FBE 529 Financial Analysis and Valuation
Case IV Sypder Active Sports
Luke Hsieh
Tianfan Wu
Xijun Hou
Xinyu Tao
Kelei Zhu
Yifan Liu
2019.11.04
1. ​ ​Identify the different exit options that are feasible for Spyder in 2004 and analyze the benefits and costs of
each alternative.
1）Sell to Strategic Buyers
A Strategic buyer often offers a higher price than a Financial buyer does. However, the buyer asks not only for the
return rate but also the controlling rights over the target company. As a result, the target company would sacrifice
almost all of its control over its strategy and decision making.
2）Sell to Financial Buyers
A financial buyer often offers a lower price than a Strategic buyer does, but they do not ask for control rights over
the target company, which will not influence the strategy and decision making of the target company.
2. Is this a good time to sell the business? Consider the interests and needs of the owner(s), the current state
and future prospects of the company, and the current state of the financial markets.
Jacobs prioritizes the fair selling price over the ownership of the company, whereas CHB, who was planned to exit
in 2002, desires to exit for the liquidation of its fund.
Spyder shows strong performance in the last 3 years and the promising growth in the future:
- The CAGR of Net Income from 2001 to 2004 was 178%.
- The Inventory dropped from $1,458K in 2001 to $845K in 2004.
- The 87% Top 2 Sell-through Rate represents a strong customer loyalty and its brand premium.
All of the above and the increasing net PP&E in 2004 show that the company is expanding its business and
increasing its earnings rapidly. We believe the company will maintain its strong growth in the next few years.
It is a good time to sell the business from a financial analyst’s point of view. We would use the EBITDA/Sales ratio
to explain (Proof of its reasonability is in the appendix). The ratio was 15.61% in 2004 (Exhibit 5), and the average
ratio of strategy acquirer is 12.14% (Exhibit 11). Since the company has a significantly higher ratio than the
industry average, together with the willing Jacob wants a fair selling price, we arrived at the conclusion of this
being the right time to gain a significant premium by selling the company out.
3. Perform a valuation of Spyder utilizing both a DCF approach and a comparables based approach.
We used the industry average Unlevered Beta of 0.82 as its Equity Beta for calculation because Spyder is a private
company. Also, consider that the company can sell to either a strategic buyer or a financial buyer and that it remains
100% equity-financed for any of the two deals, Spyder’s WACC will remain the same with its cost of equity -8.47% (4.37%+0.82*5%).
Using the Gordon Growth method and assuming the terminal growth rate being 3% annually, the enterprise value
arrived at $245M, but we suppose that a private company would be asked for an illiquidity premium, which we
assume to be 3%, so the WACC would be adjusted to 11.47%. Leaving all other conditions equal, the company’s
value then drops down to $154M under this circumstance.
We also used Exit Multiple method to calculate the company’s terminal value in the DCF model. The industry
average EV/EBITDA is 10.77 and the EV/Sales is 1.28, and we used these two as the main multiple for our
valuation. Spyder’s enterprise value would be $275M and $188M in cash.
The last approach we tried is using the M&A data to calculate Spyder’s enterprise value directly. The comparable
transaction’s average EV/EBITDA and EV/Sales are 11.1 and 1.2, and for financial acquisition, the two ratios are
9.9 and 1.4, respectively. Based on these data, Spyder’s enterprise value would be:
*For strategic buyers:
$106M or $72M
For financial buyers: $95M or $87M
*For a deal with a strategic buyer, we would add a premium for the future control of the company. We assume the premium being 30%, and
therefore the enterprise value would arrive between $94M and $137.8M.
Besides the premium we added in the valuation, there are several risks to be considered.
-
The Gordon Growth method’s risks are the discount rate -- WACC and the terminal growth rate we choose
to use.
The Exit Multiple method’s risks are the comparable companies we chose, which can change the multiple
drastically, and the discount value.
The Market approach’s risk is mainly the comparable acquisitions we chose.
After we performed the sensitivity analysis for some of the risks in the valuation model, the results show that
different discount rates and terminal growth rates can change the value of the company from $181M to $384M in
the Gordon Growth method, and the discount rate and EV/EBITDA multiplier’s change can also change the value
from $244M to $309M (See figure 1 & 2). Different valuation results are shown in the Football Field chart (See
figure 3).
4. Compare the alternative transactions described on the last page of the case. Which one would you choose
if you were David Jacobs? Which one would you choose if you were CHB Capital Partners? Who else is
affected by this choice and how?
From CHB capital and Tsunehisa Shimokubo’s standpoint, it is better to choose a strategic acquisition, which
benefits them economically. Strategic buyers are usually larger companies, they often offer both stocks and cash to
pay for the target company and pay extra for potential synergies. CHB capital is looking for a higher return, so
selling it through a strategic acquisition would be a better choice.
For David Jacobs, we considered more about Spyder and the future of the company, and the fair price and
maintenance of growth became the two major concerns while making our decision. As we mentioned above, there
is sustained growth of the company-- the high CAGR, the Top 2 Sell-through rate, and the low inventories, etc. On
the other hand, the EBITDA/Sales ratio of Spyder is also much higher than the strategic acquiring company.
Therefore, staying on the right track and not making significant changes would be better for the company. We still
recommend Spyder to go with a strategic buyer for a higher price, but David Jacobs may have to negotiate with
them and try to seek an agreement on the way of running the Spyder’s business in the future.
Appendix
Figure 1 Sensitivity Analysis for Gordon Growth Method
Figure 2 Sensitivity Analysis for EV/EBITDA Multiplier Method
Figure 3 Football Field for Valuation Approachs