valuation exercise
Impact on post merger/acquisition financials (definite lived vs. indefinite intangibles)Robustness of business model and forecast assumptions (pre deal “euphoria” can lead to serious post deal consequences)