JP摩根并购企业估值培训材料-DCF估值和相对估值模型

DECEMBER 2004M&A: DCF AND MERGER ANALYSISSTRICTLYPRIVATEANDCONFIDENTIALM&A - DCF and M&A analysisFor any pitchbook or presentation including advisory, equity or debt security or loan product or combinations thereof. NOT for use in fairness/valuation or Commercial Bank presentations.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 clients 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 disclosed or used for any other purpose without the prior written consent of JPMorgan.The information in this presentation is based upon any management forecasts supplied to us and reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change. JPMorgans opinions and estimates constitute JPMorgans judgment and should be regarded as indicative, preliminary and for illustrative purposes only. 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. Unless expressly contemplated hereby, the information in this presentation does not take into account the effects of a possible transaction or transactions involving an actual or potential change of control, which may have significant valuation and other effects.Notwithstanding anything herein to the contrary, the Company and each of its employees, representatives or other agents may disclose to any and all persons, without limitation of any kind, the U.S. federal and state income tax treatment and the U.S. federal and state income tax structure of the transactions contemplated hereby and all materials of any kind (including opinions or other tax analyses) that are provided to the Company relating to such tax treatment and tax structure insofar as such treatment and/or structure relates to a U.S. federal or state income tax strategy provided to the Company by JPMorgan.JPMorgans 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 JPMorgan Chase & Co. and its subsidiaries worldwide. Securities, syndicated loan arranging, financial advisory and other investment banking activities are performed by a combination of J.P. Morgan Securities Inc., J.P. Morgan plc, J.P. Morgan Securities Ltd. and the appropriately licensed subsidiaries of JPMorgan Chase & Co. in Asia-Pacific, and lending, derivatives and other commercial banking activities are performed by JPMorgan Chase Bank, N.A. JPMorgan deal team members may be employees of any of the foregoing entities.This presentation does not constitute a commitment by any JPMorgan entity to underwrite, subscribe for or place any securities or to extend or arrange credit or to provide any other services.M&A:DCFANDMERGERANALYSISAgendaPageM&A - DCF and M&A analysisMerger consequencesRelative value analysisDiscounted cash flow analysisIntroduction 1165671M&A:DCFANDMERGERANALYSISM&A - DCF and M&A analysisValuation methodologiesPublicly tradedcomparablecompanies analysisComparable transactionsanalysisDiscountedcash flowanalysisLeveragedbuyout/recapanalysisOther “Public Market Valuation” Value based on market trading multiples of comparable companies Applied using historical and prospective multiples Does not include a control premium “Private Market Valuation” Value based on multiples paid for comparable companies in sale transactions Includes control premium “Intrinsic” value of business Present value of projected free cash flows Incorporates both short-term and long-term expected performance Risk in cash flows and capital structure captured in discount rate Value to a financial/LBO buyer Value based on debt repayment and return on equity investment Liquidation analysis Break-up analysis Historical trading performance Expected IPO valuation Discounted future share price EPS impact Dividend discount modelValuationmethodologies2INTRODUCTIONM&A - DCF and M&A analysisThe valuation processDetermining a final valuation recommendation is a process of triangulation using insight from each of the relevant valuation methodologies(3) Comparable Acquisition TransactionsUtilizes data from M&A transactions involving similar companies.(2) Publicly Traded Comparable CompaniesUtilizes market trading multiples from publicly traded companies to derive value. (4) LeveragedBuy OutUsed to determine range of potential value for a company based on maximum leverage capacity.(1) DiscountedCash FlowAnalyzes the present value of a companys free cash flow.3INTRODUCTIONM&A - DCF and M&A analysis$15.00$9.75$5.50$26.75$5.00$4.00$5.00$3.50$4.94$3.00$4.00$10.25$6.00$3.75$0.00$5.00$10.00$15.00$20.00Price per shareImplied offer = $8.46Public trading comparablesTransaction comparablesDCF analysis52-weekhigh/low19.0x to 25.0x2005E cashEPS of $0.1615.0x to 19.0x2005E EBITof $20.62.5x to 4.0xLTM revenueof $185.712% to 15% Discount RateEBIT exit mult.of 15.0x to 20.0x15.0x to 20.0x2006E cashEPS of $0.25Mgmt. Case Street Case12% to 15% Discount RateEBIT exit mult.of 15.0x to 20.0xThe valuation summary is the most important slide in a valuation presentationThe science is performing each valuation method correctly, the art is using each method to develop a valuation recommendation4INTRODUCTIONM&A - DCF and M&A analysisA primer: firm value vs. equity valueFirm value = Market value of all capital invested in a business(1)(often referred to as “enterprise value” or “firm value” or “asset value”) The value of the total enterprise: market value of equity + (total debt + Capitalized Leases - Cash and Cash equivalents) + Minority Interest + Preferred Equity Total debt includes all Long term debt, Current portion of Long term debt, short term debt and overdrafts Equity value = Market value of the shareholders equity (often referred to as “offer value”) The market value of a companys equity (shares outstanding x current stock price) Liabilities and Shareholders EquityAssetsEnterprisevalueNet debt, etc.Equity valueEnterpriseValue1The value of debt should be a market value. It may be appropriate to assume book value of debt approximates the market value as long as the companys credit profile has not changed significantly since the existing debt was issued.5INTRODUCTIONAgendaPageM&A - DCF and M&A analysisMerger consequencesRelative value analysisDiscounted cash flow analysisIntroduction 1665671M&A:DCFANDMERGERANALYSISM&A - DCF and M&A analysisDiscounted cash flow analysis as a valuation methodologyPublicly tradedcomparablecompanies analysisComparable transactionsanalysisDiscountedcash flowanalysisLeveragedbuyout/recapanalysisOther “Public Market Valuation” Value based on market trading multiples of comparable companies Applied using historical and prospective multiples Does not include a control premium “Private Market Valuation” Value based on multiples paid for comparable companies in sale transactions Includes control premium “Intrinsic” value of business Present value of projected free cash flows Incorporates both short-term and long-term expected performance Risk in cash flows and capital structure captured in discount rate Value to a financial/LBO buyer Value based on debt repayment and return on equity investment Liquidation analysis Break-up analysis Historical trading performance Expected IPO valuation Discounted future share price EPS impact Dividend discount modelValuationmethodologies7DISCOUNTEDCASHFLOWANALYSISM&A - DCF and M&A analysisOverview of DCF analysis Discounted cash flow analysis is based upon the theory that the value of a business is the sum of its expected future free cash flows, discounted at an appropriate rate DCF analysis is one of the most fundamental and commonly-used valuation techniques Widely accepted by bankers, corporations and academics Corporate clients often use DCF analysis internally One of several techniques used in M&A transactions； others include: Comparable companies analysis Comparable transaction analysis Leveraged buyout analysis Recapitalization analysis, liquidation analysis, etc. DCF analysis may be the only valuation method utilized, particularly if no comparable publicly-traded companies or precedent transactions are availableOverviewFree cash flowTerminal valueWACCOther topics8DISCOUNTEDCASHFLOWANALYSISM&A - DCF and M&A analysisOverview of DCF analysis DCF analysis is a forward-looking valuation approach, based on several key projections and assumptions Free cash flows What is the projected operating and financial performance of thebusiness? Terminal value What will be the value of the business at the end of the projection period? Discount rate What is the cost of capital (equity and debt) for the business? Depending on practical requirements and availability of data, DCF analysis can be simple or extremely elaborate There is no single “correct” method of performing DCF analysis, but certain rules of thumb always apply Do not simply plug numbers into equations You must apply judgment in determining each assumptionOverviewFree cash flowTerminal valueWACCOther topics9DISCOUNTEDCASHFLOWANALYSISM&A - DCF and M&A analysisThe process of DCF analysis Project the operating results and free cash flows of the business over the forecast period (typically 10 years, but can be 520 years depending on the profitability horizon) Estimate the exit multiple and/or growth rate in perpetuity of the business at the end of the forecast period Estimate the companys weighted-average cost of capital to determine the appropriate discount rate range Determine a range of values for the enterprise by discounting the projected free cash flows and terminal value to the present Adjust the resulting valuation for all assets and liabilities not accounted for in cash flow projectionsOverviewFree cash flowTerminal valueWACCOther topicsProjections/FCFProjections/Terminal valueTerminal valuDiscount rateDiscount ratePresent valuePrese t valAdjustmentsts10DISCOUNTEDCASHFLOWANALYSISM&A - DCF and M&A analysisDCF theory and its applicationOverviewFree cash flowTerminal valueWACCOther topicsDCF theory: The value of a productive asset is equal to the present value of all expected future cash flows that can be removed without affecting the assets value (including an estimated terminal value), discounted using an appropriate weighted-average cost of capital The cash-flow streams that are discounted include Unlevered or levered free cash flows over the projection period Terminal value at the end of the projection period These future free cash flows are discounted to the present at a discount rate commensurate with their risk If you are using unlevered free cash flows (our preferred approach), the appropriate discount rate is the weighted-average cost of capital for debt and equity capital invested in the enterprise in optimal/targeted proportions If you are using levered free cash flows, the appropriate discount rate is simply the cost of equity capital (often referred to as flows to shareholders or dividend discount model)11DISCOUNTEDCASHFLOWANALYSISM&A - DCF and M&A analysisThe two basic DCF approaches must not be confusedOverviewFree cash flowTerminal valueWACCOther topics DCF of unlevered cash flows (the focus of these materials) Projected income and cash-flow streams are free of the effects of debt, net of excess cash Present value obtained is the value of assets, assuming no debt or excess cash (“firm value” or “enterprise value”) Debt associated with the business is subtracted (and excess cash balances are added) to determine the present value of the equity (“equity value”) Cash flows are discounted at the weighted-average cost of capital DCF of levered cash flows (most common in valuation of financial institutions) Projected income and cash-flow streams are after interest expense and net of any interest income Present value obtained is the value of equity Cash flows are discounted at the cost of equity12DISCOUNTEDCASHFLOWANALYSISM&A - DCF and M&A analysisOther considerationsOverviewFree cash flowTerminal valueWACCOther topicsReliability of projections DCF results are generally more sensitive to cash flows (and terminal value) than to small changes in the discount rate. Care should be taken that assumptions driving cash flows are reasonable. Generally, we try to use estimates provided by analysts from reputable Wall Street firms if the client has not provided projectionsSensitivity analysis Remember that DCF valuations are based on assumptions and are therefore approximate. Use several scenarios to bound the targets value. Generally, the best variables to sensitize are sales, EBITDA margin, WACC and exit multiples or perpetuity growth rateHence, always present a range for the valuation!13DISCOUNTEDCASHFLOWANALYSISM&A - DCF and M&A analysisAlways remember Three key drivers Projections and incremental cash flows (unlevered free cash flow) Residual value at end of the projection period (terminal value) Weighted-average cost of capital (discount rate) Avoid pitfalls Validate and test projection assumptions Determine appropriate cash flow stream Thoughtfully consider terminal value methodology Use appropriate cost of capital approach Carefully consider all variables in calculation of the discount rate Sensitize appropriately (base projection variables, synergies, discount rates, terminal values, etc.) Footnote assumptions in detail Think about other value enhancers and detractorsOverviewFree cash flowTerminal valueWACCOther topicsAlways double-check with a calculator!14DISCOUNTEDCASHFLOWANALYSISM&A - DCF and M&A analysisThe first step in DCF analysis is projection of unlevered free cash flowsOverviewFree cash flowTerminal valueWACCOther topics 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 companys management Acquiring companys management Research analysts Bankers15DISCOUNTEDCASHFLOWANALYSISM&A - DCF and M&A analysisProjecting financial statementsOverviewFree cash flowTerminal valueWACCOther topics Ideally projections should go out as far into the future as can reasonably be estimated to reduce dependence on the terminal value Most important assumptions Sales growth: Use divisional, product-line or location-by-location build-up or simple growth assumptions Operating margins: Evaluate improvement over time, competitive factors, SG&A costs Synergies: Estimate dollars in Year 1 and evaluate margin impact over time Depreciation: Should conform with historic and projected capex Capital expenditures: Consider both maintenance and expansion capex Changes in net working capital: Should correspond to historical patterns and grow as the business grows Should show historical financial performance and sanity check projections against past results. Be prepared to articulate why projections may or may not be similar to past results (e.g. reasons behind margin improvements, increased sales growth, etc.) Analyze projections for consistency Sales increases usually require working capital increases CAPEX and depreciation should converge over time16DISCOUNTEDCASHFLOWANALYSISM&A - DCF and M&A analysisFree cash flow is the cash that remains for creditors and owners after taxes and reinvestmentOverviewFree cash flowTerminal valueWACCOther topics1Although 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 firms 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 Unlevered free cash flows can be forecast from a firms financial projections, even if those projections include the effects of debt To do this, simply start your calculation with EBIT (earnings before interest and taxes) EBIT (from the income statement)Plus: Non-tax-deductible goodwill amortizationLess: Taxes (at the marginal tax rate) Equals: Tax-effected EBITAPlus: Deferred taxes1Plus: Depreciation and any tax-deductible amortizationLess: Capital expendituresPlus/(less): Decrease/(increase) in net working investment Equals: Unlevered free cash flow 17DISCOUNTEDCASHFLOWANALYSISM&A - DCF and M&A analysisFiscal year ending December 31, 2001 2002 2003 2004P 2005P 2006P 2007P 2008P Net sales $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 Tax-effected EBITA $40.8 $44.9 $49.4 $54.3 $59.7 $65.7 $72.3 $79.5 Plus: Depreciation 16.0 17.6 19.3 21.3 23.4 Plus: Deferred taxes 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 $69.6 Key assumptions:Deal/valuation date = 12/31/04Marginal tax rate = 40%Example: Calculating unlevered free cash flowsOverviewFree cash flowTerminal valueWACCOther topicsStand-alone DCF analysis of Company X$ millionsStand-alone DCF analysis of Company X$ millions18DISCOUNTEDCASHFLOWANALYSISM&A - DCF and M&A analysisValuing the incremental effects of changes in projected operating results In performing DCF analysis, we often need to determine the incremental impact on value of certain events or adjustments to the projections, including: Synergies achievable through the M&A transaction Revenue Cost Capital expenditures Expansion plans Cost reductions Change in sales growth Margin improvements These incremental effects can be valued by discounting them independently (net of taxes) or by adjusting the DCF model and simply measuring the incremental impactOverviewFree cash flowTerminal valueWACCOther topics19DISCOUNTEDCASHFLOWANALYSISM&A - DCF and M&A analysis The standard present value calculation takes into account the cost of capital by attributing greater value to cash flows generated earlier in the projection period than later cash flows Since most businesses do not generate all of their free cash flows on the last day of the year, but rather more-or-less continuously during the year, DCF analyses often use the so-called “mid-year convention,” which takes into account the fact that free cash flows occur during the year This approach moves each cash flow from the end of the applicable period to the middle of the same period (i.e., cash flows are moved closer to the present)FCF1FCF2FCF3FCFnPresent value = (1+r)1+ (1+r)2+ (1+r)3+ . . . + (1+r)nFCF1FCF2FCF3FCFnPresent value = (1+r)0.5+ (1+r)1.5+ (1+r)2.5+ . . . + (1+r)n-0.5Once unlevered free cash flows are calculated, they must be discounted to the presentOverviewFree cash flowTerminal valueWACCOther topicsJPMorgan standardrgan stan rd20DISCOUNTEDCASHFLOWANALYSISM&A - DCF and M&A analysisIt is important to differentiate between the transaction date and the mid-year conventionYear01230.5 1.5 2.5 3.5First cash flow,mid-year 1Second cash flow,mid-year 2Third cash flow,mid-year 3Discounting =CF1(1+r)0.5+CF2(1+r)1.5+CF3(1+r)2.5+.Year01230.75 1.5 2.5 3.5First cash flow,mid-period 1Second cash flow,mid-year 2Third cash flow,mid-year 3Discounting =CF1(1+r)(0.75-0.5)+CF3(1+r)(2.5-0.5)+.0.5Period 1 CF to buyerCF2(1+r)(1.5-0.5)Transaction date: 01/01Transaction date: 01/01Transaction date: 06/30Transaction date: 06/3021DISCOUNTEDCASHFLOWANALYSISM&A - DCF and M&A analysis1st flow,mid-period 12nd cash flow,mid-year 23rd cash flow,mid-year 3Discounting =CF1(1+r)(0.875-0.75)+CF3(1+r)(2.5-0.75)+.Period 1 CF to buyerCF2(1+r)(1.5-0.75)Practice exerciseYear012 30.75 1.5 2.5 3.50.5Transaction date: 09/30Transaction date: 09/3022DISCOUNTEDCASHFLOWANALYSISM&A - DCF and M&A analysisStand-alone DCF analysis of Company X$ millionsStand-alone DCF analysis of Company X$ millionsExample: Discounting free cash flowsKey assumptions:Deal/valuation date = 12/31/04Marginal tax rate = 40%Discount rate = 10%$189.6 = $46.8(1+.10)0.5$53.8(1+.10)1.5$61.4(1+.10)2.5$69.6(1+.10)3.5+FormulaOverviewFree cash flowTerminal valueWACCOther topicsFiscal year ending December 31, 2001 2002 2003 2004P 2005P 2006P 2007P 2008P Net sales $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 Tax-effected EBITA $40.8 $44.9 $49.4 $54.3 $59.7 $65.7 $72.3 $79.5 Plus: Depreciation 16.0 17.6 19.3 21.3 23.4 Plus: Deferred taxes 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 Discounted value of unlevered FCF $0.0 $44.6 $46.7 $48.4 $49.9 Discounted value of FCF 2005P2008P 189.6 23DISCOUNTEDCASHFLOWANALYSISM&A - DCF and M&A analysisTerminal value can account for a significant portion of value in a DCF analysis Terminal value represents the businesss value at the end of the projection period； i.e., the portion of the companys total value attributable to cash flows expected after the projection period Terminal value is typically based on some measure of the performance of the business in the terminal year of the projection (which should depict the business operating in a steady-state/normalized manner) Terminal (or “Exit”) multiple method Assumes that the business is valued/sold at the end of the terminal year at a multiple of some financial metric (typically EBITDA) Growth in perpetuity method Assumes that the business is held in perpetuity and that free cash flows continue to grow at an assumed rate A terminal multiple will have an implied growth rate and vice versa. It is essential to review the implied multiple/growth rate for sanity check purposes Once calculated, the terminal value is discounted back to the appropriate date using the relevant rate Attempt to reduce dependence on the terminal value What is appropriate projection time frame? What percentage of total value comes from the terminal value?OverviewFree cash flowTerminal valueWACCOther topics24DISCOUNTEDCASHFLOWANALYSISM&A - DCF and M&A analysisTerminal multiple method This method assumes that the business will be valued at the end of the last year of the projected period The terminal value is generally determined as a multiple of EBIT, EBITDA or EBITDAR； this value is then discounted to the present, as were the interim free cash flows The terminal value should be an asset (firm) value； remember that not all multiples produce an asset value Note that in the exit multiple method terminal value is always assumed to be calculated at the end of the final projected year, irrespective of whether you are using the mid-year convention Should the terminal multiple be an LTM multiple or a forward multiple? If the terminal value is based on the last year of your projection then the multiple should be based on an LTM multiple (most common) There are circumstances where you will project an additional year of EBITDA and apply a forward multipleOverviewFree cash flowTerminal valueWACCOther topics25DISCOUNTEDCASHFLOWANALYSISM&A - DCF and M&A analysisMost common error: The final year is not normalized Consider adding a year to the projections which represents a normalized year A steady-state, long-term industry multiple should be used rather than a current multiple, which can be distorted by contemporaneous industry or economic factors Treat the terminal value cash flow as a separate, critical forecast Growth rate Consistent with long-term economic assumptions Reinvestment rate Net working investment consistent with projected growth Capital expenditures needed to fuel estimated growth Depreciation consistent with capital expenditures Margins Adjusted to reflect long-term estimated profitability Normalized tax rateOverviewFree cash flowTerminal valueWACCOther topics26DISCOUNTEDCASHFLOWANALYSISM&A - DCF and M&A analysisExample: Terminal multiple methodKey assumptions:Deal/valuation date = 12/31/04Marginal tax rate = 40%Discount rate = 10%Exit multiple of EBITDA = 7.0x$745.4 =($155.9 * 7.0x)(1+.10)4FormulaOverviewFree cash flowTerminal valueWACCOther topicsFiscal year ending December 31, 2001 2001 2003 2004P 2005P 2006P 2007P 2008P Net sales $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 Tax-effected EBITA $40.8 $44.9 $49.4 $54.3 $59.7 $65.7 $72.3 $79.5 Plus: Depreciation 16.0 17.6 19.3 21.3 23.4 Plus: Deferred taxes 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 Discounted value of unlevered FCF $0.0 $44.6 $46.7 $48.4 $49.9 Discounted value of FCF 2005P2008P 189.6 EBITDA in 2008P $155.9 Exit multiple 7.0x Firm value at exit 1,091.3 Discounted terminal value 745.4 Total present value to acquirer $934.9 Stand-alone DCF analysis of Company X$ millionsStand-alone DCF analysis of Company X$ millions27DISCOUNTEDCASHFLOWANALYSISM&A - DCF and M&A analysisExample: Terminal multiple method (contd)A + B = C Discounted Discounted terminal value Firm value FCF at 2008P EBITDA multiple of at 2008P EBITDA multiple of Discount rate 20052008 6.0x 7.0x 8.0x 6.0x 7.0x 8.0x 8% $196.8 $687.5 $802.1 $916.7 $884.4 $999.0 $1,113.6 9% 193.1 662.6 773.1 883.5 855.8 966.2 1,076.7 10% 189.6 638.9 745.4 851.8 828.4 934.9 1,041.4 11% 186.1 616.2 718.9 821.6 802.3 904.9 1,007.6 12% 182.7 594.5 693.5 792.6 777.2 876.3 975.3 D = E Equity value Equity value per share1 Net debt at 2008P EBITDA multiple of at 2008P EBITDA multiple of Discount rate 12/31/04 6.0x 7.0x 8.0x 6.0x 7.0x 8.0x 8% $100.0 $784.4 $899.0 $1,013.6 $19.17 $21.97 $24.77 9% 100.0 755.8 866.2 976.7 $18.47 $21.17 $23.87 10% 100.0 728.4 834.9 941.4 $17.80 $20.41 $23.01 11% 100.0 702.3 804.9 907.6 $17.16 $19.67 $22.18 12% 100.0 677.2 776.3 875.3 $16.55 $18.97 $21.39 OverviewFree cash flowTerminal valueWACCOther topicsStand-alone DCF analysis of Company X$ millions, except per share dataStand-alone DCF analysis of Company X$ millions, except per share dataNote: DCF value as of 12/31/01 based on mid-year convention1Based on 40.91 million diluted shares outstanding28DISCOUNTEDCASHFLOWANALYSISM&A - DCF and M&A analysisGrowth in perpetuity method This method assumes that the business will be owned in perpetuity and that the business will grow at approximately the long-term macroeconomic growth rate Few businesses can be expected to have cash flows that truly grow forever； be conservative when estimating growth rates in perpetuity Take free cash flow in the last year of the projection period, n, and grow it one more year to n+1；1this free cash flow is then capitalized at a rate equal to thediscount rate minus the growth rate in perpetuity To ensure that the terminal year is normalized, JPMorgan models are set up to project one year past the projection year and allow for normalizing adjustments； this FCFn+1 is then discounted by the perpetuity formulaOverviewFree cash flowTerminal valueWACCOther topicsJPM recommended methodJPM recommended methodAcademic formulaAcademic formulaTerminal value = (FCFn* (1 + g)/(WACC g)where FCFn= FCF in final projected period g = growth rate in perpetuityWACC = weighted-avg. cost of capitalPV of terminal value = terminal value/(1+WACC)n-0.5Terminal value = (FCFn+1)/(WACC g)where FCFn+1= FCF in year after projections g = growth rate in perpetuityWACC = weighted-avg. cost of capitalPV of terminal value = terminal value/(1+WACC)n-0.51This step is taken because the perpetuity growth formula is based on the principle that the terminal value of a business is the value of its next cash flow, divided by the difference between the discount rate and a perpetual growth rate29DISCOUNTEDCASHFLOWANALYSISM&A - DCF and M&A analysisGrowth in perpetuity method (contd) Note that when using the mid-year convention, terminal value is discounted as if cash flows occur in the middle of the final projection period Here the growth-in-perpetuity method differs from the exit-multiple method Typical adjustments to normalize free cash flow in Year n include revising the relationship between revenues, EBIT and capital spending, which in turn affects CAPEX and depreciation Working capital may also need to be adjusted Often CAPEX and depreciation are assumed to be equalOverviewFree cash flowTerminal valueWACCOther topics30DISCOUNTEDCASHFLOWANALYSISM&A - DCF and M&A analysisExample: Growth in perpetuity methodKey assumptions:Deal/valuation date = 12/31/04Marginal tax rate = 40%Discount rate = 10%Perpetuity growth rate = 3%Fiscal year ending December 31, 2001 2002 2003 2004P 2005P 2006P 2007P 2008P Net sales $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 Tax-effected EBITA $40.8 $44.9 $49.4 $54.3 $59.7 $65.7 $72.3 $79.5 Plus: Depreciation 16.0 17.6 19.3 21.3 23.4 Plus: Deferred taxes 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 Discounted value of unlevered FCF $0.0 $44.6 $46.7 $48.4 $49.9 Discounted value of FCF 2005P2008P 189.6 PV of Terminal Value 733.7 Total present value to acquirer $923.3 $733.6 =$69.6 * (1 + .03)(.10 - .03)*(1+.10)3.5FormulaOverviewFree cash flowTerminal valueWACCOther topicsStand-alone DCF analysis of Company X$ millionsStand-alone DCF analysis of Company X$ millions31DISCOUNTEDCASHFLOWANALYSISM&A - DCF and M&A analysisExample: Growth in perpetuity method (contd)A + B = C Discounted Discounted terminal value Firm value FCF at perpetuity growth rate of at perpetuity growth rate of Discount rate 20052008 2.5% 3.0% 3.5% 2.5% 3.0% 3.5% 8% $196.8 $991.0 $1,095.4 $1,223.0 $1,187.8 $1,292.2 $1,419.8 9% 193.1 811.9 883.8 968.9 1,005.0 1,077.0 1,162.0 10% 189.6 681.5 733.7 794.0 871.1 923.3 983.6 11% 186.1 582.6 622.0 666.7 768.7 808.1 852.8 12% 182.7 505.1 535.8 570.1 687.9 718.5 752.8 D = E Equity value Equity value per share1 Net debt at perpetuity growth rate of at perpetuity growth rate of Discount rate 12/31/04 2.5% 3.0% 3.5% 2.5% 3.0% 3.5% 8% $100.0 $1,087.8 $1,192.2 $1,319.8 $26.59 $29.14 $32.26 9% 100.0 905.0 977.0 1,062.0 $22.12 $23.88 $25.96 10% 100.0 771.1 823.3 883.6 $18.84 $20.12 $21.59 11% 100.0 668.7 708.1 752.8 $16.34 $17.31 $18.40 12% 100.0 587.9 618.5 652.8 $14.37 $15.12 $15.95 OverviewFree cash flowTerminal valueWACCOther topicsNote: DCF value as of 12/31/04 based on mid-year convention1Based on 40.91 million diluted shares outstandingStand-alone DCF analysis of Company X$ millions, except per share dataStand-alone DCF analysis of Company X$ millions, except per share data32DISCOUNTEDCASHFLOWANALYSISM&A - DCF and M&A analysisTerminal multiples and perpetuity growth rates are often considered side-by-side Assumptions regarding exit multiples are often checked for reasonableness by calculating the growth rates in perpetuity that they imply (and vice versa) To go from the exit-multiple approach to an implied perpetuity growth rate:g = (WACC*terminal value) / (1+WACC)0.5-FCFn / FCFn+ (terminal value / (1 + WACC)0.5) To go from the growth-in-perpetuity approach to an implied exit multiple:multiple = FCFn* (1 + g)(1 + WACC)0.5 / EBITDAn* (WACC - g) These formulas adjust for the different approaches to discounting terminal value when using the mid-year conventionOverviewFree cash flowTerminal valueWACCOther topics33DISCOUNTEDCASHFLOWANALYSISM&A - DCF and M&A analysisTerminal multiple method and implied growth ratesA + B = C Discounted Discounted terminal value Firm value Terminal value as percent Discount FCF at 2008P EBITDA multiple of at 2008P EBITDA multiple of of total firm value rate 20052008 6.0x 7.0x 8.0x 6.0x 7.0x 8.0x 6.0x 7.0x 8.0x 8% $196.8 $687.5 $802.1 $916.7 $884.4 $999.0 $1,113.6 78% 80% 82% 9% 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% D = E Equity value Equity value per share1 Implied perpetuity growth rate Discount Net debt at 2008P EBITDA multiple of at 2008P EBITDA multiple of at 2008P EBITDA multiple of rate 12/31/04 6.0x 7.0x 8.0x 6.0x 7.0x 8.0x 6.0x 7.0x 8.0x 8% $100.0 $784.4 $899.0 $1,013.6 $19.17 $21.97 $24.77 0.2% 1.3% 2.1% 9% 100.0 755.8 866.2 976.7 $18.47 $21.17 $23.87 1.1% 2.2% 3.0% 10% 100.0 728.4 834.9 941.4 $17.80 $20.41 $23.01 2.0% 3.1% 3.9% 11% 100.0 702.3 804.9 907.6 $17.16 $19.67 $22.18 2.9% 4.0% 4.8% 12% 100.0 677.2 776.3 875.3 $16.55 $18.97 $21.39 3.8% 4.9% 5.8% OverviewFree cash flowTerminal valueWACCOther topicsStandalone Company X DCF analysis$ millionsStandalone Company X DCF analysis$ millionsAt a 9% discount rate and an 8.0x exit multiple the price is $23.87 and the implied terminal growth rate is 3.0%Note: DCF value as of 12/31/04 based on mid-year convention1Based on 40.91 million diluted shares outstanding34DISCOUNTEDCASHFLOWANALYSISM&A - DCF and M&A analysisPerpetuity growth rate and implied terminal multiplesOverviewFree cash flowTerminal valueWACCOther topicsA + B = C Discounted Discounted terminal value Firm value Terminal value as percent Discount FCF at perpetuity growth rate of at perpetuity growth rate of of total firm value rate 20052008 2.5% 3.0% 3.5% 2.5% 3.0% 3.5% 2.5% 3.0% 3.5% 8% $196.8 $991.0 $1,095.4 $1,223.0 $1,187.8 $1,292.2 $1,419.8 83% 85% 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 = E Equity value Equity value per share1 Implied EBITDA exit multiple Discount Net debt at perpetuity growth rate of at perpetuity growth rate of at perpetuity growth rate of rate 12/31/04 2.5% 3.0% 3.5% 2.5% 3.0% 3.5% 2.5% 3.0% 3.5% 8% $100.0 $1,087.8 $1,192.2 $1,319.8 $26.59 $29.14 $32.26 8.6x 9.6x 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 $15.95 5.1 5.4 5.8 Standalone Company X DCF analysis$ millionsStandalone Company X DCF analysis$ millionsAt a 9% discount rate and a terminal growth rate of 3.0%, the price is $23.88 and the implied exit multiple is 8.0xNote: DCF value as of 12/31/04 based on mid-year convention 1Based on 40.91 million diluted shares outstanding 35DISCOUNTEDCASHFLOWANALYSISM&A - DCF and M&A analysisChoosing the discount rate is a critical step in DCF analysis The discount rate represents the required rate of return given the risks inherent in the business, its industry, and thus the u