16TH M&A VALUATION TECHNIQUES FOR CFOs
OCTOBER 8 AND 9, 2013 — TORONTO
“VALUING ACQUISITION TARGETS
ON A STAND-ALONE BASIS”
Richard M. Wise,
FCPA, FCA, FCBV, FASA, FRICS, MCBA, CVA
Partner, Valuation & Litigation Support Group
MNP LLP
Montréal, Québec
• Fair market value
• Going-concern
• Liquidation
Business
Valuation
Valuation of
Business Interests
& Intangibles
Litigation
Support
• M&A
• Taxation
• Reorganizations
• Estate planning
• Securities regs
• Transfer pricing
• Economic damages
• Shareholder dissent &
•
•
•
•
•
•
oppression
IP Infringement
Divorce
Insurance claims
Personal injury
Wrongful dismissal
Expert witness
• Fair Value
• Value to Owner
GAAP
• Fair value measurement
• IFRS
Richard1 M. Wise, FCPA, FCA, FCBV, FASA, FRICS, MCBA, CVA
-1-
1
CLIENTS HAVE INCLUDED
 Abitibi-Consolidated Inc.
 Chiron
 Aeroplan
 Cossette Communication Group
 Air Canada
 CP Air
 Alliance Film Corporation
 CSX
 Amrop International
 Domtar
 Bank of Montreal
 Dufry International
 Bank of Nova Scotia
 Emersons
 BASF
 Fraser Companies
 Bell Canada
 Gainers Inc.
 Benjamin Moore Paints
 General Instrument
 Blasland, Bouck & Lee
 George Weston Limited
 Boralex Inc.
 Gildan Activewear
 BP America
 Global Communications
 Canadian Pacific Ltd.
 Guarantee Company of North America
Richard M. Wise, FCPA, FCA, FCBV, FASA, FRICS, MCBA, CVA
-2-
CLIENTS HAVE INCLUDED (CONT’D)

Honeywell

Quebecor

Hunter Douglas

Radio Shack

Ivaco Inc.

Reitmans

Keeprite Inc.

Southam Publishing

Kruger Inc.

Telefilm Canada

Lactantia


Lamborghini
Télémedia Inc.

Lloyds of London

Toronto-Dominion Bank

Ultramar

Value Creation Inc.

Viking River Cruises Ltd.
West Edmonton Mall

Loblaw Companies

Maple Leaf Gardens Limited

Merck

Michelin Tire


Montreal Trust

Westfair Foods

National Sea Products Inc.

Xerox Financial Corp.
Richard M. Wise, FCPA, FCA, FCBV, FASA, FRICS, MCBA, CVA
-3-
2
AUTHORITATIVE BOOKS AND
CHAPTERS
 Co-Authored
 Guide to Canadian
Business Valuations
(Carswell)
Richard M. Wise, FCPA, FCA, FCBV, FASA, FRICS, MCBA, CVA
-4-
COMPOSITION OF A BUSINESS ENTERPRISE
Working Capital
Other Tangible Assets
Intellectual Property
Other Intangible Assets
Richard M. Wise, FCPA, FCA, FCBV, FASA, FRICS, MCBA, CVA
-5-
3
THE BUSINESS ENTERPRISE EQUATION
VALUE OF NET
MONETARY
ASSETS
VALUE
OF
BUSINESS
ENTERPRISE
VALUE
OF
EQUITY
+
=
VALUE OF
TANGIBLE
ASSETS
+
VALUE OF
INTANGIBLE
ASSETS
Value of
Underlying Assets
+
=
VALUE
OF
LONG-TERM
DEBT
Value of
Invested Capital
Richard M. Wise, FCPA, FCA, FCBV, FASA, FRICS, MCBA, CVA
-6-
VALUATION APPROACHES
 Income-Based
 Market-Based
 Asset-Based
Richard M. Wise, FCPA, FCA, FCBV, FASA, FRICS, MCBA, CVA
-7-
4
INCOME APPROACH — METHODS
 Earnings Method (Capitalization of
Earnings)
 Cash Flow Method (Capitalization of
Cash Flow)
 Discounted Future Earnings Method
 Discounted Cash Flow Method
 Gross Revenues Method
Richard M. Wise, FCPA, FCA, FCBV, FASA, FRICS, MCBA, CVA
-8-
VALUATION/PRICING CONSIDERATIONS
INCOME-BASED APPROACH
 Valuation “formula” components
 Numerator (earnings, cash flow,
EBITDA)
 Denominator (cap rate,
discount rate,
i.e., rate of return)
Richard M. Wise, FCPA, FCA, FCBV, FASA, FRICS, MCBA, CVA
-9-
5
INCOME APPROACH
Earnings Method:
Representative Earnings or Cash Flow
Rate of Return
OR
DCF Method:
Projected Stream of Future Benefits x Discount Rate
Richard M. Wise, FCPA, FCA, FCBV, FASA, FRICS, MCBA, CVA
- 10 -
INCOME APPROACH — DCF ANALYSIS
SELLER’S PROJECTIONS

Assumptions go to heart of
projections

Often optimistic; can be unrealistic

Assumptions must be
scrutinized; sometimes challenged

Purchaser should perform
sensitivity analyses
Richard M. Wise, FCPA, FCA, FCBV, FASA, FRICS, MCBA, CVA
- 11 -
6
INCOME APPROACH — DCF ANALYSIS
SELLER’S PROJECTIONS
(CONT’D)
Are assumptions realistic and consistent with:

General economic environment and entity’s
economic circumstances?

Existing market information?

Entity’s plans, including management’s
expectations of outcome of specific objectives and
strategies?
Richard M. Wise, FCPA, FCA, FCBV, FASA, FRICS, MCBA, CVA
- 12 -
CAPITALIZATION RATE OR DISCOUNT RATE
INCLUDES FOLLOWING COMPONENTS
a.
Risk-free rate
b.
Equity risk premium
c.
Illiquidity
d.
Size premium
e.
Company-specific risk premium
Richard M. Wise, FCPA, FCA, FCBV, FASA, FRICS, MCBA, CVA
- 13 -
7
DEVELOPING RATE OF RETURN
(DISCOUNT RATE OR CAPITALIZATION RATE)
“BUILD-UP METHOD” — EXAMPLE
(Rates for illustrative purposes only)
(After-Tax)
17.9%
FACTOR
Industry- or BusinessSpecific Risk
BUILD-UP
Impact of “Size”
3.7
CompanySpecific
Risk
Factors
Illiquidity Factor
Equity Risk Premium
7.1
0.4
Market
Rate of
Return
Risk-Free Rate
3.6
3.1
RATE OF RETURN —
WEIGHTED AVERAGE COST OF CAPITAL

Determine appropriate capital structure

Consider comparable companies for benchmark
 Consider whether control or minority interest being
value

Calculate cost-of-equity component (to arrive at
equity rate of return)



Build-Up Method, or
Capital Asset Pricing Model
Calculate cost-of-debt component (to arrive at
interest rate)
Richard M. Wise, FCPA, FCA, FCBV, FASA, FRICS, MCBA, CVA
- 15 -
8
VALUATION APPROACHES

Market-Based

Guideline Public Company Method

Guideline Transactions Method

Past transactions in the subject
shares
Richard M. Wise, FCPA, FCA, FCBV, FASA, FRICS, MCBA, CVA
- 16 -
Market
Approach
Guideline
Public Company
Method
Guideline
Transactions
Method
Prior
Transactions
in Shares of
Subject Company
Richard M. Wise, FCPA, FCA, FCBV, FASA, FRICS, MCBA, CVA
- 17 -
9
GUIDELINE PUBLIC COMPANY METHOD
Method within Market Approach whereby
market multiples (Valuation Ratios) derived
from market prices of stocks of companies
engaged in same or similar lines of business,
and actively traded on a free and open
market.
International Glossary of Business Valuation Terms, 2001.
Richard M. Wise, FCPA, FCA, FCBV, FASA, FRICS, MCBA, CVA
- 18 -
MARKET APPROACH
VALUATION RATIOS
Comparisons normally made through use of
Valuation Ratios
“Valuation Ratio”: “fraction in which a value
or price serves as numerator and financial,
operating, or physical data serves as
denominator”
(International Glossary of Business Valuation Terms)
Richard M. Wise, FCPA, FCA, FCBV, FASA, FRICS, MCBA, CVA
- 19 -
10
MARKET APPROACH
(CONT’D)
In using Valuation Ratios, care is exercised in:
 Selection of underlying data
 Choice of time periods and/or averaging methods
in using such data
 Timing of price data (in relation to valuation date)
 How Valuation Ratios selected
 How Valuation Ratios applied to underlying data
Richard M. Wise, FCPA, FCA, FCBV, FASA, FRICS, MCBA, CVA
- 20 -
USE OF VALUATION RATIOS

Importance of Valuation Ratios can vary by industry


Book value multiples considered for companies when
assets are significant determinants of value
Revenue multiples often used for service businesses

Multiples relied on for pricing purposes in particular
industry typically clustered within fairly narrow
range

Wide dispersion of multiples often indicates
Valuation Ratio might not be meaningful for industry
Richard M. Wise, FCPA, FCA, FCBV, FASA, FRICS, MCBA, CVA
- 21 -
11
IN WHICH MARKET
WILL TRANSACTION OCCUR?
Principal
Market
Most Advantageous
Market
Greatest Volume
and Level of Activity
Price Maximization
Including
Highest & Best Use
Pool of
Market Participants
Other
Market Participants
Ordinary
Purchasers
Special
Purchasers
1, 2 or more
Richard M. Wise, FCPA, FCA, FCBV, FASA, FRICS, MCBA, CVA
- 22 -
EXAMPLES OF MARKETS
 Example 1:
Parking lot operation on ABC land
vs
Apartment building/condo development
on ABC land
 Example 2:
Summer camp on XYZ land
vs
Condos or resort hotel on XYZ land
Richard M. Wise, FCPA, FCA, FCBV, FASA, FRICS, MCBA, CVA
- 23 -
12
MARKETS, PRICES AND
INFORMATION AVAILABLE
Public Companies
Private Companies
 Organized market
 Not organized*
 Regulated market
 Not regulated
 Liquid market
 Illiquid*
 Trading prices/
patterns (active vs thin)
 No frequent share
transactions
* May be affected by Shareholders’ Buy/Sell Agreements.
Richard M. Wise, FCPA, FCA, FCBV, FASA, FRICS, MCBA, CVA
- 24 -
MARKETS, PRICES AND
INFORMATION AVAILABLE
(CONT’D)
Public Companies
 No reference price
 No quoted market/
liquid price
 Limited information/
disclosure
Private Companies
 Takeover bids
influenced by stock
market price
 Company's stock price
may influence offer/bid
 Required information
disclosure with
regulators
Richard M. Wise, FCPA, FCA, FCBV, FASA, FRICS, MCBA, CVA
- 25 -
13
MARKETS, PRICES AND
INFORMATION AVAILABLE
(CONT’D)
Public Companies
 Takeover information
not publicly available
 No published reports
 No competing bids
Private Companies
 Disclosure of
information on
takeover
 Investment analysts’
reports
 Competing bids may
surface due to
publicity
Richard M. Wise, FCPA, FCA, FCBV, FASA, FRICS, MCBA, CVA
- 26 -
MARKETS, PRICES AND
INFORMATION AVAILABLE
(CONT’D)
Public Companies
Private Companies
 Shareholders generally
 Shareholders not active;
active; have much
information re plans and
policy
 Investors consider
potential strategic
benefits
 In takeover, purchaser
has much information
regarding target
have little information re
business plans, strategy
 Stock market investors
do not formulate policy
 In takeover bid,
purchaser relies on
filings, analyses, etc.
(after, will do pre-closing
due-diligence)
Richard M. Wise, FCPA, FCA, FCBV, FASA, FRICS, MCBA, CVA
- 27 -
14
MARKET APPROACH
IF RELYING ON (“GUIDELINE”) TRANSACTIONAL
DATA, YOU MUST KNOW ABOUT

Seller’s motives
Buyer’s motives
 Special/strategic buyers vs financial/ordinary buyers


Redundant assets, if any, included in price
 Tax structuring
 Other “consideration” included in/excluded from
transaction “price”:

Consulting agreement with seller
Non-compete covenant with vendor
Earn-out provision


Richard M. Wise, FCPA, FCA, FCBV, FASA, FRICS, MCBA, CVA
- 28 -
VALUATION APPROACHES

Asset-Based

Going-concern

Liquidation

Forced

Orderly
Richard M. Wise, FCPA, FCA, FCBV, FASA, FRICS, MCBA, CVA
- 29 -
15
ASSET APPROACH

Adjusted Balance Sheet Method (Adjusted
Shareholders’ Equity Method)

Minority shareholder issues
e.g., Can shareholder access company’s
assets (prior to liquidation or
distribution by controlling
shareholder(s))?
Richard M. Wise, FCPA, FCA, FCBV, FASA, FRICS, MCBA, CVA
- 30 -
“FAIR MARKET VALUE”
RELATIVE LEVELS OF VALUE
Strategic Control Value
Enterprise
Level
Strategic-Control
Premium
Financial Control Value
Financial-Control
Premium
Minority Discount
Shareholder
Level
Marketable Minority Value
Discount for Lack of Marketability
Non–Marketable Minority Value
Richard M. Wise, FCPA, FCA, FCBV, FASA, FRICS, MCBA, CVA
- 31 -
16
TEN MOST VALUABLE GLOBAL BRANDS — 2012
($ U.S. BILLIONS — SOURCES: INTERBRAND, S&P CAPITAL IQ)
Rank
Brand
10
Toyota
Estimated
Value
Book Value of
Intangible Assets
(Balance Sheet)
Market
Capitalization
(January 10/13)
Book Value of
Shareholders’
Equity
(Balance Sheet)
30.3
-
153.0
144.6
9
32.9
3.3
189.4
104.7
8
39.4
15.8
108.2
49.3
7
McDonald’s
40.1
2.7
91.8
13.9
6
GE
43.7
57.5
222.0
128.0
TEN MOST VALUABLE GLOBAL BRANDS — 2012
($ U.S. Billions — SOURCES: INTERBRAND, S&P CAPITAL IQ)
Rank
Brand
5
Microsoft
4
Market
Capitalization
(January 10/13)
Book Value of
Shareholders’
Equity
(Balance Sheet)
Estimated
Value
Book Value of
Intangible Assets
(Balance Sheet)
57.9
17.9
222.7
68.8
69.7
18.2
242.5
68.0
3
IBM
75.5
31.8
217.3
21.7
2
Apple
76.6
5.4
485.6
118.2
1
Coca-Cola
77.8
27.8
166.1
33.6
17
VALUATION METHODOLOGY FOR
INTELLECTUAL PROPERTY

Income Approach: Present value of future
benefits

Market Approach: “Guideline”
transactions

Avoided Cost Approach: Relief-fromroyalty method
Richard M. Wise, FCPA, FCA, FCBV, FASA, FRICS, MCBA, CVA
- 34 -
QUESTIONS?
Richard M. Wise
FCPA, FCA, FCBV, FASA, FRICS, MCBA, CVA
Partner,
Valuation & Litigation Support Group
1155. René-Lévesque Boulevard West
19th Floor
Montréal, Québec H3B 2J8
Telephone: 514.861.9724
Fax:
514.861.9446
Toll-Free:
1.888.861.9724
E-mail: richard.wise@mnp.ca
mnp.ca
ACCOUNTING › CONSULTING
› TAX
Richard M. Wise, FCPA, FCA, FCBV, FASA, FRICS, MCBA, CVA
18