18
Target Valuation Based on Following Multiples (MVC/VIC)
Comparable Company
Forward
P/Ea
Price /
Revenueb
Price
/Bookc
Enterprise
Value to
EBITDA
Enterprise
Value to
Revenue
Average
Col. 1
Col. 2
Col. 3
Col. 4
Col. 5
Cols. 1-5
Medtronic
16.14
4.17
2.32
15.19
4.69
Boston Scientific
18.04
4.10
4.82
18.41
4.70
a S&P Capital IQ Report Consensus Estimate (4/26/16)
b Trailing 12 month average
c Most recent quarter (April 2, 2016)
d Billions of dollars. Average multiple (MVC/VIC) x St. Jude value indicator expressed in dollars per share (VIT). For
2. Does your answer to question (1) include a purchase price premium? Explain your answer.
Answer: No. The use of the comparable companies’ valuation methodology provides an estimate of the standalone value of
3. What are the key limitations of the comparable companies’ valuation methodology? Be specific.
Answer: The comparable company method measures the value of the target firm at a moment in time. In the current (as of
this writing) artificially low interest rate environment, P/E multiples tend to be overstated. Why? Abnormally low interest rates
4. In estimating the value of anticipated cost savings, should the analyst use St. Jude’s marginal tax rate of 40% or its effective tax
rate of 22%? Explain your answer.
5. What is the present value of the $500 million pre-tax annual cost savings expected to start in 2020? Assume the appropriate cost
of capital is 10% and that the savings will continue in perpetuity. Show your work.
Answer: The $500 million in pretax cost savings is expected to be realized beginning in 2020 or 5 years after closing. Assuming
6. What are the key valuation assumptions underlying this valuation of St. Jude Medical? Be specific.
Edward Life Sciences
29.28
9.13
26.77
4.99
19
Answer: With respect to the standalone valuation, it is assumed that both the valuation multiples are appropriate and that the
firms selected for the peer group are very similar to St. Jude in terms of profitability, growth and risk. In addition, it is assumed
7. What is the maximum amount Abbott Labs could have paid for St. Jude’s Medical and still earned its cost of capital? Did Abbott
overpay for St. Jude? Explain your answer.
VALUING THE TWITTER IPO
Case Study Objectives: To Illustrate
• Valuation is far more an art than a science.
• Understanding the limitations of individual valuation methods is critical.
• Averaging multiple valuation methods is often the most reliable means of valuing a firm.
• The credibility of any valuation ultimately rests on the credibility of its key underlying assumptions.
In the now infamous “dotcom” era, firms like Yahoo, Lycos, Excite and others evolved into portals in a desperate attempt to find ways to
make money from providing users the ability to search the web. Enter Google and the competitive landscape changed quickly. Google
invented the concept of paid search and contextual, pay-to-click advertising models.
Today, social networks like Twitter and Facebook, while attracting new users at an astonishing pace, have not fully defined their
business models. In fact, the eventual winners in the social networking space may not even exist today. Nonetheless, investor expectations
for the growth potential of social networking firms remained very optimistic during 2013. This investor enthusiasm prompted Twitter’s
financial backers and founders to take the firm public late in 2013, at a time when the firm’s valuation was likely to be high.
Per the IPO prospectus, Twitter’s projected revenue from advertising in 2013 was $600 million based on what Twitter call “promoted
Tweets.” Revenue projections for 2014 were $1 billion. Using this information, investors in anticipation of the November 6, 2013 IPO
turned to estimating the market value of Twitter based on comparable publicly traded firms. Firms believed to be similar to Twitter were
those in the social networking space and which seemed to display similar growth, risk and profitability characteristics. As is often the
case, there were no firms that were both publicly traded and truly similar in size, product offering, and which satisfied the same customer
needs. Investors used valuation multiples for Facebook, LinkedIn, and Yelp as Twitter’s foremost peers.
20
Since the firm was expected to lose $(.11) per share in 2013 and $(.02) in 2014, Twitter could not be valued based on estimates of
earnings per share or similar profitability measures. However, it could also be valued based on enterprise value as a multiple of earnings
before interest, depreciation, and amortization (EBITDA). For most firms, EBITDA is positive and often is used as a proxy for cash flow.
Enterprise value (EV) includes the market value of equity and debt less cash on the balance sheet. The appropriate valuation multiple was
calculated by computing the ratio of EV to EBITDA. Using this valuation multiple, Facebook traded at a ratio of 36 and LinkedIn at 159
for 2014. Yelp, with a negative EBITDA for 2013, did not have a meaningful enterprise to EBITDA ratio. Twitter’s estimated EBITDA
for 2013 was $230 million and $260 million in 2014.
These valuation multiples implied a very high valuation (market capitalization) and price per share for the IPO. But investors remained
cautious, as valuation estimates too often prove wrong. For every successful IPO like LinkedIn, there is a Groupon or Zynga that were
duds. Groupon, the provider of online discount coupons, went public in November 2011 at $20 per share. After accounting
Investors also had reason to question how similar Twitter actually was to its presumed peers. For example, the differences between
Twitter and Facebook are enormous in that they purport to satisfy substantially different user needs. Twitter is focused and simple while
Facebook offers users a portal interface. Facebook appeals to people looking to reconnect with friends and family or find new friends
online and offers email, instant messaging, image and video sharing. Most people can grasp how to use Facebook quickly. In contrast, the
usefulness of Twitter is not as obvious to some people as Facebook, although it may be more addictive since you get immediate
responses. Users often say they like Twitter because they can get instant responses to a question or comment.
The actual value of the IPO depended on whether investors used basic shares outstanding or fully diluted shares. Twitter ended the first
day of the IPO at $44.90 a share based on the number of basic shares outstanding (excluding options and restricted shares). Unlike the
Facebook IPO, the Twitter IPO went off without a hitch. This valued the firm at $24.9 billion. This valuation is based on 555 million
shares outstanding. The basic share count excludes options, warrants, and restricted stock. Altogether, Twitter has 150 million such shares
Discussion Questions
1. Based on the information given in the case, how would you estimate the value of Twitter at the time of the IPO based on a simple
average of comparable firm revenue multiples based on projected 2014 revenue?
21
Answer: Multiples of projected 2014 revenue just prior to the Twitter IPO were 11, 14, and 13 times revenue for Facebook, LinkedIn,
2. Based on the information given in the case, how would you estimate the value of Twitter at the time of the IPO based on a simple
average of comparable firm enterprise to EBITDA multiples based on projected 2014 EBITDA?
Answer: Facebook’s enterprise to EBITDA ratio based on projected 2014 EBITDA was 36 and LinkedIn was 159. Twitter’s
3. The valuation estimates in the preceding two questions are substantially different. What are the key assumptions underlying each
valuation method? Be specific. How can an analyst combine the two valuation estimates assuming she believes that the enterprise to
EBITDA ratio is twice as reliable as the valuation based on a revenue multiple?
Answer: Relative valuation methods assume that the peer firms selected to compute the valuation multiple are substantially similar to
the target firm at a moment in time. These multiples in turn reflect investor assumptions about continued user growth and the ability
4. Scenario analysis involves valuing businesses based on different sets assumptions about the future. What are the advantages and
disadvantages of applying this methodology in determining an appropriate purchase price using relative valuation methods to
estimate firm value?
Answer: Scenario analysis enables the analyst to create several different scenarios such as most likely, least likely and optimistic and
China’s CNOOC Acquires Canadian Oil and Gas Producer Nexen Inc.
______________________________________________________________
Key Points
• DCF valuation assumes implicitly that management has little decision-making flexibility once an investment decision is made.
• In practice, management may accelerate, delay, or abandon the original investment as new information is obtained.
_____________________________________________________________________________
In its largest foreign takeover ever, China’s state owned energy company CNOOC acquired Canadian oil and gas company Nexen Inc. in
2013 for $15.1 billion. The acquisition gives CNOOC new offshore production in the North Sea, the Gulf of Mexico, offshore of western
Africa, and oil and gas properties in the Middle East and Canada. The deal also gives CNOOC control of major oil sands reserves in
Canada.
This acquisition by CNOOC represents an effort to secure geographically distributed sources of existing production and future reserves
as well as a bet on the future development of nonconventional oil and gas reserves such as the Canadian oil sands. Given the nature of the
reserves, their development is considerably more costly than conventional crude reserves. Also, the process by which oil sands are
22
export to China. Continued opposition to further development of these properties could reduce their value significantly. Given these
uncertainties what options does CNOOC have with respect to these reserves?
Standard discounted cash flow analysis assumes implicitly that once CNOOC made this investment decision to buy Nexen, CNOOC’s
management could do little to alter the investment stream it had included in the calculation of future cash flows used to value Nexen. In
reality, management has a series of so-called real options enabling changes to be made to their original investment decisions. Which
Is Texas Instruments Overpaying for National Semiconductor? As Always, It depends.
Key Points
Valuation is far more an art than a science, and understanding the limitations of individual valuation methods is critical.
Averaging multiple valuation methods is often the most reliable means of valuing a firm.
Evaluating success of an individual acquisition is best viewed in the context of an acquirer’s overall business strategy.
Value is in the eye of the beholder. Various indicators often provide a wide range of estimates. No single method seems to provide
consistently accurate valuation estimates. Which method the analyst ultimately selects often depends on the availability of data and on the
analyst’s own biases. Whether a specific acquisition should be viewed as successful depends on the extent to which it helps the acquirer
realize a successful business strategy.
At $25 per share in cash, Texas Instruments (TI) announced on March 5, 2011, that it had reached an agreement to acquire National
Semiconductor (NS). The resulting 78% premium over NS’s closing share price the day prior to the announcement raised eyebrows. After
showing little activity in the days immediately prior to the announcement, NS’s share price soared by 71% and TI’s share price rose by
2.25% immediately following the announcement. While it is normal for the target’s share price to rise sharply to reflect the magnitude of
the premium, the acquirer’s share price sometimes remains unchanged or even declines. The increase in TI’s share price seems to suggest
agreement among investors that the acquisition made sense. However, within days, analysts began to ask the question that bedevils so
many takeovers. Did Texas Instruments overpay for National Semiconductor?
Whether TI overpaid depends on how you measure value and how you interpret the results. Looking at recent semiconductor industry
transactions, the magnitude of the premium is almost twice the average paid on 196 acquisitions in the semiconductor industry during the
last several years. Based on price-to–earnings ratio analysis, TI paid 19.1 times NS’s 2012 estimated earnings, as compared to 14.3 times
industry average earnings for the same year. This implied that TI was willing to pay $19.10 per share for each dollar of the next year’s
23
growth rate of earnings. At 1.28 prior to the TI takeover, NS was trading at a premium to its growth rate according to this measure. After
the acquisition, the PEG ratio jumped to 2.09.
While suggesting strongly that TI overpaid, these measures may be seriously biased. A large percentage of TI’s and NS’s revenue
comes from the production and sale of analog chips, a rapidly growing segment of the semiconductor industry. Part of the growth in
analog chips is expected to come from the explosive growth of smartphones and tablets, where their use in regulating electricity
Discussion Questions
1. Most studies purporting to measure the success or failure of acquisitions base their findings of the performance of acquiring
share prices around the announcement date of the acquisition or on accounting performance measures during the three to
five years following the acquisition. This requires that acquisitions be evaluated on a “standalone” basis. Do you agree or
disagree with this methodology? Explain your answer.
Answer: While event studies have merit to the extent markets are efficient, they often fail to recognize that acquisitions
usually are undertaken as part of a larger strategy. If the acquisition enables the implementation of the larger strategy and
that strategy makes sense, then the success of the acquisition should be considered in the context of the larger strategy. This
2. Despite their limitations, why is the judicious application of the various valuation methods critical to the acquirer in
determining an appropriate purchase price?
Answer: Individual valuation methods routinely provide significantly different valuations because they are estimated using
substantially different approaches, with some incorporating both the risk and timing of future cash flows (i.e., DCF) and
others reflecting investor sentiment at a moment in time (i.e., relative valuation). Nevertheless, depending on the availability
24
3. Scenario analysis involves valuing businesses based of different sets assumptions about the future. What are the advantages
and disadvantages of applying this methodology in determining an appropriate purchase price?
4. Do you agree or disagree with the following statement: Valuation is more an art than a science. Explain your answer.
Answer: The scientific method requires that repetition of the same experiment will result in an identical outcome. It is clear
from the variation of estimates derived from the various methods reflecting different time periods and data limitations that
Bristol-Myers Squibb Places a Big Bet on Inhibitex
___________________________________________________________
Key Points
DCF valuation assumes implicitly that management has little decision-making flexibility once an investment decision is made.
In practice, management may accelerate, delay, or abandon the original investment as new information is obtained.
______________________________________________________________________________________________________________
Pharmaceutical firms in the United States are facing major revenue declines during the next several years because of patent expirations for
many drugs that account for a substantial portion of their annual revenue. The loss of patent protection will enable generic drug makers to
sell similar drugs at much lower prices, thereby depressing selling prices for such drugs across the industry. In response, major
pharmaceutical firms are inclined to buy smaller drug development companies whose research and developments efforts show promise in
order to offset the expected decline in their future revenues as some “blockbuster” drugs lose patent protection.
Aware that its top-selling blood thinner, Plavix, would lose patent protection in May 2012, Bristol-Myers Squibb (Bristol-Myers)
moved aggressively to shed its infant formula and other noncore businesses to focus on pharmaceuticals. Such restructuring has reduced
Google Buys YouTube: Valuing a Firm Without Cash Flows
YouTube ranks as one of the most heavily utilized sites on the Internet, with one billion views per day, 20 hours of new video uploaded
every minute, and 300 million users worldwide. Despite the explosion in usage, Google continues to struggle to “monetize” the traffic on
the site five years after having acquired the video sharing business. 2010 marked the first time the business turned marginally profitable.
Whether the transaction is viewed as successful depends on whether it is evaluated on a stand-alone basis or as part of a larger strategy
designed to steer additional traffic to Google sites and promote the brand.
This case study illustrates how a value driver approach to valuation could have been used by Google to estimate the potential value of
YouTube by collecting publicly available data for a comparable business. Note the importance of clearly identifying key assumptions
underlying the valuation. The credibility of the valuation ultimately depends on the credibility of the assumptions.
Started in February 2005 in the garage of one of the founders, YouTube displayed in 2006 more than 100 million videos daily and had
an estimated 72 million visitors from around the world each month, of which 34 million were unique.3 As part of Google, YouTube
retained its name and current headquarters in San Bruno, California. In addition to receiving funding from Google, YouTube was able to
tap into Google’s substantial technological and advertising expertise.
To determine if Google would be likely to earn its cost of equity on its investment in YouTube, we have to establish a base-year free
cash-flow estimate for YouTube. This may be done by examining the performance of a similar but more mature website, such as
about.com. Acquired by The New York Times in February 2005 for $410 million, about.com is a website offering consumer information
and advice and is believed to be one of the biggest and most profitable websites on the Internet, with estimated 2006 revenues of almost
$100 million. With a monthly average number of unique visitors worldwide of 42.6 million, about.com’s revenue per unique visitor was
estimated to be about $0.15, based on monthly revenues of $6.4 million.4
26
Recall that a firm earns its cost of equity on an investment whenever the net present value of the investment is zero. Assuming a risk-
free rate of return of 5.5 percent, a beta of 0.82 (per Yahoo! Finance), and an equity premium of 5.5 percent, Google’s cost of equity
would be 10 percent. For Google to earn its cost of equity on its investment in YouTube, YouTube would have to generate future cash
flows whose present value would be at least $1.65 billion (i.e., equal to its purchase price). To achieve this result, YouTube’s free cash
flow to equity would have to grow at a compound annual average growth rate of 225 percent for the next 15 years, and then 5 percent per
year thereafter. Note that the present value of the cash flows during the initial 15-year period would be $605 million and the present value
of the terminal period cash flows would be $1,005 million. Using a higher revenue per unique visitor assumption would result in a slower
.
Discussion Questions:
1. What alternative valuation methods could Google have used to justify the purchase price it paid for YouTube? Discuss the
advantages and disadvantages of each.
Answer: Alternative methods include comparable recent transactions (e.g., News Corp’s purchase of MySpace in 2005),
comparable recent transactions, and discounted cash flow. Advantages of using the recent comparable transactions method is
2. The purchase price paid for YouTube represented more than one percent of Google’s then market value. If you were a Google
shareholder, how might you have evaluated the wisdom of the acquisition?
3. To what extent might the use of stock by Google have influenced the amount they were willing to pay for YouTube? How might
the use of “overvalued” shares impact future appreciation of Google stock?
4. What is the appropriate cost of equity for discounting future cash flows? Should it be Google’s or YouTube’s? Explain your
answer.
27
Answer: The appropriate cost of equity should be YouTube’s since it represents the marginal risk that Google is assuming by
5. What are the key valuation assumptions implicit in the valuation method discussed in this case study?
A REAL OPTIONS’ PERSPECTIVE ON MICROSOFT’S DEALINGS WITH YAHOO
In a bold move to transform two relatively weak online search businesses into a competitor capable of challenging market leader Google,
Microsoft proposed to buy Yahoo for $44.6 billion on February 2, 2008. At $31 per share in cash and stock, the offer represented a 62
percent premium over Yahoo’s prior day closing price. Despite boosting its bid to $33 per share to offset a decline in the value of
Microsoft’s share price following the initial offer, Microsoft was rebuffed by Yahoo’s board and management. In early May, Microsoft
withdrew its bid to buy the entire firm and substituted an offer to acquire the search business only. Incensed at Yahoo’s refusal to accept
the Microsoft bid, activist shareholder Carl Icahn initiated an unsuccessful proxy fight to replace the Yahoo board. Throughout this entire
melodrama, critics continued to ask how Microsoft could justify an offer valued at $44.6 billion when the market prior to the
announcement had valued Yahoo at only $27.5 billion.
Microsoft could have continued to slug it out with Yahoo and Google, as it has been for the last five years, but this would have given
Google more time to consolidate its leadership position. Despite having spent billions of dollars on Microsoft’s online service (Microsoft
Network or MSN) in recent years, the business remains a money loser (with losses exceeding one half billion dollars in 2007).
Furthermore, MSN accounted for only 5 percent of the firm’s total revenue at that time.
28
The decision tree in the following exhibit illustrates the range of real options (albeit an incomplete list) available to the Microsoft
board at that time. Each branch of the tree represents a specific option. The decision-tree framework is helpful in depicting the significant
flexibility senior management often has in changing an existing investment decision at some point in the future.
Base Case:
Microsoft offers
to buy all
outstanding share
of Yahoo
Option to postpone
contingent on
offer
Enter long-term
search partnership
Option to expand
contingent on
successful
integration of Yahoo
and MSN
Purchase Yahoo
online search only.
Buy remaining
businesses later.
29
Merrill Lynch and BlackRock Agree to Swap Assets
During the 1990s, many financial services companies began offering mutual funds to their current customers who were pouring money
into the then booming stock market. Hoping to become financial supermarkets offering an array of financial services to their customers,
these firms offered mutual funds under their own brand name. The proliferation of mutual funds made it more difficult to be noticed by
potential customers and required the firms to boost substantially advertising expenditures at a time when increased competition was
reducing mutual fund management fees. In addition, potential customers were concerned that brokers would promote their own firm’s
mutual funds to boost profits.
This trend reversed in recent years, as banks, brokerage houses, and insurance companies are exiting the mutual fund management
business. Merrill Lynch agreed on February 15, 2006, to swap its mutual funds business for an approximate 49 percent stake in money-
manager BlackRock Inc. The mutual fund or retail accounts represented a new customer group for BlackRock, founded in 1987, which
had previously managed primarily institutional accounts.
Discussion Questions:
1. Merrill owns less than half of the combined firms, although it contributed more than one- half of the combined firms’ assets and
net income. Discuss how you might use DCF and relative valuation methods to determine Merrill’s proportionate ownership in
the combined firms.
a. Answer using DCF methods:
PV(Merrill) = $397/(.10 – .04) = $6,617
PV(BlackRock) = $270/(.10 – .06) = $6,750
2. Why do you believe Merrill was willing to limit its influence in the combined firms?
Answer: Increased competition in the retail mutual fund business would result in eroding margins and perceived conflicts of
30
3. What method of accounting would Merrill use to show its investment in BlackRock?
Answer: The equity method of accounting in which Merrill displays its 49% investment in BlackRock valued at $9.8 billion as
Valuation Methods Employed in Investment Bank Fairness Opinion Letters
Background
A fairness opinion letter is a written third-party certification of the appropriateness of the price of a proposed transaction such as a merger,
acquisition, leveraged buyout, or tender offer. A typical fairness opinion provides a range of what is believed to be fair values, with a
presumption that the actual deal price should fall within this range. The data used in this case study is found in SunGard’s Schedule 14A
Proxy Statement submitted to the SEC in May 2005.
On March 27, 2005, the investment banking behemoth Lazard Freres (Lazard) submitted a letter to the board of directors of SunGard
Corporation pertaining to the fairness of a $10.9 billion bid to take the firm private made by an investor group. Lazard employed a variety
Comparable Company Analysis
Using publicly available information, Lazard reviewed the market values and trading multiples of the selected publicly held companies
for each business segment. Multiples were based on stock prices as of March 24, 2005 and specific company financial data on publicly
available research analysts’ estimates for 2005. In the case of SunGard’s software business, Lazard reviewed the market values and
Table 8-1 Enterprise Value Multiples for
Comparable Recovery Availability Companies
Enterprise Value as a Multiple of
EBITDA
Price-to-Earnings
Multiple (P/E)
2005E
2005E
High
9.0x
38.1x
Mean
6.7x
18.2x
Median
6.5x
15.3x
Low
3.8x
12.6x
E = estimate.
31
Based on this analysis, Lazard determined an enterprise value to estimated 2005 EBITDA multiple range for SunGard’s recovery
availability services business of 5.5x to 7.0x. Lazard also determined a 2005 estimated P/E range for this segment of 14.0x to 16.0x.
Multiplying SunGard’s projected EBITDA and earnings per share for 2005 by these ranges, Lazard calculated an enterprise value range
for SunGard’s recovery availability services business of approximately $3.1 billion to $3.7 billion. Financial projections for SunGard
were provided by SunGard’s management.
Table 8-2. Enterprise Value Multiples for Comparable Software Companies
Enterprise Value as a Multiple of
EBITDA
Price-to-Earnings
Multiple (P/E)
High
13.8x
21.5x
Based on the results in Table 8-2, Lazard determined an enterprise value to estimated 2005 EBITDA multiple range for SunGard’s
software business of 7.5x to 9.5x. Lazard also determined a 2005 estimated P/E range for SunGard’s software business of 17.0 to 19.0x.
Multiplying SunGard’s projected EBITDA and earnings per share for 2005 by these ranges, Lazard calculated an enterprise value range
Recent Transactions Method
For the recovery availability services business, Lazard reviewed ten merger and acquisition transactions since October 2001 for
companies in the information technology outsourcing business. To the extent publicly available, Lazard reviewed the transaction
enterprise values of the recent transactions as a multiple of the last twelve months EBITDA for the period ending on the recent transaction
announcement date. See Table 8-3.
Table 8-3. Enterprise Value as a Multiple of Last Twelve Months EBITDA
for Recovery Availability Business
High
10.8x
Mean
7.37x
Median
Low
Based on Table 8-3, Lazard determined an EBITDA multiple range of 6.5x to 7.5x and multiplied this range by the last twelve months
EBITDA for SunGard’s recovery availability business to calculate an implied enterprise value range of approximately $3.4 billion to $4.0
billion.
Lazard reviewed 21 merger and acquisition transactions since February 2003 with a value greater than approximately $100 million for
Table 8-4. Enterprise Value as a Multiple of Last Twelve Months EBITDA
for the Software Business
High
11.6x
Mean
Mean
18.8x
Median
18.1x
Low
16.9x
32
Based on the information contained in Table 8-5, Lazard determined an EBITDA multiple range of 9.0x to 11.0x and multiplied this
range by the last twelve month EBITDA for SunGard’s software business to calculate an implied enterprise value range for this business
segment of approximately $5.0 billion to $6.1 billion.
Discounted Cash Flow Analysis
Using projections provided by SunGard’s management, Lazard performed an analysis of the present value, as of March 31, 2005, of the
free cash flows that SunGard could generate annually from calendar year 2005 through calendar year 2009. Lazard analyzed separately
the cash flows for SunGard’s software business and recovery availability services business.
For SunGard’s recovery availability services business, in calculating the terminal value Lazard assumed perpetual growth rates of
2.0% to 3.0% for the projected free cash flows for periods subsequent to 2009. The projected cash flows were then discounted to present
value using discount rates ranging from 10.0% to 12.0%. Lazard then calculated an implied enterprise value range for SunGard’s recovery
availability business of approximately $2.6 billion to $3.3 billion.
Lazard then aggregated the enterprise value ranges for SunGard’s two business segments to calculate a consolidated enterprise value
range for SunGard of approximately $8.2 billion to $10.7 billion. Using this consolidated enterprise value range and assuming net debt of
Table 8-5. Premiums Paid Analysis
Greater Than $1 Billion1
Greater Than $5 Billion
1 Day
1 Week
1 Month
1 Day
1 Week
1 Month
High
69.8%
67.8%
80.2%
33.4%
38.3%
44.0%
Mean
23.8%
26.6%
27.0%
15.3%
23.1%
26.2%
Median
21.3%
24.0%
25.7%
13.0%
25.4%
23.7%
Low
(8.0)%
(19.6)%
0.0%
(1.2)%
5.4%
Based on this analysis, Lazard determined an applicable premium range of 20% to 30% for SunGard and applied this range to
33
Summary and Conclusions
Table 8-6 summarizes the estimated valuation ranges based on the alternative valuation methods employed by Lazard Freres. Note that
the $36 per offer price compares favorably to the estimated average valuation range, representing a premium of 12% (i.e., $36/$27.11) to
33% (i.e., $36/$32.19). Consequently, Lazard Freres viewed the investor group’s offer price for SunGard as fair.
Table 8-6. Valuation Range Summary
Valuation Method
Valuation Range ($/Common
Share)
(Max. Valuation less Min.
Valuation)/Min. Valuation
Comparable Companies
24.20-29.00
19.8%
Discussion Questions:
1. Discuss the strengths and weaknesses of each valuation method employed by these investment banks in constructing estimates of
SunGard’s value for the Fairness Opinion Letter. Be specific.
Answer:
a. Discounted cash flow: Strengths include consideration of differences of the magnitude and timing of cash flows, the
adjustment for risk, and a clear statement of valuation assumptions. Weaknesses include the requirement to forecast
cash flows for each period, a terminal value, and a discount rate using limited or unreliable data. DCF methods are also
2. Why do you believe that the percentage difference between the maximum and minimum valuation estimates varies so much from
one valuation method to another? See Table 8-7.
Answer: Each method the comparable companies, recent transactions, and premiums paid methods rely on the accuracy of the
samples selected. Are the companies selected truly representative? EBITDA and earnings per share projections are based on
Recent Transactions
27.60-32.70
18.5%
Discounted Cash Flow
26.70-34.60
29.6%
Premiums Paid
29.94-32.44
Average
27.11-32.19
18.7%