OCTOBER 2004
S T R I C TL Y
P R I V A T E
AN D
C O N F I D E N T I A L
INTRODUCTION TO VALUATION METHODS USED IN INVESTMENT BANKING
B A N KI N G
I N T R O D U C TI O N
T O
VAL U ATI O N
M E TH OD S
U S E D
I N
I N V E S T M E N T
CONFIDENTIAL, FOR TRAINING PURPOSES ONLY
This presentation was prepared exclusively for the benefit and internal use of the JPMorgan client to whom it is directly addressed and delivered (including
such client’s subsidiaries, the “Company”) in order to assist the Company in evaluating, on a preliminary basis, the feasibility of a possible transaction or
transactions and does not carry any right of publication or disclosure, in whole or in part, to any other party. This presentation is for discussion purposes
only and is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by JPMorgan. Neither this
presentation nor any of its contents may be used for any other purpose without the prior written consent of JPMorgan.
The information in this presentation may be based upon any management forecasts provided to us and reflects prevailing conditions and our views as of this
date, all of which are accordingly subject to change. In preparing this presentation, we have relied upon and assumed, without independent verification,
the accuracy and completeness of all information available from public sources or which was provided to us by or on behalf of the Company or which was
otherwise reviewed by us. In addition, our analyses are not and do not purport to be appraisals of the assets, stock, or business of the Company or any
other entity. JPMorgan makes no representations as to the actual value which may be received in connection with a transaction nor the legal, tax or
accounting effects of consummating a transaction.
Notwithstanding the foregoing (but subject to any applicable federal or state securities laws), JPMorgan and the Company may disclose to any and all
persons, without limitation, the tax treatment and tax structure of any transaction contemplated hereby and all materials (including opinions or other tax
analyses) relating thereto, so long as such disclosure is not made prior to the earlier of (x) public announcement of discussions relating to the transaction or
of the transaction itself and (y) the execution of an agreement to enter into the transaction.
JPMorgan’s policies prohibit employees from offering, directly or indirectly, a favorable research rating or specific price target, or offering to change a
rating or price target, to a subject company as consideration or inducement for the receipt of business or for compensation. JPMorgan also prohibits its
research analysts from being compensated for involvement in investment banking transactions except to the extent that such participation is intended to
benefit investors.
JPMorgan is a marketing name for investment banking businesses of J.P. Morgan Chase & Co. and its subsidiaries worldwide. Securities, syndicated loan
arranging, financial advisory and other investment banking activities are performed by J.P. Morgan Securities Inc. and its banking affiliates. JPMorgan deal
team members may be employees of any of the foregoing entities.
MICHIGAN BUSINESS SCHOOL
B A N KI N G
I N V E S T M E N T
I N
U S E D
M E TH OD S
Valuation overview
1
Discounted cash flow
8
Publicly traded comparable company analysis
17
Comparable transactions analysis
23
LBO analysis
28
Additional valuation materials
36
I N T R O D U C TI O N
T O
VAL U ATI O N
Agenda
MICHIGAN BUSINESS SCHOOL
1
Applications
Acquisitions
Acquisitions
How much should we
How much should we
pay to buy the
pay to buy the
company?
company?
Divestitures
Divestitures
How much should we
How much should we
sell our
sell our
company/division for?
company/division for?
Research
Research
Fairness
Fairnessopinions
opinions
Should
Shouldour
ourclients
clientsbuy,
buy,
sell
sellororhold
holdpositions
positionsinina a
given
givensecurity?
security?
IsIsthe
theprice
priceoffered
offeredfor
for
company/division
company/divisionfair
fair
(from
(froma afinancial
financialpoint
pointofof
view)?
view)?
VALUATI O N
O V E R VI EW
Valuation
Hostiledefense
defense
Hostile
Public
Publicequity
equityofferings
offerings
ourcompany
company
IsIsour
undervalued/
undervalued/
vulnerabletotoa araider?
raider?
vulnerable
For
Forhow
howmuch
muchshould
shouldwe
we
sell
sellour
ourcompany/division
company/division
ininthe
thepublic
publicmarket?
market?
New business
New business
presentations
presentations
Various applications
Various applications
Debt offerings
Debt offerings
What is the underlying
What is the underlying
value of the business/
value of the business/
assets against which
assets against which
debt is being issued?
debt is being issued?
MICHIGAN BUSINESS SCHOOL
2
Valuation methodologies
Valuation
methodologies
Discounted cash
flow analysis
„ “Intrinsic”
value of
business
VALUATI O N
O V E R VI EW
„ Present value
of projected
free cash flows
to all providers
of capital
Publicly traded
comparable
companies
analysis
„ “Public market
valuation”
„ Value based on
market trading
multiples of
comparable
companies
„ How does a
firm’s financial
performance
match to
market value?
Comparable
acquisitions
analysis
„ “Public market
valuation”
„ Value based on
multiples for
comparable
companies in
sale
transactions
„ Includes
control
premium
Leveraged
buyout/recap
analysis
„ Value based on
debt
repayment and
return on
investment
„ Value to a
financial/LBO
buyer
Other
„ Liquidation analysis
„ Break-up analysis
„ Historical trading
performance
„ Private company
valuation
„ Expected IPO
valuation
„ Premiums paid
analysis
MICHIGAN BUSINESS SCHOOL
3
Approach to valuation
VALUATI O N
O V E R VI EW
In
In arriving
arriving at
at a
a preliminary
preliminary valuation
valuation for
for its
its clients,
clients, JPMorgan
JPMorgan utilizes
utilizes several
several methodologies
methodologies that
that are
are
consistent
with
industry
practices
consistent with industry practices
(1) Discounted
cash flow
Analyzes the
present value of
a company’s
free cash flow
(2) Publicly traded
comparable
companies
Utilizes market
trading multiples
from publicly traded
companies to derive
value
(3) Comparable
acquisition
transactions
Utilizes data from
M&A transactions
involving similar
companies
(4) Leveraged
buy out
Used to determine
range of potential
value for a company
based on maximum
leverage capacity
MICHIGAN BUSINESS SCHOOL
4
Equity value versus enterprise value
Enterprise value
=
Market value of all capital invested in a business1 (often referred to as
“transaction value”)
The value of the total enterprise: market value of equity + net debt
Equity value
=
Market value of the shareholders’ equity (often referred to as
“offer value”)
The market value of a company’s equity (shares outstanding x current
stock price)
Equity value
=
Enterprise value - net debt2
O V E R VI EW
Assets
Enterprise
value
Enterprise
value
Net debt
Equity value
1
2
VALUATI O N
Liabilities and shareholders’ equity
Assume book value of debt approximates market value of debt
Net debt equals total debt + minority interest + capitalized leases + short-term debt - cash and cash equivalents
MICHIGAN BUSINESS SCHOOL
5
Equity value versus enterprise value (cont’d)
Equity
Equity value
value or
or offer
offer value
value
Enterprise
Enterprise value
value or
or transaction
transaction value
value
„ Value for owners of business
„ Value available to all providers of capital
„ Multiples of
„ Multiples of
„ Sales
„ After tax cash flow
„ EBITDA
„ Book value
„ EBIT
VALUATI O N
O V E R VI EW
„ Net income
MICHIGAN BUSINESS SCHOOL
6
Application example: Valuation summary
Implied
Implied share
share price
price
$64.60
$60.00
$54.70
$55.50
$50.50
50.00
$60.00
$55.00
$45.00
$50.40
$47.10
40.00
$34.75
$37.30
$38.00
Current stock
price = $34.20
$37.60
30.00
20.00
VALUATI O N
O V E R VI EW
$19.25
10.00
52-week
trading range
7.0x—9.0x
2004E EBITDA
Analyst price
target
Public market
comparables 2
1
2
3
1.6x LTM sales
9.8x LTM EBITDA
13.3x LTM EBIT
Precedent
comparable transactions
7.0x—9.0x
With synergies
2008E EBITDA
of $1,500mm 3
8.0%—11.0%
discount rate
DCF analysis
7.0x—9.0x
25% IRR
LTM EBITDA
LBO
Share prices are based on 157.6 million diluted shares outstanding
Forecasts are based on JPMorgan research
Synergies assumed to be 6.0% of sales, capitalized at 8.0x
MICHIGAN BUSINESS SCHOOL
7
B A N KI N G
I N V E S T M E N T
I N
U S E D
M E TH OD S
Valuation overview
1
Discounted cash flow
8
Publicly traded comparable company analysis
17
Comparable transactions analysis
23
LBO analysis
28
Additional valuation materials
36
I N T R O D U C TI O N
T O
VAL U ATI O N
Agenda
MICHIGAN BUSINESS SCHOOL
8
DCF analysis: the process
Projections
Step
Step 11
Project the operating results and free cash flows of a business over the
forecast period. The typical forecast period is 10 years. However, the
range can vary from five to 20 years depending on the profitability
horizon.
Discount rate
Step
Step 22
Use the weighted average cost of capital (WACC) to
determine the appropriate discount rate range.
Terminal value
Step
Step 33
Estimate the value of the business at the end of
the forecast period.
Step
Step 44
D I S C O UN T E D
C A S H
F L OW
Present value
Determine a range of values for the
enterprise by discounting the projected
free cash flows and terminal value to the
present.
Adjustments
Step
Step 55
Adjust your valuation for all assets
and liabilities not accounted for in
cash flow projections.
MICHIGAN BUSINESS SCHOOL
9
The first step in DCF analysis is projection of unlevered
free cash flows
„ Calculation of unlevered free cash flow begins with financial projections
„ Comprehensive projections (i.e., fully-integrated income statement, balance
sheet and statement of cash flows) typically provide all the necessary elements
„ Quality of DCF analysis is a function of the quality of projections
„ Often required to “fill in the gaps”
„ Confirm and validate key assumptions underlying projections
„ Sensitize variables that drive projections
„ Sources of projections include
„ Target company’s management
„ Acquiring company’s management
„ Research analysts
D I S C O UN T E D
C A S H
F L OW
„ Bankers
MICHIGAN BUSINESS SCHOOL
10
Free cash flow is cash available to creditors and owners
after taxes and reinvestment
„ Unlevered free cash flows can be forecast from a firm’s financial projections, even if
those projections include the effects of debt
„ Start your calculation with EBIT (earnings before interest and taxes)
EBIT (from the income statement)
Plus: Non-tax-deductible goodwill amortization
Less: Taxes (at the marginal tax rate)
Equals: Tax-effected EBITA
Plus: Deferred taxes1
Plus: Depreciation and any tax-deductible amortization
F L OW
Less: Capital expenditures
Plus/(less): Decrease/(increase) in net working investment
D I S C O UN T E D
C A S H
Equals: Unlevered free cash flow
1
Although beyond the scope of our current discussions, you should only include actual cash taxes paid in the DCF. Depending on the firm and industry, you may want to
adjust for the non-cash (or deferred) portion of a firm’s tax provision. The tax footnote in the financial statements will give you a good idea of whether this is a
meaningful issue for your analysis
MICHIGAN BUSINESS SCHOOL
11
Projections
Stand-alone
Stand-alone projections
projections for
for Company
Company X
X ($
($ millions)
millions)
Fiscal year ending December 31,
2001
2002
2003
2004E
2005E
2006E
2007E
2008E
$400.0
$440.0
$484.0
$532.4
$585.6
$644.2
$708.6
$779.5
EBITDA
80.0
88.0
96.8
106.5
117.1
128.8
141.7
155.9
Less: Depreciation
12.0
13.2
14.5
16.0
17.6
19.3
21.3
23.4
EBITA
68.0
74.8
82.3
90.5
99.6
109.5
120.5
132.5
Less: Taxes at marginal rate
27.2
29.9
32.9
36.2
39.8
43.8
48.2
53.0
$40.8
$44.9
$49.4
$54.3
$59.7
$65.7
$72.3
$79.5
16.0
17.6
19.3
21.3
23.4
—
—
—
—
—
Less: Capital expenditures
20.0
22.0
24.2
26.6
29.3
Less: Incr./(decr.) in working capital
10.0
8.5
7.0
5.5
4.0
Unlevered free cash flow
40.3
46.8
53.8
61.4
69.6
Adjustment for deal date
(40.3)
—
—
—
—
Unlevered FCF to acquirer
$0.0
$46.8
$53.8
$61.4
$69.6
Memo: Discounting factor
0.0
0.5
1.5
2.5
3.5
$0.0
$44.6
$46.7
$48.4
$49.9
Net sales
Tax-effected EBITA
Plus: Depreciation
D I S C O UN T E D
C A S H
F L OW
Plus: Deferred taxes
Discounted value of unlevered FCF
Discounted value of FCF 2004P—2008P
Key assumptions:
Deal/valuation date = 12/31/04
Marginal tax rate = 40%
Discount rate = 10%
$189.6
JPMorgan convention is to use the
“mid-year” convention—which
assumes cash flows happen
midway during the year
MICHIGAN BUSINESS SCHOOL
12
Weighted average cost of capital (WACC) formula
„ Most firms use a combination of debt and equity to fund their operations. The overall cost of
capital is the weighted average of the cost of debt and the cost of equity
WACC =
rd * (Total debt) + re * (Total equity)
(Total cap)
(Total cap)
More accurately stated the formula is:
WACC =
rd * [D *(1-T)] + re * E
D+E
D+E
D I S C O UN T E D
C A S H
F L OW
E = market value of equity
D = market value of debt
T = marginal tax rate
re = return on equity (from CAPM)
rd = return on debt (assumed to be weighted average cost of debt¹)
„ Because interest is tax deductible, the true cost of debt is the after tax rate due to the ability
of interest expense to shield taxes. The tax rate used should be the marginal tax rate for each
specific company
¹ In order to be more accurate, the analyst should try to estimate the current market cost of debt by looking at the market cost of debt of comparable companies (with similar
credit ratings)
MICHIGAN BUSINESS SCHOOL
13
Terminal values: The exit multiple method
In the EBITDA exit multiple method, a multiple is applied to the final year’s EBITDA to determine a
terminal value in the final year. This terminal value is discounted to the present and added to the
PV of the cash flows
A
+
Discounted
F L OW
Firm value
at 2008P EBITDA multiple of
6.0x
7.0x
8.0x
Terminal value as percent
at 2008P EBITDA multiple of
6.0x
7.0x
8.0x
of total firm value
6.0x
7.0x
8.0x
$196.8
$687.5
$802.1
$916.7
$884.4
$999.0
$1,113.6
78%
80%
82%
193.1
662.6
773.1
883.5
855.8
966.2
1,076.7
77
80
82
10%
189.6
638.9
745.4
851.8
828.4
934.9
1,041.4
77
80
82
11%
186.1
616.2
718.9
821.6
802.3
904.9
1,007.6
77
79
82
12%
182.7
594.5
693.5
792.6
777.2
876.3
975.3
76
79
81
Discount
rate
8%
C A S H
C
9%
-
D I S C O UN T E D
=
Discounted terminal value
FCF
2004–2008
Discount
rate
8%
B
D
=
Net debt
E
Equity value
at 2008P EBITDA multiple of
12/31/04
$100.0
6.0x
7.0x
8.0x
$784.4
$899.0
9%
100.0
755.8
866.2
10%
100.0
728.4
11%
100.0
12%
100.0
Equity value per share1
Implied perpetuity growth rate
at 2008P EBITDA multiple of
at 2008P EBITDA multiple of
6.0x
7.0x
8.0x
$1,013.6
6.0X
$19.17
7.0X
$21.97
8.0X
$24.77
0.2%
1.3%
2.1%
976.7
18.47
21.17
23.87
1.1
2.2
3.0
834.9
941.4
17.80
20.41
23.01
2.0
3.1
3.9
702.3
804.9
907.6
17.16
19.67
22.18
2.9
4.0
4.8
677.2
776.3
875.3
16.55
18.97
21.39
3.8
4.9
5.8
A review of the terminal value and implied perpetuity is
useful to help understand the drivers of the DCF value
Note: DCF value as of 12/31/04 based on mid-year convention
1 Based on 40.0 million basic shares outstanding and 2.0 million options with a weighted exercise price of $8.13 calculated using the treasury method
MICHIGAN BUSINESS SCHOOL
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Terminal values: The perpetuity method
In the perpetuity method the final year cash flow is used to determine the terminal value of the
cash flows
A
+
Discounted
FCF
F L OW
C A S H
=
C
Discounted terminal value
Firm value
at perpetuity growth rate of
at perpetuity growth rate of
Terminal value as percent
of total firm value
Discount
rate
8%
2004–2008
$196.8
2.5%
$991.0
3.0%
$1,095.4
3.5%
$1,223.0
2.5%
$1,187.8
3.0%
$1,292.2
3.5%
$1,419.8
2.5%
83%
3.0%
85%
3.5%
86%
9%
193.1
811.9
883.8
968.9
1,005.0
1,077.0
1,162.0
81
82
83
10%
189.6
681.5
733.7
794.0
871.1
923.3
983.6
78
79
81
11%
186.1
582.6
622.0
666.7
768.7
808.1
852.8
76
77
78
12%
182.7
505.1
535.8
570.1
687.9
718.5
752.8
73
75
76
-
D I S C O UN T E D
B
D
=
Net debt
E
Equity value
Equity value per share1
Implied EBITDA exit multiple
at perpetuity growth rate of
at perpetuity growth rate of
at perpetuity growth rate of
Discount
rate
8%
12/31/04
$100.0
2.5%
$1,087.8
3.0%
$1,192.2
3.5%
$1,319.8
2.5%
$26.59
3.0%
$29.14
3.5%
$32.26
2.5%
8.6x
3.0%
9.6x
3.5%
10.7x
9%
100.0
905.0
977.0
1,062.0
22.12
23.88
25.96
7.4
8.0
8.8
10%
100.0
771.1
823.3
883.6
18.84
20.12
21.59
6.4
6.9
7.5
11%
100.0
668.7
708.1
752.8
16.34
17.31
18.40
5.7
6.1
6.5
12%
100.0
587.9
618.5
652.8
14.37
15.12
15.95
5.1
5.4
5.8
The PV of a growing perpetuity in year 5 is:
FCF * (1+g)
(r - g)
Thus, this PV 5 years forward must then be
discounted back to the valuation date
Note: DCF value as of 12/31/04 based on mid-year convention
1 Based on 40.0 million basic shares outstanding and 2.0 million options with a weighted exercise price of $8.13 calculated using the treasury method
MICHIGAN BUSINESS SCHOOL
15
Concluding DCF remarks
„ DCF analysis is a key valuation methodology
„ Three key variables
„ Projections/relevant and incremental cash flows (unlevered free cash flow)
„ Weighted average cost of capital (discount rate)
„ Residual value at end of the projection period (terminal value)
„ Remember
„ Validate and test projection assumptions
„ Determine appropriate cash flow stream
„ Utilize appropriate cost of capital approach
„ Carefully consider all variables in the calculation of the discount rate
„ Thoughtfully consider terminal value methodology
D I S C O UN T E D
C A S H
F L OW
„ Sensitize appropriately (base projection variables, synergies, discount rates,
terminal values, etc.)
„ Footnote assumptions in detail
„ Think about other value enhancers and detractors
— NOLs
— Options, warrants, etc.
Check it with a calculator!
MICHIGAN BUSINESS SCHOOL
16
B A N KI N G
I N V E S T M E N T
I N
U S E D
M E TH OD S
Valuation overview
1
Discounted cash flow
8
Publicly traded comparable company analysis
17
Comparable transactions analysis
23
LBO analysis
28
Additional valuation materials
36
I N T R O D U C TI O N
T O
VAL U ATI O N
Agenda
MICHIGAN BUSINESS SCHOOL
17
Overview
„ Comparable company analysis values a company by reference to other publicly-
P U BLIC LY
T RAD E D
C O M P ARA B L E
C OM P ANY
ANALY SI S
traded companies with similar operating and financial characteristics. It compares
the public company value with operating statistics to calculate the valuation
multiple
„ Comparable companies values do not incorporate the “control” premiums reflected
in comparable acquisitions. Depending on market conditions, the comparable
companies' multiples may or may not be higher than comparable acquisitions’
multiples
„ The trick to comparable company analysis is to find good comparables
„ The bad news: no two companies are really comparable
„ The good news: it doesn't matter, because everybody else (equity research
analysts, traders, arbs, etc.) has to deal with the same problem
„ Once you have chosen the comparable companies, calculate the implied value of
your company by multiplying the company’s historical and projected sales, EBIT,
EBITDA, net income, book value and other key operating statistics by the respective
comparable company multiples
MICHIGAN BUSINESS SCHOOL
18
Identifying the right peer group
„ The key to compiling a trading comparables analysis is to identify companies that are considered comparable
and that closely resemble the composition and function of the Company you are evaluating
„ SIC code search
P U BLIC LY
T RAD E D
C O M P ARA B L E
C OM P ANY
ANALY SI S
„ Research reports
„ 10K
„ To find comparable companies, look for companies with similar characteristics to those of the business being
valued
Operational
Financial
„ Industry
„ Size
„ Product
„ Leverage
„ Markets
„ Margins
„ Distribution channels
„ Growth prospects
„ Customers
„ Shareholder base
„ Seasonality
„ Cyclicality
MICHIGAN BUSINESS SCHOOL
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Choosing the right metric
„ Even with standard metrics, certain multiples are more relevant for some industries than others
„ For many industries, FV/EBITDA multiples are the most common trading metric (e.g.
Industrials, Transportation, Distribution, etc.)
P U BLIC LY
T RAD E D
C O M P ARA B L E
C OM P ANY
ANALY SI S
„ For other industries, P/E multiples are more widely followed (Pharmaceuticals, Restaurants,
Biotech, etc.)
„ Reading analyst reports will help you understand the metrics analysts use to value the sector
and the industry
„ Certain sectors have unique metrics
Telecommunications
Natural resources
„ Enterprise value to
„ Enterprise value to
— Pretax Sec10
— EBITDAX
— Reserves
— Production
—
—
—
—
—
—
Run rate revenue (LQA)
2000 to 2002 revenue
Net PPE (Latest 10-Q)
Route miles (Latest 10-Q)
Fiber miles (Latest 10-Q)
Access lines (Latest 10-Q
and 1-year forward)
Retail/Real estate
„ Enterprise value
— Square footage
— EBITDAR
„ Equity value
— Discretionary cash flow
MICHIGAN BUSINESS SCHOOL
20
Managed care trading comparables
$
$ millions,
millions, except
except for
for per
per share
share data
data
Company
FV/EBITDA4
P/E5
Share
price1
% of
52-wk. high
Equity
value2
Firm value3
2004E
2005E
2004E
2005E
LTGR5 2004E PEG
$111.05
94.0%
$17,926
$19,164
8.9x
7.8x
15.6x
13.6x
15.0%
Aetna
87.40
91.9%
14,598
16,211
8.7x
7.8x
12.9x
11.3x
15.0%
0.86x
ANALY SI S
Anthem
87.35
92.0%
12,264
13,927
7.4x
6.8x
14.0x
12.2x
15.0%
0.94x
Cigna
65.22
92.5%
9,273
10,773
C OM P ANY
Large capitalization
WellPoint
PacifiCare
7.4x
11.3x
10.2x
10.0%
1.13x
92.6%
8.2x
7.5x
13.5x
11.8x
13.8%
0.99x
Median
92.2%
8.2x
7.6x
13.5x
11.7x
15.0%
0.99x
Oxford
C O M P ARA B L E
T RAD E D
7.7x
Mean
Mid c apitalization
$53.62
88.1%
$4,561
$4,965
7.8x
7.3x
12.0x
10.9x
12.0%
1.00x
38.25
89.5%
3,752
4,372
7.4x
6.5x
12.5x
10.5x
13.0%
0.96x
Coventry
42.63
90.2%
3,979
4,149
8.9x
7.7x
13.1x
11.4x
15.0%
0.87x
Humana
18.10
75.4%
2,973
3,616
6.8x
6.1x
11.1x
10.1x
13.5%
0.82x
Health Net
26.05
72.8%
3,028
3,427
5.4x
4.8x
9.3x
8.1x
13.5%
0.69x
WellChoice
36.75
94.5%
3,079
3,128
7.3x
6.4x
13.1x
11.5x
15.0%
0.88x
Mean
85.1%
7.3x
6.5x
11.9x
10.4x
13.7%
0.87x
Median
88.8%
7.3x
6.5x
12.3x
10.7x
13.5%
0.87x
8.0x
7.7x
13.3x
11.8x
15.0%
0.89x
Small c apitalization
Sierra
American Medical Security
1
2
4
5
$35.98
25.74
92.7%
$1,322
$1,324
92.3%
397
427
7.1x
6.5x
12.0x
11.0x
15.0%
0.80x
Median
92.5%
7.5x
7.1x
12.6x
11.4x
15.0%
0.84x
Blended mean
90.3%
7.6x
6.9x
12.7x
11.2x
14.2%
0.90x
Blended median
92.4%
7.6x
7.1x
13.0x
11.4x
15.0%
0.88x
11.2x
9.9x
17.4x
15.0x
17.0%
1.02x
UnitedHealth Group
3
P U BLIC LY
1.04x
$65.41
95.5%
$43,979
$46,379
As of 4/16/04
Based on diluted shares outstanding using the treasury stock method
Calculated using equity value plus debt
Based on equity analyst research reports; includes investment income
Based on I/B/E/S
MICHIGAN BUSINESS SCHOOL
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Concluding remarks on comparable companies
„ Trading comps are an important valuation metric for a number of reasons
„ Benchmark of how the equity market is valuing the company stand alone and relative to its peers
„ Every CEO knows his own multiples and those of his peers
P U BLIC LY
T RAD E D
C O M P ARA B L E
C OM P ANY
ANALY SI S
„ Key steps for comps
„ Choose the right comparable companies and valuation metrics to focus on
„ Spread the comps correctly
„ Use the comps to determine a valuation range
„ Getting the comps correct
„ Ensure you have correctly captured the equity and net debt components
— Diluted shares (includes options using the treasury method and convertibles if in the money)
— Net debt includes preferreds, out of the money converts, capital leases, etc.
„ Ensure your income statement projections are uniform across your comps
— Adjust for extraordinary items and one time charges
— Calendarize so that projections reflect the same time periods
— Check analyst projections to make sure they are treating all expense components the same
across the comps (e.g., amortization of intangibles)
„ Determining a value range
„ Thoughtfully consider the multiple range—using the mean/median is not thoughtful
„ Calculate the value correctly (Firm value versus Equity value issue)
MICHIGAN BUSINESS SCHOOL
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B A N KI N G
I N V E S T M E N T
I N
U S E D
M E TH OD S
Valuation overview
1
Discounted cash flow
8
Publicly traded comparable company analysis
17
Comparable transactions analysis
23
LBO analysis
28
Additional valuation materials
36
I N T R O D U C TI O N
T O
VAL U ATI O N
Agenda
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Overview of comparable transactions analysis
„ Comparable transactions analysis values a company by reference to other private market sales of
similar businesses.
„ The trick is to find the right comparable transactions and to ferret out the information required to
do the math. As in comparable companies analysis, look for acquisitions of companies in similar
industry spaces, with comparable operational and financial characteristics
„ Recent transactions are a more accurate reflection of the values buyers are currently willing to
pay than acquisitions completed in the further in the past because market fundamentals are
subject to dramatic change over the periods of time
„ Establish relative values of various component businesses i.e., break-up analysis)
C O MP AR ABL E
T RA N SAC T I O N S
ANALY S I S
„ Multiples should be based on the latest public financial information available to the acquiror at the
time of the acquisition
„ Develop understanding of M&A activity in industry
„ Relative activity
„ Who is buying?
„ What are they buying (market share, technology, etc.)?
„ How much are buyers paying?
„ Deal technicals (e.g., termination fees, lock-up options, etc.)
MICHIGAN BUSINESS SCHOOL
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Overview of comparable transactions analysis (cont’d)
„ Comparable transaction analysis contains information about selected
acquisition transactions in the same industry as the company being
evaluated or in similar situations, e.g. LBO, hostile, reverse acquisitions
„ Purpose is similar to that of public comparables analysis except that by
C O MP AR ABL E
T RA N SAC T I O N S
ANALY S I S
looking at prior acquisitions, insight can be gained as to the premium paid
to gain control (i.e., control premium) of the target company, valuation
multiples, social issues, and technical transaction elements
„ In addition, “private market” values sometimes differ from public market
values
„ Measure private market value, including control value, strategic
benefits and synergies
MICHIGAN BUSINESS SCHOOL
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Selected precedent managed care transactions
Acquiror/
target
4/26/04
UnitedHealth
/Oxford
$4,999
Anthem/
WellPoint
17,529
ANALY S I S
10/27/03
T RA N SAC T I O N S
7.8%4
Date
announced
10/27/03
C O MP AR ABL E
Transaction
value
($mm)
10-day
premium
paid
(offer/
average)
6/3/03
4/29/02
11/21/01
10/18/01
UnitedHealth
/MAMSI
WellPoint/
Cobalt
2,695
930
Anthem/
Trigon
4,326
WellPoint/
CareFirst
1,300
WellPoint/
RightCHOICE
1,358
LTM
1-year forward¹
Transaction value/
LTM EBITDA
13.3x
8.7x
20.4
10.6x
13.8
12.1x
24.7
19.8x
NA
11.3x
45.1
11.6x
LTM EBIT /
adjusted
members2
$3,714
13.1x
10.6x
16.0
Equity value/
net income
Transaction
value/
adjusted
members2
19.0x
Long term
growth rate3
$417
$1,792
11.5%
$152
15.0%
15.9x
17.2x
$2,254
15.2x
16.5x
$1,813
13.7x
33.7x
$202
16.0%
$125
$2,828
20.0%
$125
15.0%
20.8x
26.1x
$1,506
$51
NA
23.3x
22.6x
$698
$106
NA
20.2x
LTM/1-year forward
Mean5
11.9%
9.7x
15.3x/14.2x
$2,984
$310
13.8%
Offer6
43.8%
9.8x
16.1x/13.8x
$1,724
$154
10.0%
Forward estimates based on equity research at the time of the transaction
Adjusted members calculated using 100% of risk members and 20% of non-risk members, as of most recent filing prior to announcement
3 I/B/E/S long term growth rate prior to announcement
4 Premium paid to the 10-day average stock price prior to the news of the rumored Wellchoice/Oxford transaction was 18.9%
5 Based on highlighted transactions
6 LTM EBITDA based on Company financials as of 6/30/04
1
2
MICHIGAN BUSINESS SCHOOL
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Calculating the LTM (latest twelve months)
Most recent
period
+
Fiscal year
–
Period ending
one year prior to
most recent
C O MP AR ABL E
T RA N SAC T I O N S
ANALY S I S
QT-1
QT
Q1
Q2
Q3
Q4
Q1
Q2
Annual
Example:
Example: Terra
Terra Industries
Industries LTM
LTM =
= 6/30/04
6/30/04
Annual
(12/03)
Total revenue
$2,292.2
+
Six months
10-Q (6/04)
$1,480.4
–
Six months
10-Q (6/03)
$1,447.0
=
LTM
(6/04)
$2,325.6
Note: If the third quarter Form 10-Q is being used, revenues for nine months should be used when calculating LTM results, not three months
MICHIGAN BUSINESS SCHOOL
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B A N KI N G
I N V E S T M E N T
I N
U S E D
M E TH OD S
Valuation overview
1
Discounted cash flow
8
Publicly traded comparable company analysis
17
Comparable transactions analysis
23
LBO analysis
28
Additional valuation materials
36
I N T R O D U C TI O N
T O
VAL U ATI O N
Agenda
MICHIGAN BUSINESS SCHOOL
28
LBO analysis provides another perspective on M&A transactions
„ A leveraged buyout is an acquisition transaction in which much of the purchase price is funded with
debt; usually done by financial sponsors
„ This type of capital structure provides the ability to “leverage” returns on a relatively small equity
investment, as cash flows generated during the investment period are used to pay down debt
„ Financial sponsors profit by exiting three to five years after the transaction
„ Sell the target to another buyer
„ Take the target public
„ Recapitalize the target
„ Assumptions regarding the investment transaction, the exit and the period between the acquisition
and the exit are critical to determining an appropriate capital structure and potential returns to
equity
„ M&A clients include both financial sponsors and strategic players
„ Financial sponsors typically pursue M&A transactions with different perspectives and objectives
(e.g., a shorter investment horizon)
„ Strategic buyers sometimes behave like financial investors (i.e., acquiring with the expectation
of selling in several years)
„ Financial sponsors generally analyze a transaction using LBO methodologies in the first instance
(and DCF, comparable companies/transactions analyses thereafter)
L B O
AN A L Y S I S
„ LBO valuation may be useful from a competitive point of view, as strategic players vie with
financial sponsors for the same assets
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The process of LBO analysis
Projections
Projections
Terminal
Terminal value
value
Pro
Pro forma
forma
capitalization
capitalization
L B O
AN A L Y S I S
IRR
IRR
Adjustments
Adjustments
Develop an integrated model of the business that projects EBITDA and
cash available for debt repayment over the investment horizon
(typically three to five years)
Estimate the multiple at which the sponsor can be expected to exit the
investment at the end of the investment period
Determine a transaction structure and a pro forma capital structure that
result in realistic financial coverage
Calculate returns (IRR) to the equity sponsor
Tweak the transaction/capital structure as needed to achieve harmony
(if possible) between IRR, leverage and valuation
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The initial steps in an LBO analysis are identical to those
in a DCF analysis
„ The same financial projections developed for a DCF analysis can be used to build a
basic LBO model
„ Free cash flows are expected to be used to service debt, with positive flows to
equity typically coming at exit
„ Amount and predictability of free cash flows dictate whether a company is an
attractive or viable LBO target
„ Cash flows are not discounted
„ Terminal value drives valuation, and is calculated on the basis of multiples
„ Multiple of exit-year EBITDA is generally used to bound the valuation of the
L B O
AN A L Y S I S
enterprise in any possible exit scenario
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Pro forma capitalization and transaction structure are set
forth in “sources and uses”
„ Sources should show the entire pro forma capitalization of the company, including
„ New debt
„ New equity
„ Rolled-over debt and equity
„ Uses of funds should address all parts of the target’s existing capital structure, as
well as transaction-related leakage
„ Refinancing existing debt
„ Transaction expenses
„ Equity purchase price
„ Debt and equity to be rolled-over
„ Sources must equal uses
„ Any debt or equity that is rolled-over shows up under both sources and uses
„ Always depict every part of the capitalization, whether it changes pro forma or
L B O
AN A L Y S I S
not
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LBO models are driven by the characteristics of the
sources of capital for the transaction
Components
Components of
of capital
capital
Senior
Seniordebt
debt
Sample inputs
„ Revolving
„ Term
„ 30%–50% of total
capital
„ LIBOR + 200-400
„ 5–8
Sample inputs
„ Discount notes
„ 25%–35% of total
capital
„ T + 350–650
„ 7–10 years
Mezzanine
Mezzaninesecurities
securities
„ Sub. debt (conv.)
„ Preferred stock
„ PIK
Typically supplied by an investment or commercial bank
Usually secured/most restrictive covenants
Amortizing 5- to 8-year tenor
First in line at liquidation
Lowest coupon
years
Subordinated
Subordinateddebt
debt
„ Senior/sub notes
„
„
„
„
„
Sample inputs
„ 0%–35% total capital
„ High teens/low 20s
„ 7–10+ years
„ Typically supplied by an investment or commercial bank or a mezzanine
„
„
„
„
fund
Riskier debt/typically unsecured
Primarily bullet structures
Typical tenor is 10-year
High coupon
„ Typically supplied by an investment or commercial bank or a mezzanine
fund (often sponsor-affiliated)
„ Multiple forms: Convertible debt, exchangeable debt, convertible preferred
stock, PIK securities and warrants
„ Expected IRR in the 15—20% range
L B O
AN A L Y S I S
„ Warrants
Common
Commonequity
equity
Sample inputs
„ 20%–40% of total capital
„ 20%-30% IRR
„
„
„
„
Typically supplied by a financial sponsor
Highest risk/cost of capital
Sometimes “stapled” to high-yield paper to attract broader investor group
Minimum annual returns >20%
„ 5–7 year horizon
MICHIGAN BUSINESS SCHOOL
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Sample LBO valuation analysis
$
$ millions
millions
Exit multiple
6.5x
2008 projected EBITDA
Implied 2008 firm value
Plus: 2008 cash
7.0x
7.5x
$556
$556
$556
3,613
$3,891
$4,169
36
$36
$36
Less: 2008 total debt
(1,154)
(1,154)
(1,154)
Implied 2008 total equity value
$2,496
$2,774
$3,052
Implied 2008 sponsor equity value1
$2,371
$2,635
$2,899
25%
30%
35%
25%
30%
35%
25%
30%
35%
$869
$728
$614
$965
$809
$683
$1,062
$890
$751
(@ 5.0x LTM EBITDA)
$1,550
$1,550
$1,550
$1,550
$1,550
$1,550
$1,550
$1,550
$1,550
Implied firm value2
$2,419
$2,278
$2,164
$2,515
$2,359
$2,233
$2,612
$2,440
$2,301
8.0x
7.5x
7.1x
8.3x
7.8x
7.4x
8.7x
8.1x
7.6x
Required return
Implied max. equity contribution
Plus: Maximum transaction debt
Implied LTM EBITDA multiple
Value sensitivity analysis
Maximum leverage3
25% returns
30% returns
35% returns
Exit multiple
Exit multiple
Exit multiple
6.5x
7.0x
7.5x
6.5x
7.0x
7.5x
6.5x
7.0x
7.5x
4.50x
$2,336
$2,433
$2,530
$2,185
$2,266
$2,347
$2,062
$2,131
$2,199
4.75x
2,378
2,475
2,571
2,232
2,313
2,394
2,114
2,182
2,250
5.00x
2,419
2,515
2,612
2,278
2,359
2,440
2,164
2,233
2,301
Assumes management promote of 5%
Valuation as at 12/31/01
3 Leverage based on bank/bond case
1
L B O
AN A L Y S I S
2
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34
IRR drivers
$
$ millions
millions
No operating
improvement/
No arbitrage
Operating
improvement/
No arbitrage
Operating
improvement and
arbitrage
EBITDA exit multiple
7.0x
7.0x
8.0x
EBITDA at exit
$100
$128
$128
Firm value at exit
700
896
1,024
Debt (after paydown of $75 per yr.)
125
125
125
Equity value at exit
575
771
899
23.5%
31.0%
35.1%
At purchase
EBITDA purchase multiple
7.0x
EBITDA on purchase date
$100
Firm value at purchase date
$700
Debt at purchase (5x EBITDA)
500
Equity value invested
200
IRR (5-year exit)
L B O
AN A L Y S I S
Three important factors drive IRRs:
1) De-levering
2) Operating improvement, and
3) Multiple expansion (arbitrage)
MICHIGAN BUSINESS SCHOOL
35
B A N KI N G
I N V E S T M E N T
I N
U S E D
M E TH OD S
Valuation overview
1
Discounted cash flow
8
Publicly traded comparable company analysis
17
Comparable transactions analysis
23
LBO analysis
28
Additional valuation materials
36
I N T R O D U C TI O N
T O
VAL U ATI O N
Agenda
MICHIGAN BUSINESS SCHOOL
36
Several other types of analysis are common in
M&A transactions
„ Pro forma analysis—what is the impact on the company of this merger/acquisition?
„ Earnings impact (accretion/dilution)
„ Growth impact
„ Multiple impact
„ Premiums paid analysis—how does the premium to be paid compare with prior
transactions?
„ Analysis at various prices (AVP)—At different prices what are the implied premiums
ADDITI O N AL
VALUA TI O N
MAT E RIA LS
and multiples?
„ Contribution analysis (stock for stock deals)
„ Shareholders of each company receive shares in the merged entity—contribution
analysis looks at what each company gives versus what it gets
„ Shares traded analysis
„ Attempts to establish cost basis in shares
„ Interloper analysis
„ On the buyside, tactically it is important to determine which other companies
may be interested in the target
„ Once other potential bidders have been identified it is important to analyze their
capacity to pay and the pro forma impact on their earnings
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37
Purpose of pro forma analysis
„ Evaluate the impact of a merger or acquisition on the income statement and
balance sheet of a potential buyer
„ Pro forma analysis is used to determine
„ Pricing capacity of Acquirer to pay for Target based on certain key measures
„ Optimal form of consideration (cash, stock, other securities, combination)
„ Key measures
„ Dilution in earnings per share
„ Pretax synergies required to break even
„ Interest coverage
„ Post-transaction ownership
ADDITI O N AL
VALUA TI O N
MAT E RIA LS
„ Leverage/capitalization
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Accretion/(dilution)
Proforma
Proforma calculation
calculation
Acquiror standalone EPS
Acquiror NI
Target NI
ADDITI O N AL
VALUA TI O N
MAT E RIA LS
Combined NI
Transaction adjustments:
Amortization of identifiable intangibles
Incremental interest expense from transaction debt
Foregone interest income on cash
Amortization of transaction fees
Tax rate differential
Total transaction adjustments
Pro forma net income
Total shares outstanding
Pro forma EPS
xxx
xx
xx
XX
A
(xx)
(xx)
(xx)
(xx)
(xx)
(XX) B
A—B
xxx
xxx
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EPS accretion/dilution summary
$
$ millions,
millions, except
except per
per share
share data
data
EPS1
Current price
P/E
9/27/04
% 52-wk high
2004E
2005E
2004E
Target
$22.67
99.3%
$2.18
$2.43
10.4x
9.3x
Acquiror
$57.99
97.9%
$5.87
$6.70
9.9x
8.7x
2005E
$
$ millions,
millions, except
except per
per share
share data
data
ADDITI O N AL
VALUA TI O N
MAT E RIA LS
Premium to Target
Implied offer price per share
Implied exchange ratio2
Implied transaction value3
Implied Acquiror ownership
Target 2004E transaction P/E
Target 2005E transaction P/E
0%
$22.67
0.39x
$373
89.7%
10.4x
9.3x
20%
$27.20
0.47x
$446
87.9%
12.5x
11.2x
25%
$28.34
0.49x
$465
87.5%
13.0x
11.7x
30%
$29.47
0.51x
$483
87.1%
13.5x
12.1x
100% stock
2004E $—EPS
2004E %—EPS
Add’l pre-tax synergies to break even
($0.08)
(1.3%)
$5.8
($0.24)
(4.0%)
$18.4
($0.27)
(4.7%)
$21.5
($0.31)
(5.3%)
$24.6
2005E $—EPS
2005E %—EPS
Add’l pre-tax synergies to break even
($0.13)
(1.9%)
$9.7
($0.30)
(4.5%)
$23.8
($0.35)
(5.2%)
$27.4
($0.39)
(5.8%)
$30.9
Pro
Pro
Pro
Pro
$735.5
2,586.5
1.3x
28.4%
$735.6
2,660.0
1.4x
27.7%
$735.7
2,678.4
1.4x
27.5%
$735.7
2,696.8
1.4x
27.3%
75% stock/ 25% cash
2004E $—EPS
2004E %—EPS
Add’l pre-tax synergies to break even
$0.03
0.6%
NM
($0.11)
(1.9%)
$8.3
($0.15)
(2.5%)
$11.0
($0.18)
(3.1%)
$13.7
2005E $—EPS
2005E %—EPS
Add’l pre-tax synergies to break even
$0.03
0.4%
NM
($0.13)
(2.0%)
$9.9
($0.17)
(2.5%)
$12.9
($0.21)
(3.1%)
$15.9
$820.5
2,586.6
1.5x
31.7%
$839.0
2,660.1
1.5x
31.5%
$843.6
2,678.5
1.5x
31.5%
$848.2
2,696.9
1.6x
31.5%
Pro
Pro
Pro
Pro
forma
forma
forma
forma
forma
forma
forma
forma
debt
capitalization
debt/pro forma 2003E EBITDA
debt/pro forma total cap
debt
capitalization
debt/pro forma 2003E EBITDA
debt/pro forma total cap
Note: Target estimates based on equity research, expect EPS, which is based on I/B/E/S; Acquiror estimates based on JPMorgan equity research; Assumes transaction date of 12/31/03, tax rate of 37.0%, 10.0% of excess purchase price
allocated to non-goodwill intangibles and amortized over 10 years, transaction expenses of 0.20% and financing fees of 0.10% for illustrative purposes; Assumes interest expense of 6.5%, existing Target debt is refinanced at this rate
1 Based on I/B/E/S
2 Exchange ratio calculated as offer price per share over Acquiror price of $57.99
3 Includes assumption of $33.3 million in Target debt
MICHIGAN BUSINESS SCHOOL
40
Bootstrapping
„ Potentially increasing your P/E by acquiring a company with a lower P/E and “bootstrapping”
Acquiror’s P/E
P/E multiple
Stock price
EPS
Shares outstanding
Finance club (FC)
Consulting club (CC)
20x
10x
$20.00
$10.00
1.00
1.00
1
1
Earnings
Shares outstanding
EPS
Stock Price
2.00
1.5
$1.33
$26.66
Accretive, assuming multiple stays the same
ADDITI O N AL
VALUA TI O N
MAT E RIA LS
„ FC acquires CC for stock. It takes 1/2 of FC stock to acquire CC
MICHIGAN BUSINESS SCHOOL
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Premiums paid analysis for US targets
1
1 day
day prior
prior to
to announcement
announcement (median
(median %;
%; 2004YTD)
2004YTD)
1
1 month
month prior
prior to
to announcement
announcement (median
(median %;
%; 2004YTD)
2004YTD)
Median: 20%
24%
Median: 23%
30%
24%
22%
22%
$0.5-$1bn
$1-$5bn
$5-$10bn
$10bn+
32
4
5
25%
15%
10%
$0.5-$1bn
ADDITI O N AL
VALUA TI O N
MAT E RIA LS
# of transactions
27
$1-$5bn
$5-$10bn
$10bn+
32
4
5
# of transactions
27
1
1 day
day prior
prior to
to announcement:
announcement: $0.5bn+
$0.5bn+
1
1 month
month prior
prior to
to announcement:
announcement: $0.5bn+
$0.5bn+
1
Stock
Stock
Cash
40%
27% 26%
27%
32%
29%
20%
1999
2000
2001
18%
2002
25%
19%
2003
38%
31% 34%
28%
30%
20%
22%
13%
15%
2004YTD
1999
1
52%
44%
36%
27%
Cash
2000
2001
2002
2003
25%
2004YTD
Source: Thomson Financial
Note: Includes all transactions with US targets (friendly and hostile) from 1/1/99 to 7/31/04
1 Cash transaction if cash is greater than 40%
MICHIGAN BUSINESS SCHOOL
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Analysis at various prices
$
$ millions,
millions, except
except per
per share
share data
data
Current
Price per share
$23.39
Offer
$30.00
$32.75
$33.00
$34.00
$35.00
$36.00
28.3%
40.0%
41.1%
45.4%
49.6%
53.9%
Implied premium/(discount) to:
Current price (9/10/04)
$23.39
52-week high
$27.76
(15.7%)
8.1%
18.0%
18.9%
22.5%
26.1%
29.7%
One month prior average price
$22.60
3.5%
32.8%
44.9%
46.0%
50.5%
54.9%
59.3%
Three month prior average price
$24.61
(5.0%)
21.9%
33.1%
34.1%
38.1%
42.2%
46.3%
Six month prior average price
$25.20
(7.2%)
19.0%
30.0%
31.0%
34.9%
38.9%
42.9%
One year prior average price
$23.83
(1.9%)
25.9%
37.4%
38.5%
42.7%
46.8%
51.0%
MAT E RIA LS
Implied equity value1
$377
$483
$527
$531
$547
$564
$580
Add: Total debt2
30
30
30
30
30
30
30
Implied firm value
$407
$513
$558
$562
$578
$594
$610
Operating
Implied firm value multiples
VALUA TI O N
ADDITI O N AL
-
Metrics3
LTM revenue2
$740
0.55x
0.69x
0.75x
0.76x
0.78x
0.80x
0.82x
2004E revenue
$744
0.55x
0.69
0.75
0.75
0.78
0.80
0.82
2005E revenue
$799
0.51x
0.64
0.70
0.70
0.72
0.74
0.76
LTM EBITDA2
$57
7.2x
9.0x
9.8x
9.9x
10.2x
10.4x
10.7x
2004E EBITDA
$58
7.1x
8.9
9.7
9.7
10.0
10.3
10.6
2005E EBITDA
$62
6.6x
8.3
9.0
9.1
9.3
9.6
9.9
LTM EPS2
$2.04
11.5x
14.7x
16.1x
16.2x
16.7x
17.2x
17.6x
2004E EPS
$2.15
10.9x
14.0
15.2
15.4
15.8
16.3
16.8
2005E EPS
$2.37
9.9x
12.7
13.8
13.9
14.3
14.8
15.2
Implied P/E multiples
Based on 16.1mm fully diluted shares outstanding as of 9/5/04 provided by management
2 As of 6/30/04
3 Based on management estimates
1
MICHIGAN BUSINESS SCHOOL
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Contribution analysis
Contribution
ADDITI O N AL
VALUA TI O N
MAT E RIA LS
London
Total
($mm)
Umbrella
Revenue - 2004E
14.1%
85.9%
$40,940
Revenue - 2005E
13.7%
86.3%
$46,126
EBITDA - 2004E
14.0%
86.0%
$4,868
EBITDA - 2005E
13.7%
86.3%
$5,542
Net income - 2004E
14.1%
85.9%
$2,850
Net income - 2005E
13.8%
86.2%
$3,195
Current equity value
Transaction equity value
8.9%
91.1%
$48,695
10.1%
89.9%
$49,360
Note: Estimates for London and Umbrella based on projections prepared by Umbrella management; analysis excludes transaction adjustments
MICHIGAN BUSINESS SCHOOL
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Shares traded analysis
One-month
One-month
Three-month
Three-month
Avg. daily trading vol (’000s)
Total shares traded (’000s)
Peak daily volume (’000s)
VWAP
High price
Low price
53
1,167
180
$22.51
$23.38
$22.07
Avg. daily trading vol (’000s)
Total shares traded (’000s)
Peak daily volume (’000s)
VWAP
High price
Low price
45%
53
3,320
180
$24.60
$27.25
$22.07
44%
29%
14%
6%
$22.00—22.25
ADDITI O N AL
VALUA TI O N
MAT E RIA LS
Cum:
6%
$22.25—22.50 $22.50—22.75 $22.75—23.00
29%
35%
80%
94%
25%
$25.00—26.50
75%
$26.50—28.00
100%
7%
$23.25—23.50
100%
Six-month
Six-month
$22.00—23.50
Cum:
44%
$23.50—25.00
51%
1
1 year
year
Avg. daily trading vol (’000s)
Total shares traded (’000s)
Peak daily volume (’000s)
VWAP
High price
Low price
21%
24%
24%
27%
56
7,132
266
$25.17
$27.76
$22.07
Avg. daily trading vol (’000s)
Total shares traded (’000s)
Peak daily volume (’000s)
VWAP
High price
Low price
61
15,420
266
$23.57
$27.76
$19.75
42%
28%
25%
8%
$22.00—23.50
Cum:
21%
$23.50—25.00
45%
$25.00—26.50
72%
$26.50—28.00
100%
Cum:
$19—21
8%
$21—23
50%
$23—25
75%
18%
$25—27
93%
7%
$27—29
100%
Note: As of 9/10/04
Source: Tradeline
MICHIGAN BUSINESS SCHOOL
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Interloper analysis
Potential acquirors
2003 cash EPS
Thermo-Electron
Waters
$2.53
$1.19
$1.60
(0.07)
0.01
(0.11)
(0.02)
(0.08)
(5.0)%
1.3%
(4.1)%
(1.6)%
(4.8)%
15.0
NA
9.5
6.2
20.4
19%
NA
12%
8%
26%
$1.66
$1.35
$3.26
$1.41
$2.00
Accretion/dilution - $
0.04
0.08
0.13
0.06
(0.01)
Accretion/dilution - %
2.4%
6.0%
4.3%
4.2%
(0.4)%
NA
NA
NA
NA
2.0
NA
NA
NA
NA
2%
2004 cash EPS
Incremental pretax synergies to break even
% of target S,G&A
MAT E RIA LS
Mettler-Toledo
$1.07
Accretion/dilution - %
% of target S,G&A
Ownership
PBSC
21%
11%
24%
13%
16%
Acquiror
79%
89%
76%
87%
84%
2003 Break even price
$6.45
$9.41
$7.06
$7.48
$5.94
2004 Break even price
$9.44
$12.96
$9.89
$11.08
$8.24
1
VALUA TI O N
Applied BioSystems
$1.36
Accretion/dilution - $
Incremental pretax synergies to break even
ADDITI O N AL
Apogent
2
Based on Pedro offer of 0.311 shares per Pablo share, implying a price per share of $8.46 based on Pedro closing price of $27.19 on 7/12/03
Assumes synergies of $30 million with 50% realized in 2003
MICHIGAN BUSINESS SCHOOL
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Valuation references
„ Valuation—Measuring and Managing the Value of Companies,
Copeland, Koller and Murrin
„ Introduction to Business Analysis and Valuation,
Palepu, Bernard, & Healey
„ Mergers & Acquisitions,
Marren
Stewart
ADDITI O N AL
VALUA TI O N
MAT E RIA LS
„ The Quest for Value,
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