Credit Suisse Analyst Valuation Book PDF

CONFIDENTIAL
VALUATION PROJECT
WORKBOOK
SUMMER ANALYST PROGRAM 2007
PRELIMINARY | SUBJECT TO FURTHER REVIEW AND EVALUATION

THESE MATERIALS MAY NOT BE USED OR RELIED UPON FOR ANY PURPOSE OTHER THAN AS SPECIFICALLY CONTEMPLATED BY A
WRITTEN AGREEMENT WITH CREDIT SUISSE.
CONFIDENTIAL \\nnyc14p20005\training\_summer analysts\Scheduled Credit Suisse Presentations\Valuation Project Overview (TRAINING LEADERS)\2007 Summer Analyst Valuation Book.ppt /1
Table of Contents
1 Overview of Valuation Project
2 Sample Project
3 Weekly Assignments and Resources

A Public Information Book (PIB)
B Company Profile
C Equity Comps / M&A Comps
D DCF and WACC Analysis
E Merger Consequences Analysis
If you have any questions regarding materials in this book, or the valuation project in general, dont hesitate to call us:
Anna Golynskaya Phil Kohn

Training Leader Training Leader
anna.golynskaya@credit-suisse.com phil.kohn@credit-suisse.com
(212) 538-5442 (212) 538-0558
Miriam Roshan Jeff Volling

Training Leader Training Leader
(212) 325-1822 (212) 325-5529
miriam.roshan@credit-suisse.com jeffrey.volling@credit-suisse.com
1
1. Overview of Valuation Project
2
Overview of Valuation Project

Welcome to Credit Suisse! In addition to meeting a ton of new people and having fun for the next
10 weeks, we figured it would be helpful for you to return to college your senior year having
learned something about what Investment Bankers do
Several analysts, associates, and Vice Presidents from across the division have worked hard to put the
following materials together as your one-stop shop for banking how tos
In addition to your group staffing assignments over the next two months, you will also be asked to
complete a group valuation project to be submitted by Week 9 of your program. The submission will
include the following:
A company profile
Equity comps and M&A comps
DCF valuation
Merger consequences analysis
At the end of the summer, August 2nd, your team will be asked to present, in a short session, your
analyses and conclusions to a team of bankers
This project will be completed gradually over the course of the summer and we will be holding 4
sessions (1 every week) to cover each of the topics or analysis we will be asking you to do
You will be required to turn in you work for the topic covered each week at the following weeks session
(i.e., you will go over profiles in first session and turn them in at the second session)
We plan to return your assignment within one week so you can see if you are on the right track and
where you may need to improve
3
Project Schedule and Key Dates
Date Session Details Next Steps
Session 1 June 29 Finding public information and creating a PIB Create Knight Ridder PIB
10 am & 2 pm Creating a company profile Create Knight Ridder profile
Session 2 July 6 Equity Comps and Acquisition Comp Analysis Find Knight Ridder trading comparables
Find important average trading stats
10 am & 2 pm For given comparable acquisitions, find key
multiples
Session 3 July 13 Discounted Cash Flow Create projected Knight Ridder income
statement
Determine WACC based on comps
10 am & 2 pm
Project free cash flows and discount at WACC
Session 4 July 27 Merger Consequences Evaluate transaction consequences including

EPS accretion/dilution, pro forma credit stats,
pro forma ownership
10 am & 2 pm
Create premiums paid and synergies sensitivity
tables
PRESENTATION August 6 Present final projects Good Luck!!
Note: Due to the fact that the deal was announced on 3/13/06, for all valuations, please use all
public information available as of then (latest filing would be the 12/25/05 10-K) and stock prices
and research as of 3/10/06.
This schedule provides a set of guidelines to help you plan your final project.
4
2. Sample Project
5
USF Corporation Company Profile

Status: Public (Nasdaq: USFC) Headquarters: Chicago, IL
Website: www.usfc.com Employees: 21,000
Company Overview Management and Board of Directors

Provides comprehensive supply chain management services in four Name Position and Affiliation
business segments: Thomas E. Bergmann Interim CEO, CFO
Less-than-truckload segment, carriers provide regional and inter- Steven Caddy President and CEO, USF Holland
regional delivery throughout the United States Edward R. Fitzgerald President and CEO, USF Reddaway
Truckload segment offers premium regional and national truckload Douglas R. Waggoner President and CEO, USF Bestway
services
Paul J. Liska Chairman of the Board
Logistics segment provides dedicated fleet, cross-dock operations,
supply chain management, contractual warehousing, domestic ocean Morley Koffman Director
freight forwarding and reverse logistics services Stephen W. Lilienthal Director
Information Technology segment provides support activities including Anthony J. Paoni Director
corporate sales and various financial management functions Glenn R. Richter Director
USF provide services to a wide variety of customers, with no single Neil A. Springer Director
customer accounting for more than 3.3% of revenue Michael L. Thompson Director
Source: Company filings and Capital IQ. Source: Company filings and FactSet.
Recent News Ownership

1/28/2005: USF Corporation reported fourth quarter and full
HOLDERS SHARES % OF TOTAL
year 2004 results, missed Wall Street earnings
Citigroup Inc. 2,595,871 9.9%
12/13/2004: Announced opening of two new terminals serving Fidelity Management & Research 2,410,515 9.2%
the Southern Minnesota and Decatur, Alabama areas Dimensional Fd Advisors, Inc. 1,831,607 7.0%
11/2/2004: Richard P. DiStasio stepped down as CEO, Paul Barclays Bank 1,567,377 6.0%
Allianz Dresdner Asset Mgmt. 1,234,140 4.7%
Liska was named interim CEO
Top 5 Institutions 9,639,510 36.8%
10/22/2004: Reported third quarter 2004 results, missed Wall Other Institutions 15,892,218 60.7%
Street earnings Total Institutions 25,531,728 97.4%
9/9/2004: USF Holland announced the opening of eight (8) Insiders 473,040 1.8%
Northeast terminals, service city includes: Baltimore, MD Other 196,072 0.7%
Albany, NY, Allentown, PA, Harrisburg, PA, Philadelphia, PA, Total 26,200,840 100.0%
Wilkes Barre, PA, Syracuse, NY, and Richmond, VA
Source: Company filings, and website. Source: Company filings and ShareWorld.
6
USF Corporation (Contd)
Stock Price Performance Market and Trading Data

$40 2,000
Stock Price (2/4/05) $32.44
Volume in Thousands
$37
1,500
% of 52-Week High 83.6%
Stock Price
$34
1,000 52-Week High / Low $38.80 / $27.51
$31
Diluted Shares 28.2
500
$28
Equity Market Value 916.0
$25 0 (+) Debt 250.1
2/4/04 4/5/04 6/5/04 8/5/04 10/5/04 12/5/04 2/4/05
USF Corp. Volume USF Corp. Stock Price () Cash & Equivalents 150.8
Enterprise Value $1,015.3
Enterprise Value to:
Financial Overview 2004E Revenue $2,516.9 / 0.4x
($ in millions)
December 31, 2005E Revenue $2,658.8 / 0.4x
2004A 2005E 2006E 2004E EBITDA $169.2 / 6.0x
Revenues $2,394.6 $2,516.9 $2,658.8
% Growth 4.5% 5.1% 5.6% 2005E EBITDA $253.7 / 4.0x
EBIT $112.1 $130.0 $150.1 EPS Estimates / P/E Ratio
% Margin 4.7% 5.2% 5.6%
EBITDA $169.2 $253.7 $273.1 2004E EPS $0.85 / 38.2x
% Margin 7.1% 10.1% 10.3% 2005E EPS $2.48 / 13.1x
Net Income $55.8 $66.5 $78.8
% Margin 2.3% 2.6% 3.0%
EPS $0.85 $2.48 $2.82
Capex 145.0 185.0 190.0
Source: Company filings and Wall Street equity research. Source: Company filings and Wall Street equity research.
Note: EPS projections based on I/B/E/S consensus.
7
Comparable Company Analysis

($ in millions)
SHARE % OF ENTERPRISE VALUE AS A LONG-TERM LTM
PRICE 52-WEEK EQUITY ENTERPRISE MULTIPLE OF SALES MULTIPLE OF EBITDA P/E EPS OPERATING
COMPANY 02/04/05 HIGH VALUE VALUE 2004E 2005E 2004E 2005E 2004E 2005E GROWTH RATIO
Truck Load
JB Hunt Transportation $45.00 97.7% $3,682 $3,697 1.3x 1.2x 8.2x 7.2x 17.5x 15.5x 15.8% 92.9%
(1)
Swift Transportation 22.61 99.4% 1,671 2,265 0.8x 0.7x 6.2x 5.9x 14.8x 12.6x 12.6% 93.6%
(1)
Werner Enterprises 20.94 90.1% 1,679 1,570 0.9x 0.9x 5.5x 4.9x 19.6x 16.1x 15.3% 91.6%
(1)
Heartland Express 20.93 90.2% 1,570 1,311 2.9x 2.6x 10.8x 9.7x 25.2x 22.0x 13.8% 79.6%
(1)
Knight Transportation 25.71 99.3% 1,460 1,434 3.5x 2.9x 11.9x 10.1x 29.4x 23.1x 16.6% 80.7%
Covenant Transportation 20.86 97.8% 312 372 0.6x 0.6x 4.8x 4.1x 18.9x 15.8x 12.0% 94.0%
Mean 1.7x 1.5x 7.9x 7.0x 20.9x 17.5x 14.4% 88.7%
Median 1.1x 1.0x 7.2x 6.5x 19.3x 16.0x 14.6% 92.3%
Less Than Truckload
(1)
CNF Inc $46.49 91.2% $2,457 $2,400 0.6x 0.6x 6.2x 5.3x 17.8x 14.3x 14.1% 92.3%
(1)
Overnite Corp 30.35 78.5% 850 925 0.6x 0.5x 5.3x 4.6x 13.2x 11.0x 15.5% 82.8%
(1)
Arkansas Best Corp 41.77 89.5% 1,069 1,000 0.6x 0.5x 4.9x 4.7x 13.0x 11.2x 12.5% 92.8%
(1)
Old Dominion Freight 35.60 97.5% 885 961 1.2x 0.9x 7.9x 6.6x 21.6x 16.9x 17.5% 91.4%
(1)
SCS Transportation 22.55 81.6% 354 470 0.5x 0.4x 5.2x 4.6x 17.8x 13.0x 15.0% 95.6%
Yellow Roadway Corp(1) 56.31 97.8% 2,769 3,320 0.5x 0.5x 6.3x 5.0x 14.2x 10.9x 10.5% 94.6%
Mean 0.7x 0.6x 6.0x 5.2x 16.3x 12.9x 14.2% 91.6%

Median 0.6x 0.5x 5.8x 4.9x 16.0x 12.1x 14.5% 92.6%
Logistics
C.H. Robinson Worldwide $51.38 91.1% $4,435 $4,201 1.0x 0.9x 18.5x 16.1x 32.9x 28.4x 14.5% 94.9%
UTi Worldwide Inc 71.88 98.5% 2,307 2,297 1.5x 1.1x 30.8x 13.0x 27.9x 21.6x 20.0% 94.0%
Sirva Inc 9.40 36.2% 693 1,165 1.1x 1.0x 6.9x 5.2x 11.1x 7.4x 20.0% 94.6%
EGL Inc 31.18 89.1% 1,461 1,475 0.5x 0.5x 19.1x 14.7x 27.7x 23.1x 17.4% 97.2%
(1)
Landstar System Inc 35.25 91.4% 1,083 1,113 0.6x 0.5x 8.3x 7.2x 29.0x 23.8x 17.0% 94.1%
Pacer International 22.19 91.0% 837 1,007 2.6x 2.4x 11.2x 9.8x 16.2x 13.7x 14.6% 94.8%
Forward Air Corp 43.33 91.7% 944 840 3.0x 2.6x 13.9x 11.5x 27.7x 23.1x 14.5% 81.1%
Hub Group 56.46 96.6% 529 529 0.4x 0.4x 10.2x 8.9x 25.3x 22.6x 25.0% 96.6%
Quality Distribution Inc 8.62 53.4% 164 436 0.7x 0.6x 6.6x 5.5x 12.3x 8.5x NA 93.9%
Mean 1.3x 1.1x 14.0x 10.2x 23.3x 19.1x 17.9% 93.5%
Median 1.0x 0.9x 11.2x 9.8x 27.7x 22.6x 17.2% 94.6%
(1)
USF Corp $32.44 83.6% $916 $1,015 0.4x 0.4x 6.0x 4.0x 38.2x 13.1x 10.2% 97.3%
Source: Public filings and Wall Street research reports.

(1) Based on 4Q '04 earnings releases.
8
Selected Precedent Transactions

($ in millions)
ENTERPRISE
EQUITY ENTERPRISE VALUE/ TARGET
DATE TARGET TARGET DESCRIPTION ACQUIROR VALUE VALUE
(1)
EBITDA
(2) UNIONIZED
Jul-03 Roadway Corporation LTL carrier providing freight services on major Yellow Corporation $966 $1231 6.7x NA
(US) city-to-city routes in North America
Nov-01 Motor Cargo Industries Provides regional less-than truckload services Union Pacific Corp. 83 78 4.0 No
in the western U.S.
Nov-01 Arnold Industries Provides regional less-than-truckload services Roadway Corp. 558 510 5.7 Yes
in northeastern states and also provides
truckload and logistics services
Aug-01 Arnold Industries (US) N/A Roadway Corporation 539 510 5.4 No
Aug-01 G.I. Trucking Company Provides regional less-than-truckload services Investor Group (Estes) 40 40 5.0 No
in western and southwestern states
Nov-00 American Freightways Operates as a scheduled common and FedEx Corp. 934 1,196 6.3 No
Corporation contract carrier transporting primarily less-
than-truckload shipments of general
commodities.
Jun-99 Jevic Transportation Provides regional and interregional Yellow Corp. 158 197 5.9 No
Inc. transportation of general commodity freight
Jun-98 Preston Trucking Provides les-than-truckload transportation of Management Group NM NA NA Yes
general commodity freight
Oct-97 Caliber Provides transportation, logistics and related FedEx Corp. 2,489 2,681 10.3 No
System, Inc. information services through its five
subsidiaries
Jul-95 Worldway Corp. Transporter of freight throughout United Arkansas Best Corp. 82 153 9.0 Yes
States; also provides truckload services and
driver leasing services through its subsidiaries
Nov-92 Central Freight Lines Carrier of intrastate and foreign commerce Roadway Services Inc. 102 148 6.8 No
Inc. within Texas, Arizona, and New Mexico
Nov-92 Preston Trucking Provides less-than-truckload transportation of Yellow Freight Systems 24 146 5.8 Yes
Jul-88 Viking Freight Inc. Provides regional carrier services in California Roadway Services Inc. 135 172 7.8 No
and 9 other Western States
Jun-88 Arkansas Best Corp. LTL and TL carriage, furniture manufacturing Kelso & Co. 317 472 6.2 Yes
and tire retreading
Median 6.1x
Average 6.5x
High 10.3x
Low 4.0x
Source: Securities Data Corporation, public filings and news reports.

(1) Enterprise Value = Value of Common + Total Debt Cash.
(2) EBITDA, EBIT and Net Income exclude extraordinary items and accounting changes.
9
WACC Schedule
Industry Statistics
(in millions)
Total Mkt Debt / Tax Levering Unlevered
Company Beta (1) Debt Equity Mkt Equity Rate (2) Factor (3) Beta (4) Assumptions
Arkansas Best Corp 0.83 15 1,069 1.4% 40.1% 1.01 0.82 Target Marginal Tax Rate 38.0%
Cnf Inc 0.89 714 2,457 29.1% 41.0% 1.17 0.76 Risk Free Rate (5) 4.330%
Old Dominion Freight 0.62 81 885 9.2% 39.1% 1.06 0.59 Equity Risk Premium (6) 7.20%
Overnite Corp 0.95 127 850 14.9% 40.0% 1.09 0.87 Size Premia ("Sp") (7) 1.59%
Scs Transportation Inc 0.63 123 354 34.7% 37.6% 1.22 0.52
Yellow Roadway Corp 1.00 728 2,769 26.3% 39.1% 1.16 0.86
Mean 0.82 19.3% 39.5% 1.12 0.74

Median 0.86 20.6% 39.6% 1.12 0.79
Schedule A (Sensitivity of Capital Structure)

Weighted Average Cost of Capital (10)
Debt / Debt / Average Levering Levered Cost of Pre-tax Cost of Debt
Capital Mkt Equity Unlev'd Beta Factor Beta (8) Equity (9) 5.0% 6.0% 7.0% 8.0% 9.0% 10.0%
0.0% 0.0% 0.74 1.00 0.74 11% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2%
10.0% 11.1% 0.74 1.07 0.79 12% 10.7% 10.8% 10.9% 10.9% 11.0% 11.1%
20.0% 25.0% 0.74 1.16 0.85 12% 10.3% 10.4% 10.5% 10.6% 10.8% 10.9%
30.0% 42.9% 0.74 1.27 0.93 13% 9.8% 10.0% 10.1% 10.3% 10.5% 10.7%
40.0% 66.7% 0.74 1.41 1.04 13% 9.3% 9.5% 9.8% 10.0% 10.3% 10.5%
50.0% 100.0% 0.74 1.62 1.19 15% 8.8% 9.1% 9.4% 9.7% 10.0% 10.4%
Schedule B (Sensitivity of Unlevered Beta)

Debt / Debt / Levering Unlevered Pre-tax Cost of Debt
Capital Mkt Equity Factor Beta 5.0% 6.0% 7.0% 8.0% 9.0% 10.0%
0.0% 0.0% 1.00 0.65 10.6% 10.6% 10.6% 10.6% 10.6% 10.6%
10.0% 11.1% 1.07 0.70 10.5% 10.5% 10.6% 10.7% 10.7% 10.8%
20.0% 25.0% 1.16 0.75 10.3% 10.5% 10.6% 10.7% 10.8% 11.0%
30.0% 42.9% 1.27 0.80 10.2% 10.4% 10.5% 10.7% 10.9% 11.1%
40.0% 66.7% 1.41 0.85 10.0% 10.2% 10.5% 10.7% 11.0% 11.2%
50.0% 100.0% 1.62 0.90 9.8% 10.1% 10.4% 10.7% 11.0% 11.3%
(1) Barra US equity Book predictions (7) Cost of equity premia based on equity market capitalization.
(2) Based on marginal tax rate low-cap ($797mm - $1,167mm) = 1.59%. Amounts per 2004 Ibbotson.
(3) Levering Factor: 1 + [ ( 1 - Tax Rate ) * ( Debt / Equity ratio ) ] (8) Levered Beta: (Beta * Levering Factor)
(4) Unlevered Beta: ( Beta / Levering Factor ) (9) Cost of Equity: Rf + B * ( Rm - Rf ) + Sp, or the risk-free rate plus the beta * the eq
(5) Yield on Interpolated 20-Year US treasury Bonds which corresponds to Ibbotson's long-term equity (10) WACC: Rd = Return on Debt; Re = Return on Equity
risk premium (as of 2/04/05). Source: Bloomberg. [ Rd * (1 - tax rate) * (D / (D + E) ) ] + [ Re * (E / (D + E) ) ]
(6) The average historic period between the return on stocks and L-T bonds (2004 Ibbotson Associates).
10
Discounted Cash Flow Analysis

($ in millions)
2005E 2006E 2007E 2008E 2009E

EBITDA $250.7 $278.5 $307.2 $317.6 $328.2
Less: D&A (113.6) (121.6) (130.3) (134.2) (138.2)
EBIT $137.1 $156.9 $176.9 $183.4 $190.0
Less: Tax Effect (52.1) (59.6) (67.2) (69.7) (72.2)
Unlevered Net Income $85.0 $97.3 $109.7 $113.7 $117.8
Plus: D&A 113.6 121.6 130.3 134.2 138.2
Less: Capex (103.2) (110.5) (118.4) (122.0) (125.7)
Plus: Changes in WC (13.7) (7.2) (7.7) (3.2) (3.2)
Unlevered Free Cash Flow $81.7 $101.1 $113.9 $122.7 $127.1
Source: Wall Street research projections and Credit Suisse estimates.
($ in millions, except per share data)

Terminal Value EBITDA Multiple
Discount Rate 4.50x 5.00x 5.50x 6.00x
9.0% $417.5 $417.5 $417.5 $417.5 Present Value of Free Cash Flows
960.0 1,066.7 1,173.3 1,280.0 Present Value of Terminal Value
$1,377.5 $1,484.2 $1,590.9 $1,697.5 Enterprise Value
(99.3) (99.3) (99.3) (99.3) Less: Net Debt
$1,278.2 $1,384.9 $1,491.6 $1,598.2 Equity Value
$44.42 $47.92 $51.42 $54.92 Equity Value per Share
(1)
36.9% 47.7% 58.5% 69.3% Implied Premium / (Discount) to Current
0.4% 1.2% 1.8% 2.4% Implied Perpetuity Growth Rate
(99.3) (99.3) (99.3) (99.3) Less: Net Debt
$1,224.0 $1,325.9 $1,427.8 $1,529.7 Equity Value
(1)
876.6 974.0 1,071.4 1,168.8 Present Value of Terminal Value
(99.3) (99.3) (99.3) (99.3) Less: Net Debt
$1,172.5 $1,269.9 $1,367.3 $1,464.7 Equity Value
26.2% 36.1% 45.9% 55.8% Implied Premium / (Discount) to Current (1)
(1) Based on share price of $32.44 as of 02/04/05. 11
Potential Merger Assumptions

Key Assumptions
Projections
USF Corporation and Yellow Roadway projections based on Wall Street equity research;
estimated marginal tax rate of 38%

Prospective acquiror net income based on Wall Street equity research
Financing
50% Stock 50% Cash Consideration assumed; financed by 100% bank debt at 3-Months
LIBOR plus 100 basis points
Purchase Price
Range of $1,015 $1,410 mm, corresponding to 4.0x 5.6x 2005E EBITDA
FMV Adjustments
Fair market value adjustment estimated at 12% of book value; depreciated over 20 years
Goodwill
Goodwill not amortized
Timing
Assumed to gain full 2005 earnings
Fees
M&A Fees of 0.5% of transaction value

Financing fees of 2.5% of debt raised
Synergies
None assumed; pre-tax synergies required to achieve acquiror break-even EPS inferred
12
Merger Consequences Analysis

Yellow Roadway Acquisition of USF Corporation
($ in millions)
50% Cash / 50% Stock Consideration
Premium to Share Price 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0%
Price Per Share $32.44 $34.06 $35.68 $37.31 $38.93 $40.55 $42.17 $43.79 $45.42
Equity Value $918 $966 $1,014 $1,062 $1,111 $1,160 $1,210 $1,259 $1,309
(1)
Net Debt 99 99 99 99 99 99 99 99 99
Enterprise Value 1,017 1,065 1,114 1,162 1,210 1,259 1,309 1,358 1,408
Enterprise Value / 2005E EBITDA 4.1x 4.2x 4.4x 4.6x 4.8x 5.0x 5.2x 5.4x 5.6x
Equity Value / 2005E Net Income 13.3x 14.0x 14.7x 15.4x 16.1x 16.9x 17.6x 18.3x 19.0x
2005E Stand Alone Diluted EPS $5.25 $5.25 $5.25 $5.25 $5.25 $5.25 $5.25 $5.25 $5.25
2005E Pro Forma Diluted EPS 5.59 5.53 5.48 5.43 5.38 5.33 5.28 5.24 5.19
2005E Accretion / (Dilution)

Acc / (Dil) $ $0.34 $0.28 $0.23 $0.18 $0.13 $0.08 $0.03 ($0.01) ($0.06)
Acc / (Dil) % 6.4% 5.4% 4.4% 3.5% 2.6% 1.6% 0.7% (0.3%) (1.2%)
Pre-Tax Breakeven Synergies $1.3 $6.1
(2)
Pro-Forma Debt / LTM EBITDA 1.6x 1.7x 1.7x 1.7x 1.8x 1.8x 1.8x 1.9x 1.9x
Debt-to-Capitalization (at closing) 45.28% 45.36% 45.45% 45.53% 45.61% 45.69% 45.76% 45.83% 45.91%
% Shares issued as currency 14.2% 14.9% 15.5% 16.1% 16.7% 17.3% 17.9% 18.5% 19.1%
ProForma Ownership% 85.8% 85.1% 84.5% 83.9% 83.3% 82.7% 82.1% 81.5% 80.9%
Source: Wall Street Projections, Credit Suisse Estimates.
(1) Net Debt numbers as of 12/31/04.
(2) Based on LTM EBITDA of $697mm.
13
3. Weekly Assignments and

Resources
A. Public Information Book (PIB)
14
Summer Assignment PIB

Assignment
Prior to the June 30th training session, please assemble a PIB on Knight Ridder
Make sure that your PIB has all the sections outlined on the next page
Insert numbered tabs between each section blue sheets between each item in the same tab, if
multiple items exist. For example, put a blue sheet between each research report
Have the Copy Center make a double-sided bound copy of your PIB
Key Takeaways
After completing this section, you should be familiar with most of the tools that are available to
access public information
Research reports are expensive!!! Purchase only those that are appropriate
Be prepared to answer questions like:
1. Where do I go to get the latest SEC filing?

2. Where do I go to get an ownership run?
3. Have any major events occurred at the Company in the recent quarter?
15
Public Information Book Resources

Sample Table of Contents Where to Get the Material
1. General Public Information
S&P Stock Report
Bloomberg Data
Price/Volume
Web Site Company Website
2. Prospectus
Usually follows a major event (M&A, Equity offering, Debt offering)
3. Annual Report Company Website
4. Form 10-K
Annual filing with the SEC, similar to an annual report
5. Form 10-Q
Quarterly filing with the SEC
6. Proxy Statement
Covers information about company shares and shareholders
7. Research Report CS Research & Analytics
Include CS if available
Look for longer, more recent research
8. News Run
Back two six months is standard Company Website
9. Ownership Run
Tracks ownership structure of company
16

Resources
B. Company Profile
17
Summer Assignment Company Profile

Assignment
In the format shown on the sample pages, create a two page company profile for Knight Ridder
Corporation
Make sure you include:
Company Overview
Market Statistics (download from FactSet)
Financial Overview
Stock Price Performance
Directors and Officers
Products
Current Ownership
Helpful Hint: The financial overview summary sheet in your Abacus shell (see Tab C) is a good
template from which to copy and paste market stats and financial overviews
Key Takeaways
At the end of this section, you should be able to answer the following:
1. What are Knight Ridder Corporations primary business segments?
2. How has Knight Ridder Corporation performed in the last year with respect to:
Earnings?
Stock price?
Any relationship between the two?
3. Any important events occur at the Company over the past year?
18
Agenda
Creating a general two page company profile
Keys to a successful acquisition ideas presentation
19
Keys to a Successful Acquisition Ideas Presentation

Know Your Audience
Use a Systematic Approach
Remember the Formula: Strategic Fit + Availability = A Good Idea
Demonstrate Industry Knowledge
Revisit Old Ideas Selectively
Stimulate Discussion and Ask Questions
Summarize Conclusions and Develop Follow-up Plan
A successful acquisition ideas presentation delivers a focused set of ideas with a point of
view and a rationale.
20
Considerations in Determining Fit
Strategic General Financial

Client specified Organic growth prospects of Leverage
Size target
Accretion / dilution
Industry Management talent
Market perception
Technology Technology or other
Geographic scope proprietary assets
(international vs. domestic)
Product synergies
Markets
Customers
Distribution
Manufacturing
Operating synergies
Corporate cost savings
S,G & A cost savings
Other
21
Signals of Availability / Lack Thereof

Signs of Availability Signs of Lack of Availability
Parent is a LBO sponsor Insiders control a meaningful percent of the stock and have no
evident need for liquidity
Filed equity offering with large secondary component
Family-owned with the next generation preparing or prepared
Previous failed attempt to sell (busted auction) or spin-off
to assume leadership
(busted IPO)
Majority owned by another company that has obvious reason to
Takeover speculation
hold onto the business
Undervalued, depressed or declining stock price
Strong and consistent stock performance
Shareholder activism
The current parent is the most obvious best owner for the
Potential odd man out in rapidly consolidating industry or business
segment
The current parent has identified the business as a core
Changes in senior management or aging senior management business and/or the equity market is in favor of current
with no obvious successor parent owning the business
Dramatic revisions in corporate strategy Consider the targets defensive posture vis-a-vis a hostile
offer, but remember the valuation/rationale must be even
Need to expand internationally or to retrench
more compelling to justify an unsolicited approach
Need for capital
Note: It is also important to review the valuation multiples of
Failure or inability to grow new products organically the publicly-traded Parent Company which owns the target
subsidiary. If sale proceeds (after tax) imply lower valuation
Parent reorganizing or realigning businesses, possibly in
multiples (EBITDA, EBITA and Net Income) than those at
preparation for a sale
which the parent stock is selling, the transaction would be
Division with no logical strategic fit with the parent (corporate dilutive to overall value and thus would probably be a non-
orphan) starter as a sale candidate today
Division underperforming or less profitable than core business
22
Acquisition Screening Information Sources

SIC code lists
Equity analyst research
Competition sections of prospectuses and 10-Ks of comparable companies
Research reports relating to the Client and its core industry group competitors
Value Line for Client and its competitors
S&P Tear Sheets (with word search)
OneSource (U.S. Public, U.S. Private, and U.K. Public SIC Code Summary Analyses)
Industry trade association lists
Trade publications
WorldScope database (Global Buyers List)
FactSet comp builder
SDC M&A summaries
23
Creating a General Company Profile
Business section of 10K / Annual Report

Company Overview finance.yahoo.com business profile
Business Description
Research reports
The Boeing Company is an aerospace firm. The Company operates in
principal areas that include commercial airplanes, military aircraft, Company Web site
missile systems, space and communications and customer and
commercial financing. VentureSource (private companies)
Business Segments
Your PIB can be a great resource (See
The Commercial Airplanes segment is involved in development,
production and marketing of commercial jet aircraft and providing
Tab A)
related support services, principally to the commercial airline
industry worldwide.
10K / Annual Report
The Military Aircraft and Missile Systems segment is involved in the
research, development, production, modification and support of Research reports
military aircraft including fighter, transport and attack aircraft, as well
as helicopters and missiles. Company Web site
The Space and Communications segment is involved in the
research, development, production, modification and support of PIB
space systems, missile defense systems, satellites and satellite
launching vehicles, rocket engines and information and battle
management systems.
10K / Annual Report
The Customer and Commercial Financing segment is primarily
engaged in the financing of commercial and private aircraft and Research reports
commercial equipment.
Competitors
finance.yahoo.com business profile
The Company competes with Lockheed Martin, Raytheon, BAE Company Web site
Systems, Northrop Grumman, Matra BAe Dynamics Alenia and The
European Aeronautics Defense & Space Corporation. PIB
24

Therapeutic Focus 2003
Sexual Antibiotics
Dysfunction $0.7 BN
Highlight product mix or any particular Osteoporosis $0.2 BN
$1.0 BN Cardiology
asset that might be of interest to your $0.5 BN
Audience Oncology
$1.0 BN
Company Web site
Research reports
10K / Annual report

Diabetes/
Note: Currently there is no similar pie graph in USF profile but it Metabolic
is a possibility for your Knight Ridder profile (or other
$2.1 BN CNS
profiles you will be expected to do in your respective
groups). $5.4 BN
Financial Overview
($ in millions)
December 31,
2004A 2005E 2006E
You can find the historical information Revenues $2,394.6 $2,516.9 $2,658.8
from company filings % Growth 4.5% 5.1% 5.6%
EBIT $112.1 $130.0 $150.1
The projections will come from % Margin 4.7% 5.2% 5.6%
research EBITDA $169.2 $253.7 $273.1
% Margin 7.1% 10.1% 10.3%
PIB Net Income $55.8 $66.5 $78.8
% Margin 2.3% 2.6% 3.0%
EPS $0.85 $2.48 $2.82
Capex 145.0 185.0 190.0
25

Market and Trading Data
This should come from your equity
Stock Price (2/4/05) $32.44 comp shell (See Tab C)
% of 52-Week High 83.6% Keep in mind, you may update this
52-Week High / Low $38.80 / $27.51 profile often (e.g. latest stock price or
Diluted Shares 28.2 estimates) so keeping your comps
flexible is key
Equity Market Value 916.0
(+) Debt 250.1
() Cash & Equivalents 150.8
Enterprise Value $1,015.3
Enterprise Value to:
2004E Revenue $2,516.9 / 0.4x
2005E Revenue $2,658.8 / 0.4x
2004E EBITDA $169.2 / 6.0x
2005E EBITDA $253.7 / 4.0x
EPS Estimates / P/E Ratio
2004E EPS $0.85 / 38.2x
2005E EPS $2.48 / 13.1x
26

Stock Price Performance
$40 2,000
Volume in Thousands
$37
1,500
Stock Price
$34
1,000
$31
500
$28
$25 0
2/4/04 4/5/04 6/5/04 8/5/04 10/5/04 12/5/04 2/4/05
USF Corp. Volume USF Corp. Stock Price
ActiveGraph made from Excel and

FactSet
Keep in mind, you may update this
often
Plot either standalone or against peer
group. If showing peer group, use the
companies in your equity comps (see
Tab C) but exclude the company you
are profiling
27

Ownership
HOLDERS SHARES % OF TOTAL
Citigroup Inc. 2,595,871 9.9%
Fidelity Management & Research 2,410,515 9.2%
ShareWorld
Dimensional Fd Advisors, Inc. 1,831,607 7.0%
Barclays Bank 1,567,377 6.0%
Proxy (for insider ownership)
Allianz Dresdner Asset Mgmt. 1,234,140 4.7%
FactSet
Top 5 Institutions 9,639,510 36.8%
Other Institutions 15,892,218 60.7%
Total Institutions 25,531,728 97.4%
Insiders 473,040 1.8%
Other 196,072 0.7%
Total 26,200,840 100.0%
Recent News
1/28/2005: USF Corporation reported fourth quarter and full
year 2004 results, missed Wall Street earnings
12/13/2004: Announced opening of two new terminals serving
Company news releases
the Southern Minnesota and Decatur, Alabama areas
Factiva
11/2/2004: Richard P. DiStasio stepped down as CEO, Paul
Liska was named interim CEO Equity research
10/22/2004: Reported third quarter 2004 results, missed Wall
Street earnings
9/9/2004: USF Holland announced the opening of eight (8)
Northeast terminals, service city includes: Baltimore, MD
Albany, NY, Allentown, PA, Harrisburg, PA, Philadelphia, PA,
Wilkes Barre, PA, Syracuse, NY, and Richmond, VA
28
Management and Board

Name Position and Affiliation
Thomas E. Bergmann Interim CEO, CFO
Steven Caddy President and CEO, USF Holland
Edward R. Fitzgerald President and CEO, USF Reddaway
Douglas R. Waggoner President and CEO, USF Bestway
Paul J. Liska Chairman of the Board
Morley Koffman Director
Stephen W. Lilienthal Director
Anthony J. Paoni Director
Glenn R. Richter Director
Neil A. Springer Director
Michael L. Thompson Director
Proxy
finance.yahoo.com
Company Web site
Sometimes you will see profiles with a
brief biography of the directors and
officers
29

Resources
C. Equity Comps
30
Summer Assignment Equity Comps

For your assignment, you are to submit an Equity Comp output page for Knight Ridder AS OF THE
DATE OF THE ACQUISITION (3/10/06)
You must first find comparable companies. For this project, you need only Knight Ridder
Corporation and three comparable companies
Include McClatchy Company and New York Times Co as comps and find one comp on your
own
Input ABACUS shells for these comps using FactSet, the companies financials and Wall Street
research to find the following multiples:
2006E and 2007EV/revenue
2006E and 2007E EV/EBITDA
2006E and 2007E EV/EBIT
2006E and 2007E P/E
2006E and 2007E EBITDA margins
When necessary, make sure to calendarize the financials
Make sure to check your output and see if something looks abnormal
If so, youve likely made a mistake
31
Summer Assignment Equity Comps (Contd)

Helpful Hint #1: If youve inserted your data properly into the input pages, ABACUS will generate
a formatted and linked output page for you: Go to ABACUS / New Summary Sheet / Forward
Multiple Analysis
Helpful Hint #2: The output page converts all currencies to US$. If you are using a foreign
company, make sure you input the proper exchange rate in the appropriate section of the shell
Key Takeaways
1. On what basis did you choose your one other comparable?
2. In retrospect, are they good comps? Why or why not?
3. How is Knight Ridder trading relative to its peer group?
4. Can you explain its relative valuation? Why does it trade at a premium or discount to its
peers? Think of its relative earnings, margins, market share, size, etc.
5. What does this mean to a potential buyer?
32
Agenda
What are Equity Comps and Why Do We Do Them?
Finding Comparable Companies
Collecting the Data
Using the Compco Model
Common Pitfalls
Interpreting the Results
USF Corporation: sample equity comps
33
What Are Equity Comps and Why Do We Do Them?

A big part of an investment bankers job is to value companies
More than anything else, clients want to know what their companies are
worth especially relative to their peers
One way to value companies is to infer (or compare) their value based on the public trading
values of other companies with similar characteristics
Because not all companies are the same size or have the same capital structure, we need to
establish universal metrics that can apply to all companies within a group
These metrics almost always take the form of a ratio or multiple, where the numerator is a
measure of trading value (Enterprise Value; Market Value) and the denominator is an
operating statistic (EBITDA, Net Income)
The most common metrics are Enterprise Value / EBITDA and Market Value / Net Income (or
P/E)
The calculation and interpretation of these metrics is a Comparable Company Analysis, or
Compco Analysis
Helpful Hint: The right terminology for this analysis is the Comparable Company Analysis, but
since bankers like to complicate matters, this analysis is referred to differently by each group.
Dont get confused if youre asked to do equity comps, compcos, comps, and a comparable
company analysis all in one night: They all mean the same thing!
34
OK, So What Are Enterprise and Equity Value?

Enterprise Value is the total dollar value of a business, represented by the sum of all of the
ownership interests in the business
Note: Enterprise Value is sometimes referred to as Adjusted Market Value, Firm Value or (in
early-stage biotech) Technology Value
In broad terms, there are two types of ownership interests in a business Debt and Equity
The public market value of a business equity is referred to as its equity value, market value
or market capitalization
We calculate a business Enterprise Value by summing the public market values of its debt and
equity
Caveat: Because the trading value of debt securities is less volatile than equity securities, we
typically use the book value of debt rather than the market value to save time
Enterprise Value is an important measure because it makes companies with different capital
structures more comparable
35
OK, So What Are Enterprise and Equity Value?
Enterprise Value = Value of All Business Assets = Equity Value + Net Debt(1)
Equity Value = Value of the Shareholders Equity = Current Stock Price x Shares Outstanding(2)
Liabilities and
Assets Shareholders Equity
Net Debt
Enterprise Value Enterprise
Value
Equity Value
(1) Net Debt equals long-term debt + short-term debt + out of the money convertible debt + minority interest + preferred stock + capitalized leases cash and
cash equivalents.
(2) The proper way to calculate Equity Value is to use the diluted number of shares outstanding, which includes all in the money and exercisable stock options.
36
Fair Enough, But Help Me With This EBITDA Thing

EBITDA is an accounting measure of how much cash flow a business generates from its
operations
EBITDA excludes interest, taxes and depreciation and amortization because these items vary
from company to company for reasons which generally do not impact value making them
harder to compare on a consistent basis
Interest is a function of capital structure

Taxes are a function of incorporation and tax structure
Depreciation is a function of depreciation policy / asset lives
Amortization is a function of how acquisitive a company has been
EBITDA = Earnings before Interest, Taxes, Depreciation and Amortization
We place emphasis on Enterprise Value / EBITDA because this metric excludes most variables
which do not affect value (or can be easily changed) making companies more comparable for
valuation purposes
37
Lets Recap
The absolute value of a business is expressed by its Enterprise and Equity Value
Enterprise Value is the total value of all ownership interests in a business
Equity Value is the value of the equity in a business
The relative value of a business is expressed by a multiple of its absolute value to its operating
results
GE is trading at 22x its 2006E projected EBITDA Translation: The ratio of GEs
Enterprise Value to its forecasted 2006E EBITDA is 22
Walmarts 2006E P/E multiple is 18x Translation: The ratio of Walmarts equity value to
its forecasted 2006 net income is 18
Enterprise Value / EBITDA is an important metric because it eliminates non-value impacting
variables which otherwise make companies less comparable
Enterprise Value Multiples Equity Value Multiples

Enterprise Value / Sales Equity Value / Net Income
Enterprise Value / EBITDA Price / Earnings
Enterprise Value / EBIT Equity Value / Tangible Book Value
Industry Specific Metrics (EV / Fiber Miles) Other Industry Specific Metrics
38
Finding Comparable Companies

Look for companies with characteristics similar to those of the business being valued:
Operational Financial
Industry Seasonality Size
Products Cyclicality Growth Profile (Sales, EBITDA, Earnings)
Distribution Channels Strategy Margins (Gross Profit, EBIT, Net Income)
Markets Customers Leverage
Sources to check to initially select comparables:

Your colleagues (before you start, make sure someone hasnt done it already!)
Associates and Officers most of the time they will pick them for you
Proxy Statements
Equity research reports and analysts

Note: This rule
SIC code searches FactSet, OneSource, Library does not apply to
S&P Tearsheets
your summer
valuation project
Value Line sorry guys!
Trade publications
IPO or other prospectuses
10K Competition section
39
Collecting The Data What Do I Need?

Most recent financial statements LTM financials
10-K, 20-F or Annual Report (available 90 days after end of period)
10-Q quarterly or interim report (available 45 days after end of period)
Earnings Releases (typically available 2-3 weeks after the end of the quarter)
Dont miss these they are the most updated information available
Often have complete income statements and balance sheets
Other Press Releases
EPS Forecasts Be Consistent!
First Call
I/B/E/S
Operating Projections
CS Equity Research
Equity Research from other firm
I/B/E/S
Stock Price Information
Current / 52 week high-low
40
Why Do I Need It and Where Do I Get It?

Why Do I Need It? Where Do I Get It?
10-K / Annual Report Thomson Research (from InfoCentral IBD
LTM Income Statement Information Internal website)
Options/Convertible Data FactSet on your PC
10-Q / Quarterly Report OneSource on your PC

10-Ks, 10-Qs, LTM Income Statement Information SEC Edgar Archives (www.sec.gov)
8-Ks
Balance Sheet Information Disclosure workstations (in library)
Basic Shares Outstanding Sedar.com (for Canadian companies)
8-Ks / Report of a Material Event Documents Library on EMA 28 at x5-4000
Pro Forma Information for Acquisitions or (use library as a last resort they will always
Other Transactions take longer to pull docs than you will)
Earnings Announcements
Research analysts submit their EPS FactSet (First Call, I/B/E/S) on your PC
estimates to publicly available centralized
First Call website (InfoCentral)
databases (First Call, I/B/E/S)
EPS Detailed First Call reports (6th Floor)
Forecasts The mean or consensus estimate
represents the Street view of a Companys Bloomberg terminals (Nelson's)
expected performance
We use Street view to calculate P/E multiples
41
Why Do I Need It and Where Do I Get It?

Why Do I Need It? Where Do I Get It?
Research analysts project what a Companys CS Research & Analytics
income statement will look like in the future
Call CS Research Analyst for updated model
We use these models to calculate projected
Research Bank Web (Info Central) for
EBITDA
non-CS research
Operating The research report you select is VERY
Projections Multex.com for non-CS research
important and will influence your valuation
multiples Research Bank workstations (older reports)
You should always select a research report Library request at x5-4000 (for older or hard
which has an EPS forecast close to the to find research reports)
consensus
To calculate equity and enterprise value FactSet on your PC
Stock Price Investment Banking Workstation on your PC

Information Bloomberg terminals
To calculate equity and enterprise value FactSet on your PC
Other Investment Banking Workstation on your PC

Information Bloomberg terminals
42
Data Collection Best Practices (How To Keep

My Associate Happy and Get a Big Bonus)
Keep a Record
Print out hardcopies of all source documents (10-Ks, 10-Qs, EPS Projections, Analyst
Reports)
Leave a Trail / Be Organized
Highlight data and tab pages used from source documents and use folders for each company
Use Comments function in Excel to footnote items that need explanation (i.e.,
approximations, assumptions, calculations and unusual items)
Be Complete
Supply your Associate with all source documents, a printout of the equity comps and an
electronic copy for all companies to be checked
Be Efficient
Work sequentially through companies, so that your Associate can start checking while you
continue working
Be a Thinker
Check your results. If something looks wrong, it probably is
Never assume FactSet downloads or other peoples comps are correct
43
1. General Company Information / User

General Company Information
The ticker identifies the company you are
Primary Company Ticker CHRW creating a comp file for and is used by
Last Fiscal Year Ended 12/31/04
Latest Balance Sheet as of 3/31/05 Factset to select data to download
Source of Latest Balance Sheet 10-Q
LTM Earnings as of 3/31/05
The financial statement dates identify which
Source of LTM Earnings 10-Q historical and projected years you are
First Projected Calendar Year End: 12/31/05 generating multiples for. These dates drive
Calendarization Factor 0.0%
the models column headings
Research Note: The dates do not drive which data
Research Source Morgan Stanley FactSet downloads; FactSet defaults to
Analyst James Valentine
the most recently available data
Date of Research 5/01/05
Recommendation
Target Price
User Information
Analysis Prepared by kjackso3 It is important to fill out the user information
Preparer Phone Number 62714
Analysis Checked by T_Bushey
so that other people using your model can
Checker Phone Number 65888 call you with questions
44
2. Diluted Share Calculation / Options and

Convertible Debt Schedules
In general, Equity Value = Current Stock Price x Basic Shares Outstanding
However, most companies have securities which represent contingent shares meaning they
are not shares today, but can become shares if certain conditions are met and as a result, we
need to make adjustments to basic shares outstanding
The most common of these securities are options / warrants
Options are a price right or option granted to management to purchase their companys stock
at a pre-specified or strike price
Management profits if the market price of the stock exceeds the strike price when they
exercise the options. Hence, Management is only likely to exercise his/her options under
these circumstances
Options are reported in the 10-K. Companies typically disclose the number of options that are
outstanding and exercisable
Exercisable options are vested and can be used to purchase shares today. Exercisable
options, NOT outstanding, are relevant for equity comp purposes
The method we use for calculating the impact on basic shares outstanding of options is called
the Treasury Stock Method
45
Calculating Diluted Shares Outstanding

Using the Treasury Stock Method
Scenario: 197.3 million basic shares outstanding

8.2 million exercisable options with a weighted average strike price of
$14.02
Current stock price is $17.74.
Translation: 8.2 million options are in the money, meaning they are exercisable at a
lower price than the current market price. This means the owner of these
options has the right to buy stock from the Company at $14.02 and could
sell it in todays market at $17.74. If the owner of the options did this, he
would pay the Company $14.02 for each share, sell it in the market for
$17.74 and pocket the $3.72 spread.
Treasury The treasury stock method assumes the above transaction occurs and that
Method Calculations: the Company uses the $14.02 they receive to repurchase shares in the
market at $17.74, thus:
Basic Shares Outstanding 197.3

Plus: Shares Issued to Options Holder 8.2
205.5
($14.02 x 8.2) / $17.74 Less: Shares Repurchased with Proceeds (6.5)
Diluted Shares Outstanding 199.0
46
What About Convertible Debt and Preferred?

Investment Bankers have created hybrid securities which pay interest like straight debt, but
become common stock if certain conditions are met
Convertible Debt
Convertible Preferred
Other Equity-Linked Securities
Convertible securities are NOT evaluated using the Treasury Stock Method
Most important thing to remember: Convertible Securities are treated as either debt or equity
for valuation purposes NOT both
47
What About Convertible Debt and Preferred?
Example: A company has a convertible preferred security with a face value of $1,114 million
that pays a dividend of 6.5% and has a conversion price of $18.00
Current Price < $18.00 Treated as Debt Current Price > $18.00 Treated as Equity
Income Statement Effect Income Statement Effect
None Debt: Interest backed out
Equity Value Effect Preferred: Dividend backed out ($1,114 x 6.5%
= $72.4)
None
Equity Value Effect
Net Debt Effect
Additional shares outstanding from conversion
Should include full amount of convertibles
(add $1,114/$18 = 61.9 to shares outstanding)
($1,114)
Net Debt Effect
Debt does NOT include face value of converted
debt/preferred
48
2. Treasury Method Diluted Share Calculation /

Options and Convertible Debt Schedules
Treasury Method Fully Diluted Share Calculation
CLASS SHS. OUT. PRICE

A 1,129.5 74.36
B 0.0 0.00
C 0.0 0.00
D 0.0 0.00
E 0.0 0.00
Total Primary Shares Outstanding 1,129.5 74.36
New Shares Issued 0.0
Converted Debt shares (Schedule A) 0.0
Converted Preferred Shares (Schedule B) 0.0
Converted Options/Warrants (Schedule C) 59.6
Shares Buy-Back from Options/Warrants exercise proceeds (48.5)
Fully Diluted Shares Outstanding 1,140.6
Schedule A - Convertible Debt

ANNUAL BOOK TRADING # SHARES IMPLIED DEBT SHARES
MATURITY INTEREST VALUE VALUE CONV INTO CONV PR CONVTD ISSUED
Debt Series 1 1/00/00 0.00% 0.0 0.0 0.0 0.00 0.0 0.0
Schedule B - Convertible Preferred

ANNUAL BOOK TRADING # SHARES IMPLIED PREF SHARES
MATURITY INTEREST VALUE VALUE CONV INTO CONV PR CONVTD ISSUED
Preferred Series 1 1/00/00 0.00% 0.0 0.0 0.00 0.0 0.0
Schedule C - Options/Warrants using Outstanding

PRICE PRICE WEIGHTED
# EXER LOW HIGH # OUTS LOW HIGH AVERAGE PRICE # EXERCISED
Options/Warrants 1 6.760 21.29 21.29 6.760 21.29 21.29 21.29 6.8
Note: Option Schedule Includes all series.
49
3. Debt & Preferred Schedule

Debt & Preferred Schedule
($ in millions) Debt can be listed on the balance sheet
DESCRIPTION VALUE under a variety of names
NAME
Long-Term
RATE
0.0%
SENIORITY
Sen
BOOK
4,503.6
MARKET
4,503.6
Notes
Long-Term
Long-Term
0.0%
0.0%
Sen
Sub
0.0
0.0
0.0
0.0
Commercial Paper (CP)
Long-Term 0.0% Sub 0.0 0.0 Current Portion of LT debt
Long-Term 0.0% Sen 0.0 0.0
LT Debt Adj 0.0% Sen 0.0 0.0 Credit Facility
Total Long-Term Debt 4,503.6 4,503.6
Out-of-the-Money Convertible Sub 0.0 0.0 Revolver
Short-Term 0.0% Sen 807.1 807.1
Short-Term 0.0% Sub 0.0 0.0 Loans
ST Debt Adj 0.0% Sen 0.0 0.0
Total Short-Term Debt 807.1 807.1 The ABACUS model allows you to calculate
Capital Leases 0.0% Sub 0.0 0.0
Capital Leases 0.0% Sub 0.0 0.0
the net debt based on book or market values
Cap. L. Adj. 0.0% Sub 0.0 0.0
Total Capital Leases 0.0 0.0
If the Company issued additional debt or
Other 0.0% Sen 0.0 0.0 convertible securities since its latest filing,
Other Adj. 0.0% Sen 0.0 0.0
input these securities in adjustment rows
Total Other Debt 0.0 0.0
Out-of-the-Money Convertible Preferred 0.0 0.0 (additional equity securities would increase
Preferred 0.0% 0.0 0.0 shares outstanding and book equity)
Preferred 0.0% 0.0 0.0
Pref. Adj. 0.0% 0.0 0.0 For Credit Stats identify Seniority of the
Total Preferred 0.0 0.0
Total Debt & Preferred 5,310.7 5,310.7 outstanding debt
Total Senior Debt 5,310.7 5,310.7 1 = Senior Debt
Total Subordinated Debt 0.0 0.0
Total Convertible Debt (assumes no conversion 0.0 0.0 2 = Sub. Debt
Total Convertible Preferred (assumes no conve 0.0 0.0
Note: 1=Senior Debt, 2=Subordinated Debt.
50
4. Historical / LTM Income Statement

Step 1
FactSet downloads the historicals automatically. Check downloaded FactSet information and
make changes as required
Fill in Last Fiscal Year column exactly as shown on financial statement (well get to adjustments
later)
You will find all the line items on the income statement, except Depreciation & Amortization, which
are on typically the cashflow statement
If the latest fiscal year end is the most recent quarter, you can ignore the other two columns
Step 2
Fill in the most current quarter and prior corresponding quarter to get to LTM
Make sure you use cumulative amounts (i.e. if the fiscal year end is 12/31 and you are looking at
9/30 10-Q, use nine months ended data)
Step 3
The model automatically calculates LTM for you. Make sure you set CS as the LTM source under
settings/options so the output picks up your hard work
51
Great, But Whats LTM?

LTM = Last Twelve Months
Companies report financial results on a quarterly basis (every 3 months)
LTM represents the sum of the last four quarters results
LTM is important because it shows what the companys reported performance has been over
the last year (though not necessarily a calendar year)
52
5. Income Statement Adjustments

Unusual and Non-Recurring Items
Companies often report one-time gains or extraordinary charges in accordance with GAAP.
As financial analysts, we do not view these charges as related to operations and thus
exclude them.
Typical non-operating charges include gains/losses on sale of assets, inventory write-downs

and restructuring charges
It is important to remember that not all unusual or non-recurring items will be broken out on the
financial statements. This is the result of:
Accountants will not always allow companies to break-out certain charges on the financial
statements because they are not unusual in the strictest sense
Some companies may not want to highlight that they made their numbers as a result of an
extraordinary gain
Charges or gains not broken out in the financials can always be found in the MD&A thats why
you need to read it!
53
6. Projected and Calendarized Income Statement

Projected income statement data comes from the research report you have selected
This data generates your projected EBITDA
It is important to make sure your projected data is presented on the same basis as your
historical data
Completing the equity comp projected data is similar to the historical / LTM data
54
A Note On Calendarizing Estimates

Some companies do not have December 31 fiscal year ends. As a result, the earnings of
these companies are not comparable to the earnings of companies with a December 31 year
end. Therefore:
EPS estimates must be adjusted to a December year end to make companies with different
fiscal year ends comparable on a P/E basis
First Call and I/B/E/S generally download a CYEPS (Calendar Year EPS)
This is intuitively clear when considering two companies one with a fiscal year ending
September 30, 2005 and the other with a fiscal year ending December 31, 2005
The 2005 earnings estimates associated with the September company have a higher
degree of certainty than the December company and thus should receive a higher multiple
than an identical December company
Our objective is to eliminate this artificial valuation differential by calendarizing the estimates
If you choose not to calendarize it, please set calendarization date equal to last fiscal year end
Helpful Hint: In the top right corner of your ABACUS shell, you have the option to calendarize
manually (meaning you do all the work) or by formula (meaning FactSet generates the formula for
you). In most cases, use the Formula option, but make sure you know how it is deriving its ratio.
55
Calendarizing EPS Estimates

Example #1: Fiscal year ends September 30
What does this mean?
It means that 9 months (or ) of the Companys fiscal 2004 results (Jan. 2004 Sept. 2004)
are included in the 2004 calendar year with the remaining 3 months (or ) of the calendar
year estimated in the fiscal 2005 results.
Illustration:
CALENDAR YEAR
FISCAL YEAR ENDED SEPT. 30, FACTOR ENDED DEC. 31,
2004A 2005E 2006E 75.0% 2004A 2005E
Sales $1,000 $1,010 25% $1,020 $1,002.5 $1,012.5

75%
EBITDA 150 200 250 162.5 212.5
EPS 1.00 1.10 1.20 1.03 1.13
56
The Sanity Check

How to avoid the dreaded, This doesnt look right response
Take 5 minutes to look at the output when youre done the team will wait
Look for outliers in the data
Comparable companies usually have comparable multiples

If 9 out of 10 companies in your equity comps are trading between 8x and 10x EBITDA,
and one is trading at 20x, you might have a problem
Possible explanations: 1. Youve made a mistake, 2. This isnt a good comp, or 3. There is
something unusual about this company
In the unlikely event of Case 3, be sure you can explain the situation
Likewise, the relationship between Enterprise Value / EBITDA and P/E should be roughly the
same across companies
Not always true, but be prepared to explain why its not
Check your multiples against research to be sure youre in the right ballpark
If the business is showing momentum and estimated annual operating statistics are improving
over current year figures, your consecutive multiples should be declining (e.g., 16.5x 2005E P/E
vs. 14.6x 2006E P/E)
If the multiples are increasing, make sure you understand why
57
Great Equity Comp Mysteries

What do I do with Minority Interests?
Include with total capital for Enterprise Value calculation, exclude from debt for credit
statistics
Include with net income if it appears to be a normal part of business
What do I do with Equity Earnings when I am calculating Net Income?
Include if it is a normal part of the business

How do I know if a company has done something recently?
Somethings not right

Common light bulbs dramatic change in stock price or shares outstanding, jump in sales
or margins
Look in News Runs, SDC, Documents Library
What if a company has done something recently?
Pro forma the event, e.g., for equity or debt offerings, use the prospectus
Make sure your forecasts (EPS and operating) reflect the event
Footnote!
58

What do I do with all those weird extraordinary charges?
Is it really extraordinary?
Most common are Environmental Charges, Restructuring, Gain/Losses on Sales, Changes in

Accounting
Get rid of it dont forget tax effects
Dont forget to adjust historical EPS
Can I trust FactSet (FDS) codes?
In general, no (exception is security prices)
Do I do anything different with options in an M&A situation?
Assume all in-the-money options are exercisable (change of control provisions)
59

What do I do if a company has had a stock split?
Look in the Stock Guide, footnotes to financial statements, Bloomberg
Make sure historical and forecast EPS reflect the split
Example:
BEFORE AFTER SPLIT: AFTER SPLIT:

SPLIT CORRECT INCORRECT
Stock Price $100 $50 $50

EPS $10.00 $5.00 $10.00
P/E 10x 10x 5x
2:1 Stock Split
60
Definitions
Equity Value (also referred to as Market Value)
The market value of a companys equity: (Number of fully diluted shares x current stock
price) - option/warrant proceeds
Number of fully diluted shares = What the market thinks is outstanding

= Primary shares + in the money exercisable options/warrants + shares from the
conversion of in the money convertible debt/convertible preferred stock
What to do with option/warrant proceeds Subtract from market value
Enterprise Value (also referred to as Adjusted Market Value, or AMV)
The market value of the total enterprise
Market value of equity + net debt
Net Debt =
Long-term debt (including current portion) + short-term debt + out of the money convertible
debt + minority interest + capitalized leases (cash + equivalents)
61
Interpreting the Results A Few General Themes

A larger business is viewed as less risky than a smaller business. However, smaller
entrepreneurial companies may get a premium valuation if they are growing quickly
Higher projected earnings growth implies faster stock appreciation potential and will positively
impact valuation
Higher leverage implies less financial flexibility and will negatively impact valuation
Higher profitability margins imply better expense controls and better ability to stay price
competitive and will positively impact valuation
The higher the economic cyclicality or seasonality of earnings, the riskier the stock
Dividend payments positively impact valuation. Dividends are usually paid by mature
companies that need further incentives for investors. High growth companies do not need a
dividend to get a high valuation
Higher trading multiples (e.g., price/earnings ratio) make the stock less attractive than a similar
company with lower statistics
62
Your Enterprise Value Is Not Correct

You forgot Minority Interest
Should be included in total capital for enterprise value calculation
Is not included in total capital when calculating credit stats
You missed a debt instrument on the balance sheet
You missed a cash equivalent on the balance sheet
The Company may have done a debt offering after the balance sheet date
You can find out in the subsequent events section of the 10-K or 10-Q, from a company
news run or Bloomberg
Make sure that you check what the proceeds were used for if they were used to pay down
other debt, then you should not change anything
Your Equity Value is not correct
63
Your Equity Value Is Not Correct

The Company has done a stock split
The Company has issued or repurchased shares after the 10-K or 10-Q date
The Company has additional classes of common stock outstanding
You forgot to include the stock options
You forgot to include convertible debt or convertible preferred stock
64
Your LTM Data Is Incorrect

You forgot to pro forma for all the charges make sure to thoroughly read the MD&A and
financial notes
You forgot to use cumulative quarterly data (i.e. three months ended 9/30 vs. nine months
ended 9/30)
You forgot to adjust your income statement for acquisitions/divestitures
You forgot to check for press releases and are not using the most up-to-date data
You assume D&A is included in operating expenses but it isnt
65
Your Projected Data Is Incorrect

Your research report is outdated make sure that the research report you are using has EPS
estimates in line with I/B/E/S or First Call
You did not calendarize
You did calendarize but used the wrong ratios
Your research report had a mistake you did not catch
Your research report currency does not match the rest of your input currency
66
Comparable Company Analysis

($ in millions)
SHARE % OF ENTERPRISE VALUE AS A LONG-TERM LTM
PRICE 52-WEEK EQUITY ENTERPRISE MULTIPLE OF SALES MULTIPLE OF EBITDA P/E EPS OPERATING
COMPANY 02/04/05 HIGH VALUE VALUE 2004E 2005E 2004E 2005E 2004E 2005E GROWTH RATIO
Truck Load
JB Hunt Transportation $45.00 97.7% $3,682 $3,697 1.3x 1.2x 8.2x 7.2x 17.5x 15.5x 15.8% 92.9%
Swift Transportation(1) 22.61 99.4% 1,671 2,265 0.8x 0.7x 6.2x 5.9x 14.8x 12.6x 12.6% 93.6%
Werner Enterprises(1) 20.94 90.1% 1,679 1,570 0.9x 0.9x 5.5x 4.9x 19.6x 16.1x 15.3% 91.6%
Heartland Express(1) 20.93 90.2% 1,570 1,311 2.9x 2.6x 10.8x 9.7x 25.2x 22.0x 13.8% 79.6%
Knight Transportation(1) 25.71 99.3% 1,460 1,434 3.5x 2.9x 11.9x 10.1x 29.4x 23.1x 16.6% 80.7%
Covenant Transportation 20.86 97.8% 312 372 0.6x 0.6x 4.8x 4.1x 18.9x 15.8x 12.0% 94.0%
Mean 1.7x 1.5x 7.9x 7.0x 20.9x 17.5x 14.4% 88.7%
Median 1.1x 1.0x 7.2x 6.5x 19.3x 16.0x 14.6% 92.3%
Less Than Truckload
CNF Inc(1) $46.49 91.2% $2,457 $2,400 0.6x 0.6x 6.2x 5.3x 17.8x 14.3x 14.1% 92.3%
Overnite Corp(1) 30.35 78.5% 850 925 0.6x 0.5x 5.3x 4.6x 13.2x 11.0x 15.5% 82.8%
Arkansas Best Corp(1) 41.77 89.5% 1,069 1,000 0.6x 0.5x 4.9x 4.7x 13.0x 11.2x 12.5% 92.8%
Old Dominion Freight(1) 35.60 97.5% 885 961 1.2x 0.9x 7.9x 6.6x 21.6x 16.9x 17.5% 91.4%
SCS Transportation(1) 22.55 81.6% 354 470 0.5x 0.4x 5.2x 4.6x 17.8x 13.0x 15.0% 95.6%
Yellow Roadway Corp(1) 56.31 97.8% 2,769 3,320 0.5x 0.5x 6.3x 5.0x 14.2x 10.9x 10.5% 94.6%
Mean 0.7x 0.6x 6.0x 5.2x 16.3x 12.9x 14.2% 91.6%
Median 0.6x 0.5x 5.8x 4.9x 16.0x 12.1x 14.5% 92.6%
Logistics
C.H. Robinson Worldwide $51.38 91.1% $4,435 $4,201 1.0x 0.9x 18.5x 16.1x 32.9x 28.4x 14.5% 94.9%
UTi Worldwide Inc 71.88 98.5% 2,307 2,297 1.5x 1.1x 30.8x 13.0x 27.9x 21.6x 20.0% 94.0%
Sirva Inc 9.40 36.2% 693 1,165 1.1x 1.0x 6.9x 5.2x 11.1x 7.4x 20.0% 94.6%
EGL Inc 31.18 89.1% 1,461 1,475 0.5x 0.5x 19.1x 14.7x 27.7x 23.1x 17.4% 97.2%
Landstar System Inc(1) 35.25 91.4% 1,083 1,113 0.6x 0.5x 8.3x 7.2x 29.0x 23.8x 17.0% 94.1%
Pacer International 22.19 91.0% 837 1,007 2.6x 2.4x 11.2x 9.8x 16.2x 13.7x 14.6% 94.8%
Forward Air Corp 43.33 91.7% 944 840 3.0x 2.6x 13.9x 11.5x 27.7x 23.1x 14.5% 81.1%
Hub Group 56.46 96.6% 529 529 0.4x 0.4x 10.2x 8.9x 25.3x 22.6x 25.0% 96.6%
Quality Distribution Inc 8.62 53.4% 164 436 0.7x 0.6x 6.6x 5.5x 12.3x 8.5x NA 93.9%
Mean 1.3x 1.1x 14.0x 10.2x 23.3x 19.1x 17.9% 93.5%
Median 1.0x 0.9x 11.2x 9.8x 27.7x 22.6x 17.2% 94.6%
USF Corp(1) $32.44 83.6% $916 $1,015 0.4x 0.4x 6.0x 4.0x 38.2x 13.1x 10.2% 97.3%
Source: Public filings and Wall Street research reports.

(1) Based on 4Q '04 earnings releases.
67

Resources
D. M&A Comps
68
Summer Assignment M&A Comps

Assignment
For the following two acquisitions, create a deal list similar to that on the sample page
Date Acquiror Target

Jan-05 Lee Enterprises Pulitzer
Jun-00 Gannett Central Newspapers
Include target business description, as well as the the following statistics:

EV / LTM sales
EV / LTM EBIT
EV / LTM EBITDA
Key Takeaways
At the end of this section you should be able to answer the following:
1. At what multiples have similar transactions been closed in the past?
2. What valuation (approximately) does this imply for Knight Ridder?
3. Is this valuation different than what was implied from the equity comp analysis, can you
explain the difference?
69
Agenda
What are M&A Comps and Why Do We Do Them?
Finding Comparable Transactions
Practical Guidelines
M&A related SEC filings
USF Corporation: Sample M&A comps
70
Comparable Acquisitions Analysis

Comparable acquisitions analysis values a company by reference to other sale transactions of similar
businesses. Comparable acquisitions analysis is based on the same multiples as those used in
comparable companies analysis
Enterprise Value / EBITDA
Equity Value / Net Income
Enterprise Value / Sales (usually less relevant)
Enterprise Value / EBIT (usually less relevant)
The trick is to find the right comparable transactions and to ferret out the relevant information required
As in comparable company analyses, look for acquisitions of companies with comparable operational and
financial characteristics
Recent transactions are a more accurate reflection of the values buyers are currently willing to pay than
are acquisitions completed in the distant past. This is because market fundamentals are subject to
dramatic change over periods of time. In addition, cyclical businesses will trade at widely different
valuations at the peak and ebb of a cycle
Multiples should be based on the latest public financial information available to the Acquiror at the time of the
acquisition
Helpful Hint #1: Unlike Equity Comps, which value companies off of forward looking estimates, M&A Comps are
historical looking
Helpful Hint #2: Comparable acquisition multiples include consideration which is paid for "control" of the Target.
Since this "control premium" is not reflected in the comparable company valuation, comparable acquisition
multiples tend to be higher and more indicative of the value of a company in a sale context
71
Finding Comparable Acquisitions

Sources to check for comparable acquisitions include:
Other comparable acquisitions schedules
Previous presentations/valuation analyses
SDC database (Securities Data Corporation)
News runs
Equity analysts
Public tender offer documents and merger proxies
Colleagues
Never rely on the multiples of a schedule with an unknown author or with an author who is
not sure that the multiples are correct.
Look for recent acquisitions of companies with operational and financial characteristics
similar to those of the business being valued.
72
Calculation of Transaction Value
Total
Equity Total Preferred Minority Cash and
Transaction = Value + Debt + Stock + Interest - Equivalents
Value
Fully Diluted
Equity Purchase
Value = Shares x Price
Outstanding
Helpful Hint: The major difference between a Transaction Value and an Enterprise Value lies in
the share count. In any Change of Control, all outstanding and in-the-money options, regardless
of whether they are exercisable or not , get converted at the weighted average strike price. This
differs from the Enterprise Value calculation, where only those options that are exercisable get
converted
Total Transaction Value of an M&A deal is similar to Enterprise Value used in Comparable
Companies Analysis.
73
Calculation of Shares Outstanding

Fully Diluted Basic Option/
Shares = Shares + Warrant
Outstanding Outstanding Shares
Basic Shares Outstanding are taken from the cover of the most recent 10-K or 10-Q.
Option/Warrant Shares are calculated using the treasury method, which assumes that all in-the-money
options/warrants are exercised and the proceeds are used to repurchase shares at todays market price
For example:
Basic Shares Option/Warrant Shares

20 million shares 500,000 in-the-money options
$25 is the average strike price
$35 is todays stock price
Helpful Hint: There are two independent concepts regarding option/warrants that tend to confuse people:
1. Outstanding versus Exercisable
2. In-the-money versus out-of-the-money
In an acquisition context, all outstanding and in-the-money options/warrants get converted. In a market value
(equity comp) context, only those options that are both exercisable and in-the-money convert
Options/warrants out-of-the-money never convert
To calculate equity value, we must always use fully diluted shares outstanding.
74
Calculation of Shares Outstanding (Contd)

In-The-Money Option/Warrant Shares:
Step 1: 500,000 x $25 = $12.5 million
Step 2: $12.5 million / $35 = 357,143 shares
Step 3: 500,000 - 357,143 = 142,857
Finally . . . To Calculate Fully Diluted Shares Outstanding.
Fully Diluted = 20,000,000 + 142,857 = 20,142,857

Shares Outstanding
Now You Can Solve For The Equity Value
75
Determination of Purchase Price per Share

Cash consideration is straightforward
Common stock issued by an acquiror is valued using the acquirors stock price on the day prior
to announcement of the transaction
Other securities are valued at market
Existing publicly traded securities should be valued at market on the day prior to
announcement
New classes of securities should be valued at market value on the first day of trading
Calculating the purchase price per share is not always as simple as it may first appear
76
Enterprise Value vs. Equity Value

General Overview
There are typically two stakeholders in any firm, the Debt Holders and the Equity Holders. The
concept of Enterprise Value contemplates that the earnings of the Company are allocated to
both the Debt Holders (through interest payments) and the Equity Holders (through dividends
and appreciation in stock price)
When You Use Enterprise Value
Typically, you will use Enterprise Value in circumstances when the financial statistic being
utilized is flowing to the debt and equity holders. In general, this means that any financial
statistic that is pre-interest expense will use an Enterprise Value concept to determine valuation
When You Use Equity Value
Typically, you will use Equity Value in circumstances when the financial statistic being utilized is
flowing only to the equity holders. In general, this means that any financial statistic that is post-
interest expense will use an Equity Value concept to determine valuation
Public market valuations tend to use earnings multiples (typically forward earnings multiples)
because the investment decision is being made based upon a capital structure that is already in
place and cannot be influenced by the common stock holder
When do you use what?
77
Stock Price Premiums
% Premium
Paid
=
[ Purchase Price
______________
Historical Price
-1
] * 100
Often calculated from day prior to announcement of transaction
Often news and rumors of a potential transaction often leak to the market and affect the stock
price prior to announcement. We also look at premiums over the stock price at other points in
time relative to announcement including:
One Day
One Week
One Month
For public companies, we often look at the percent premium paid to shareholders.
78
Practical Guidelines
1) Obtain SDC run to get general information regarding announcement dates, target/acquirors,
structure of transactions, etc. When doing an SDC run, you typically search by industry SIC
codes to find M&A deals for certain industries. If a deal has just been announced, you'll need
to get a news run done on the deal
2) Make sure the announcement date is correct by checking Bloomberg
3) Retrieve appropriate documents from SEC. You will need a merger document and 10-K
and 10-Q. Make sure that the 10-K and 10-Q are for the target company financials for the
LTM period before the announcement date. M&A comps are usually done on an LTM basis.
At some point you may have to do an M&A comp on a forward basis, but this is uncommon
4) Read a summary of the terms of the transaction in the merger doc. This is especially true
for stock-for-stock transactions. Understand whether the transaction was a stock-for-stock,
cash tender offer, asset sale, minority interest investment, etc. This will help you determine
the purchase price later on
5) Scan the notes of the 10-K and the 10-Q for any significant items not reflected in the
statements. Sometimes the target has been involved in other significant mergers,
divestitures, or other consequential events. If so, then read the appropriate 8-K or other
document in order to pro forma the financials. Also, do a quick Bloomberg scan to see if
anything has happened after the filing of the last financial statement and the announcement of
the merger, which could also affect the valuation
79
Practical Guidelines (Contd)

6) Once you have checked SDCs announcement date, enter this and the effective date.
Generally, you can trust SDC on the effective date
7) Get the business description from the Bloomberg or from the 10-K. Be brief but not vague
8) The type of merger doc you get will tell you what the structure of the deal is. If youve got a
stock deal, then you will have a merger proxy S-4. If you have a cash tender offer, then you
will have a 14D-1. Attitude (friendly vs. hostile) can be obtained from SDC. For the type of
consideration offered, read the summary of the terms of the merger. You may not always
need to show this in your comps
9) Calculate equity value using fully diluted shares outstanding and the offer price per
share. This sounds straightforward, but it is often easy to get tripped up here. Things to
consider:
80

a) For a stock-for-stock deal, the price per share is implied. Some terms to get familiar with:
The exchange ratio is simply the number of shares of the acquiror being offered for every
share of the target. So if Target Corp. received one share of Acquisition Corp. stock for
every five of its shares, then the exchange ratio would be 1/5, or 0.2.
If you read the summary of the terms, you will either get a fixed ratio or a fixed price. In
the case of a fixed price, the exchange ratio adjusts to fit the price. For example, if
Acquisition Corp. knows it wants to pay $5 per share for Target Corp., then the number of
shares it must offer to get to that $5 will depend on its own stock price. If its price were $2
per share, then it would have to offer 2.5 of its own shares, and 2.5 would be the
exchange ratio. In other cases, the exchange ratio is fixed. So if Acquisition Corp. offered
2.5 of its shares for every Target share, then the implied value of the Target share is (2.5 x
Acquisition Corp. share price). Therefore, the implied price will fluctuate over time. So
you can see, either you hold the exchange ratio constant and vary the implied purchase
price, or you have a fixed price and vary the exchange ratio
For our purposes, what we care about is what the shares were valued at prior to the
announcement. So if the Acquirors share price was $10 on the day prior to the
announcement and the exchange ratio was 2, then the implied price per Target share
would be $20. Often the merger proxy will state that the actual exchange ratio at the
closing will depend on the average closing price of the twenty trading days prior to the
three days before the Effective Date... Ignore it, unless for some reason this language is
related to the announcement date somehow, because this is the actual price to be paid.
Remember, our job is to determine how the transaction is valued as of the
announcement, so just assume that such a price is whatever it was on the day prior to
the announcement
81

b) Check the capitalization of the company to see if they have any convertible securities
(debt and preferred stock). Often such securities have takeover provisions which allow
them to convert upon a merger, in which case you want to include their value in the equity
purchase price (of course, you will have to back out their value later when calculating the
enterprise value)
c) Options. Generally, upon a change of control in a company, the options are bought out
by the acquiror. We need to account for this in the equity purchase price, so there are
columns which will calculate this value for you. You can get this info either from the 10-K,
or if available, from the merger proxy (you generally wont find this info in a 14D-1). Since
we will usually not have a detailed breakout of what each individual option is, it is sufficient
to take the average exercise price. When doing so, you should never get to a negative
purchase price for the options because when the exercise price is less than the offer
price, the options are worthless (out of the money)
10) Calculate the enterprise value by entering the appropriate debt and cash figures.
Remember, include marketable securities in the cash figure, and if you converted some pieces
of debt or preferred in calculating them in the equity purchase price, do not include them here.
Otherwise, that would be double counting
11) For LTM figures, make sure the numbers you input do not include unusual or nonrecurring
items. Simply subtract them out from EBITDA and EBIT. For the net income line, make sure
you take these out tax-affected. This means that for a net income calculation you would back
out the unusual multiplied by (1-tax rate)
82

12) There might have been significant events for which you did not pro forma the numbers. Did
the target purchase another company prior to being acquired that is not reflected in the
numbers? Did the target sell off assets or spin off a division? Use your judgment. Companies
in high-growth industries can trade at high multiples (for example, technology deals can be
done at 4x revenues, 1520x EBITDA). Slow, prodding industries should not have such
multiples. Also, if it is a hostile deal, then you may have pretty high multiples since the
acquiror has to pay a big premium to get the deal done
83
M&A Related SEC Filings

SEC FORM/ DOCUMENT
SCHEDULE NAME DESCRIPTION
14D-1 Tender Offer/Offer Filed by the acquiror when launching a tender offer
to Purchase
Has to be opened for a minimum of 20 days
Must be amended for changes in deal/material events
Some information disclosed in document:

Price per share
Number of shares sought
Conditions to closing
Source of financing
Background and purpose of offer
Financial data on acquiror
Information on acquirors investment banker and fees
14D-9 Targets Filed by the target within 10 business days of the commencement of a tender offer
Recommendation
to Tender Offer Contains a recommendation from the targets Board of Directors about how to respond to the Tender
Offer, along with reasons for such recommendation
Also contains other disclosures

Background of transaction
Agreements involving management
Fairness opinion for targets shareholders
Information on targets investment banker and fees
84
M&A Related SEC Filings (Contd)

SEC FORM/ DOCUMENT
13D Filed by any person or group which has acquired 5% of a public company within 10 days of such
acquisition
Required disclosures include:

Identity and background of acquiror
Amount and source of funds
Purpose/intent of purchase
Number of shares owned
Must be amended for material charges
Proxy/S-4 Merger Proxy; Joint Filed by target and/or acquiror
(if securities Proxy/Prospectus
involved) Comprehensive document used to solicit votes to approve transaction
Serves as a registration statement if securities are to be issued as consideration (versus all cash)
Selected disclosures include:

Vote required for approval
Terms of transaction
Recommendation of board
Fairness opinions for targets (and possibly acquirors) shareholders
May describe analysis supporting fairness opinions
Summary financial data, including pro formas
May have full financial statements as an exhibit
Form F-4 (versus S-4) is used by foreign acquirors
85
M&A Related SEC Filings (Contd)
SEC FORM/ DOCUMENT

8K Filed for material corporate events or disclosures; not only used for M&A deals
In M&A context, filed to announce a material acquisition and/or sale of a division/subsidiary
Filed by either seller or acquiror if the transaction is material to such party
Typically gives the key terms of a transaction, with the sale/purchase contract filed as an exhibit
Financial statements and/or pro forma financials are often filed as an amendment on Form 8 as
companies are given time to include financials on the filing
10K, 10Q Annual, Quarterly Contain required financial statements and MD&A filings
Filings
Ks and Qs May also contain M&A-related disclosures which could have been made on Form 8K
13E-3 Going Private Filing Used in connection with a significant affiliated party M&A transaction (i.e., LBO or Minority Buyout)
Discloses fairness of transaction to such minority shareholders, usually determined by Special

Committee
Often contains filing of actual Board presentation by financial advisor to Special Committee
86
Comparable Acquisition Analysis

($ in millions)
ENTERPRISE
EQUITY ENTERPRISE VALUE/ TARGET
DATE TARGET TARGET DESCRIPTION ACQUIROR VALUE VALUE
(1)
EBITDA
(2) UNIONIZED
Jul-03 Roadway Corporation LTL carrier providing freight services on major Yellow Corporation $966 $1231 6.7x NA
(US) city-to-city routes in North America
Nov-01 Motor Cargo Industries Provides regional less-than truckload services Union Pacific Corp. 83 78 4.0 No
in the western U.S.
Nov-01 Arnold Industries Provides regional less-than-truckload services Roadway Corp. 558 510 5.7 Yes
in northeastern states and also provides
truckload and logistics services
Aug-01 Arnold Industries (US) N/A Roadway Corporation 539 510 5.4 No
Aug-01 G.I. Trucking Company Provides regional less-than-truckload services Investor Group (Estes) 40 40 5.0 No
in western and southwestern states
Nov-00 American Freightways Operates as a scheduled common and FedEx Corp. 934 1,196 6.3 No
Corporation contract carrier transporting primarily less-
than-truckload shipments of general
commodities.
Jun-99 Jevic Transportation Provides regional and interregional Yellow Corp. 158 197 5.9 No
Inc. transportation of general commodity freight
Jun-98 Preston Trucking Provides les-than-truckload transportation of Management Group NM NA NA Yes
Oct-97 Caliber Provides transportation, logistics and related FedEx Corp. 2,489 2,681 10.3 No
System, Inc. information services through its five
subsidiaries
Jul-95 Worldway Corp. Transporter of freight throughout United Arkansas Best Corp. 82 153 9.0 Yes
States; also provides truckload services and
driver leasing services through its subsidiaries
Nov-92 Central Freight Lines Carrier of intrastate and foreign commerce Roadway Services Inc. 102 148 6.8 No
Inc. within Texas, Arizona, and New Mexico
Nov-92 Preston Trucking Provides less-than-truckload transportation of Yellow Freight Systems 24 146 5.8 Yes
Jul-88 Viking Freight Inc. Provides regional carrier services in California Roadway Services Inc. 135 172 7.8 No
and 9 other Western States
Jun-88 Arkansas Best Corp. LTL and TL carriage, furniture manufacturing Kelso & Co. 317 472 6.2 Yes
and tire retreading
Median 6.1x
Average 6.5x
High 10.3x
Low 4.0x
Source: Securities Data Corporation, public filings and news reports.

(1) Enterprise Value = Value of Common + Total Debt Cash.
(2) EBITDA, EBIT and Net Income exclude extraordinary items and accounting changes.
87
88
Summer Assignment DCF

Project Knight Ridders income statement for five years
Make note of what assumptions you use to grow the income statement
From these projections, calculate Knight Ridders annual free cash flows
Using your equity comps, find the terminal EBITDA multiple and calculate the terminal value
Using your comps, calculate the proper WACC that should be used to discount Knight Ridders
cash flows
Unlever the Beta for each comp and re-lever at Knight Ridders leverage
Discount the Free Cash Flows and terminal multiple at the WACC
Use the terminal multiple and WACC to calculate an implied perpetuity growth rate
Calculate the equity value per share and compare to Knight Ridders current price
Create a sensitivity table showing the changes in enterprise value and equity value per share as
impacted by the WACC and terminal multiple
Helpful Hint #1: ABACUS has a WACC summary sheet that unlevers and relevers the betas for
you. This schedule can be very helpful, but make sure you understand how it works. You will
have to input company betas, the risk-free rate, market risk premiums and tax rates manually
89
Summer Assignment DCF (Contd)

Key Takeaways
1. What projected income statement assumptions did you use and why?
2. How do you calculate a WACC? Why is it important to unlever and then re-lever your
beta?
3. What risk-free rate, equity risk premium and size premium did you use and where do
these numbers come from?
4. Explain how you determined your Terminal Multiple
5. What value range does your DCF imply for Knight Ridder?
6. Given this valuation, is Knight Ridder currently under- or over-valued in the marketplace?
7. What does this mean for a potential buyer?
90
Agenda
What is a DCF and why do we do it?
Projections
Terminal Value
Weighted Average Cost of Capital (WACC)
Present Value
Sample Discounted Cash Flow Analysis
Sample WACC Schedule
91

Comparable company and comparable acquisition analyses are often used as confirming
methodologies
Specific asset values are sometimes used if other methodologies are inapplicable
Applications of valuation analysis include:

Acquisitions: How much should we pay to buy the company / division?
Divestitures: How much could we sell our company / division for?
Defense: Is our company undervalued / vulnerable to a raider?
Fairness Opinions: Is the price offered for our company / division fair from a financial point of
view?
Public Equity Offerings: For how much could we sell our company / division in the public
market?
New Business Presentations: Various applications
Discounted Cash Flow analysis is typically the primary valuation methodology used by
CS in M&A and certain capital markets transactions.
92
DCF Versus Other Valuation Methodologies
Discounted Comparable Comparable

Cash Flow Analysis Company Analysis Acquisition Analysis
Methodology:
Present value of projected
Value based on market trading
Value based on multiples paid
unlevered free cash flows multiples of comparable for comparable

Inherent value companies companies/assets in sale

Best captures business in
Implied value in public securities transactions
transition markets (IPO analysis); fully-
Implied value in private market

Sensitivity analysis distributed value
Focuses mainly on multiples of

Synergies analysis
Usually focus on forward looking historical EBITDA, earnings

Buy vs. build EBITDA, earnings and cash flow and cash flow
Issues:
Financial forecasts developed
Market environment
Market environment
with management
Quality of comparables
Quality of comparables

Discount rate
Public data
Availability of data

Terminal value method
Consistent accounting treatment
Consistent accounting

Less meaningful benchmark for treatment
assets with unique cash flow
Less meaningful benchmark for
patterns assets with unique cash flow
patterns
Of the three principal valuation methodologies used on Wall Street, DCF analysis
frequently carries significant weight.
93
Discounted Cash Flow Analysis Components

Valuation Steps Remarks
Define
components of free cash flow (FCF)
Develop historical perspective

Forecast of Unlevered FCFs
Produce financial forecasts and sensitivity analysis

Step back and interpret the results

Calculate Terminal Value Exit

multiples, perpetuity formula, other approaches
Cost
of equity
Calculate WACC Cost of debt

Theoretical optimal capital structure

FCF
for periods 1 to n
Discount FCFs
Terminal value

Adjustment
for non-operating items (e.g., extraordinary items, cash
Enterprise Value flow from unconsolidated subsidiaries, hidden assets, contingent
liabilities, etc.)
Take
market value of financial debt, plus minority interests plus other
Less net debt non-working capital liabilities less excess cash and marketable
securities (sometimes referred to as corporate adjustments)
Equity Value Interpret

results
Compare
findings with other valuation methods
94
Valuation: Enterprise Value Versus Equity Value

Enterprise Value = market value of operating assets
Equity Value = market value of shareholders equity
Equity Value = Enterprise Value Net Debt(1)
Liabilities and
Net Assets Shareholders Equity
Net Debt
Enterprise
Enterprise Value
Value
Equity Value
(1) Net Debt (Corporate Adjustments) is equal to total debt + minority interest + preferred stock + capitalized leases - excess cash and cash equivalents.
We use discounted cash flow analysis to calculate the enterprise value of the firm, which
then allows us to calculate its equity value.
95
DFC Analysis: The Process
Project the operating results and free cash

Step 1 Projections flows of a business over a particular forecast
period.
Estimate the terminal value of the

Step 2 Terminal Value business, often by using terminal multiples,
at the end of the forecast period.
Use the weighted average cost of capital

Step 3 WACC to determine the appropriate discount rate
range.
Determine a range of values for the enterprise

Step 4 Present Value by discounting the projected free cash flows
and terminal value to the present.
Adjust your valuation for all assets and

Step 5 Adjustments liabilities not accounted for in the cash
flow projections.
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Step 1: Projections
DCF analysis is an attempt to look at the companys pure operating results, free and clear of financial leverage,
extraordinary items, discontinued operations, etc.
Many times, we are given financial projections from the management of a particular company; however, there
are situations in which we must develop our own forecast for a particular company or business
It is extremely important to look at the historical performance of a company or business to understand
how future cash flows relate to past performance
A companys unlevered free cash flows represent the cash generating ability of that particular company, without
regard to its present or prospective capital structure
As a result, unlevered free cash flows are projected before subtracting interest and financing expenses or
related tax shields
DCF projections should be based on:
Historical performance
Company projections (when available)
Equity research analyst estimates
Industry data
Common sense
The forecast horizon should be long enough so that the company reaches steady state by the end of the
forecast period
Typically, forecasts of 5 - 10 years are used for DCF analyses of maturing or mature firms
The free cash flows from a business can be projected using information about the
industry in which the business operates and information specific to the business.
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Step 1: Projections
Extract historical financials
Sales
Operating cash flow
Depreciation & amortization
Deferred taxes
Capital expenditures
Working capital (receivables, inventories and prepaid expenses less current payables and other
current operating liabilities)
Analyze numbers
How relevant are historical figures?

Major changes in business or industry
Managements discussion of results
Are numbers clean?
Extraordinary items
Acquisitions / divestitures
Is anything excluded?
Compare to cash flow statement
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Step 1: Projections Sales

Sales Buildup
Build a separate schedule for sales analysis which will feed through to consolidated statement
Breakdown by market segment (different prevailing market dynamics), product type/class, etc.
Assumptions on volumes and unit prices
Base assumptions on:
Research reports
Management or client forecasts (if available)
Overall industry trends
Sales growth is usually an input; aggregate sales are derived from this input
99
Step 1: Projections Operating Expenses,

Depreciation Expenses and Taxes
Operating Expenses
Build a separate schedule for cost analysis:
Breakdown by main category of costs
Cost of goods sold, personnel costs, SG&A expenses
Fixed vs. variable costs
Understand cost behavior/sensitivity to changes in sales level
Understand key cost drivers (e.g., price of raw materials, inflation, etc.)
Estimate as a percentage of sales
Depreciation Expense
Usually expressed as a percentage of sales, comparing to historical trend or hardcoded and set
relatively flat throughout the period
Tax
Tax charge that the Company would pay if it had no debt
Assess tax rate based on previous marginal tax rate (composite local and corporate tax
rates) as well as current and future tax regulation
Reflect operating loss carry forwards, if any
(1) Exclude land because it is not depreciable.
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Step 1: Projections Capital Expenditures

Capital expenditures (Capex) are the investments necessary to maintain the required capital
intensity, which includes expenditures on new as well as replacement property plant and
equipment (PP&E)
Base assumptions on:

Company forecasts
Industry levels
Research reports
Percentage of sales, percentage of PP&E
Build a CapEx schedule breaking down expenditures by type of asset (buildings, machinery and
equipment, other assets) and between new and replacement CapEx
Show beginning and ending PP&E by type of asset
At the end of forecast period, the CapEx level should be in line (equal or slightly higher) with
depreciation (i.e., assume that capital intensity is maintained going forward)
For a given year, CapEx is equal to end of year net PP&E less beginning of year net PP&E plus
depreciation expense for the year
(1) Net PP&E is equal to gross PP&E less accumulated depreciation.
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Step 1: Projections Working Capital

Working capital is defined as the sum of accounts receivable, inventories, pre-paid expenses
and other current assets, less the sum of accounts payable, accrued expenses and other
current liabilities
This definition can change slightly for companies in different industries
Exclude excess cash and marketable securities and short-term debt
We often use the term net working capital to distinguish the investment banking concept
from the accountants definition of working capital
Build a working capital schedule breaking down the main components of working capital
Estimate balances for the components of working capital as a percentage of sales, cost of
goods sold or other appropriate metrics (or using year-on-year growth rates) for each
projection year
Calculate the net increase/decrease in working capital for each year
When forecasting working capital, consider whether the companys changing mix of business
affects its need for working capital
Any action to squeeze cash from working capital by operating more efficiently (e.g.,
reducing working capital as a percentage of sales, for instance via implementation of a
just-in-time inventory system, a change in receivable/payable policy, etc.); whether there
is a discernible trend in working capital, and if so, whether the improvement/deterioration
will continue or stabilize?
Increases in net working capital are a use of cash and decreases in net working capital are a
source of cash
Remember that increases in assets and decreases in liabilities are uses of cash and
decreases in assets and increases in liabilities are sources of cash
102
Step 1: Projections Deferred Taxes

Deferred Taxes
For valuation purposes, taxes should be stated on a cash basis
Deferred tax assets and liabilities arise due to differences between financial (book) accounting
and tax accounting
The most significant differences in book and tax accounting typically arise with regard to
the depreciation of assets. In the U.S., assets often can be depreciated on an accelerated
basis for tax purposes, lowering taxable income in the current period and thus lowering
actual cash taxes paid.
On a book basis, however, often times the same assets cannot be depreciated on such an
accelerated basis, thus taxable income is higher, as are book taxes per the income tax
provision. The increase in deferred tax liabilities accounts for the difference between book
taxes and the actual taxes paid to the government
Increases in deferred tax liabilities (net of deferred tax assets) are a source of a cash and
should be added in calculating free cash flow (and alternatively, decreases in deferred tax
liabilities are a use of cash and should be subtracted in calculating free cash flow)
103
Step 1: Projections Reality Check

Confront sales growth assumptions with underlying market dynamics
Be skeptical of projected sales growth curves that look show dramatic improvements versus recent actual
performance. Does the increase in sales reflect a constant market share in an expanding market? If so, why is
the market expanding? Does that assumption agree with industry projections? If it is an expanding market, why
will the company be able to maintain a constant market share? Or does the increase reflect a rising market share
in a stagnant market? If yes, why? Are some firms leaving the industry? Why?
Check reasonableness of margins
Avoid margin hockey sticks. Be clear on the actions and/or events needed to trigger improvements in margins
(or reasons for decreases in margins). Are the margin levels consistent with the structure of competition in the
industry? Any risk of new entrants/substitute products that will drive margins down?
Capital Expenditures
Watch out for step-up of production capacity required as sales increase. Is the CapEx level sufficient to support
the forecasted increase in sales? Factor in the impact of industry trends on CapEx (e.g., increased environmental
expenditures, technology changes, etc.)
Working Capital
Are inventory and other working capital forecasts consistent with the sales increase? What is the pattern of
accounts receivable collection? How is it practically achieved? Assess bargaining power of customers
(receivables terms) and suppliers (account payable terms). Are your assumptions in line with industry standards?
Be Critical About Buyers and Sellers Projections
Use due diligence/access to seller's management to gain in-depth understanding of company's assumptions and
challenge them (if and when appropriate). Where possible, compare the company's past record of actual versus
budgeted results
Add value/ manage client's expectations (both on buy and sell sides) by thoroughly understanding the company's
market dynamics and competitive positioning
As always, it is important to perform a Reality Check on the main components of FCF
104
Step 1: Projections
Unlevered Free Cash Flow
Unlevered Free Cash Flow is the unlevered after-tax cash flow generated by the Company
(including the impact of any reinvestment)
Unlevered Free Cash Flow is available to all providers of the Companys capital, both creditors
and shareholders
Unlevered Free Cash Flow is best determined by considering sources and uses of cash:
METHOD 1 METHOD 2
Net Income EBIT
(1) (2)
(+) After-Tax Interest Expense (-) Tax Effect
= Unlevered Net Income = Unlevered Net Income
(+) Increase in net Deferred Tax Liability (+) Increase in net Deferred Tax Liability
(+) Depreciation and Amortization (+) Depreciation and Amortization
(-) Increase in Net Working Capital (-) Increase in Net Working Capital
(-) Capital Expenditures (-) Capital Expenditures
= Unlevered Free Cash Flow = Unlevered Free Cash Flow
Note: Changes in other long term assets/liabilities may affect Unlevered Free Cash Flow.
(1) After-Tax Interest Expense is defined as interest expense less the applicable interest tax shield.
(2) In most cases, amortization expense is not tax-deductible.
105
Step 2: Determination of Terminal Value

Firm value, based on free cash flows, can be separated into two components:
PV of FCF during PV of FCF after

Company Value = explicit forecast + explicit forecast
period period
Since DCF analysis is based on a limited forecast period, a terminal value must be used to capture the
value of the business at the end of the projection period
The terminal value is usually added to the free cash flow in the final year of the projections and then
discounted back to the valuation date, or it can be discounted separately to the valuation date
The terminal value typically constitutes a substantial portion of the total enterprise value. Critical
thinking about prospects of the business, and therefore the terminal value, results in a more
meaningful, accurate and defensible DCF analysis
Note that the terminal year free cash flow has to be normalized to ensure that the company has
reached a steady state
Normalized operating assumptions: sales and profitability assumptions for the final year should
reflect a steady state year, not a peak or trough in the business cycle; and depreciation and
capex should be within the same range
Terminal value is determined through either application of a valuation multiple (the terminal multiple)
or the perpetuity growth method
The terminal value captures the value of the business at the end of the projection period,
which is based on the free cash flows of the business beyond the explicit forecast period.
106
Step 2: Terminal Value Terminal Multiple Method

Terminal Value = Statistic x Multiple
Statistic: Operating statistic used (e.g., EBITDA in year 10)
Multiple: Selected multiple (e.g., 10.0x)
Multiple is based on the most appropriate multiple for the companys industry (e.g., EBIT versus
EBITDA versus EBITDAR)
The multiple applied should reflect the long-term market valuation of the company/industry,
rather than a current multiple that may be distorted by industry or economic cycles
When applying the multiple it is important to distinguish between:
Comparable trading company multiples and comparable acquisitions multiples

It is almost always more appropriate to base terminal multiples on the figures derived via
comparable companies analysis, rather than those from comparable transactions analysis
LTM and forward multiples
Always show a range of multiples
Terminal value based on assumed trading or acquisition multiple at the end of the
projection period.
107
Step 2: Terminal Value Perpetuity Growth Method

The Gordon Growth formula:
Terminal Valuen = Unlevered FCFn+1

(r - g)
Unlevered FCF n+1: Unlevered free cash flow in the first year after the explicit projection
period
Note that we often estimate FCF n+1 by taking FCF n and growing it by the growth rate g,
but this is not always appropriate
r: Discount rate (based on weighted average cost of capital)
g: Perpetuity growth rate
The perpetuity growth rate used must be realistic
Reference point should be nominal GDP growth
Expected long-term growth rate of the industry (e.g., utility industry growth rate versus cable
TV industry growth rate)
Always show a range of perpetuity growth rates
Terminal value based on business operating into perpetuity, growing free cash flow at
some constant rate.
108
Step 2: Terminal Value Cross Referencing

Check the reasonableness of the terminal value by linking the terminal multiple and perpetuity growth rate
Calculate the implied perpetuity growth rate for a range of terminal multiples or, conversely check how
the perpetuity growth rate translates into terminal multiples. For example, the terminal multiple you used
may imply too high a perpetuity growth rate for the industry, or vice versa
The formula below demonstrates how to reverse into the implied terminal multiple from the perpetuity growth
method
Implied terminal multiple = PV TV x (1+r)n FV TV
=
Statistic Statistic
PV TV: Present Value of Terminal Value
FV TV: Future Value of Terminal Value
r: Discount rate
n: Number of years discounted
Statistic: Operating statistic on which multiple applied (e.g., EBITDA in year 10)
The formula below demonstrates how to reverse into the implied perpetuity growth rate from the terminal
multiple method (assuming FCFn+1 = FCFn x (1+g) )
Implied perpetuity growth rate = (r x Statistic x Multiple) Unlevered FCFn
(Statistic x Multiple) + Unlevered FCFn
Multiple: Selected valuation multiple (e.g., 10.0x)
Unlevered FCF n: Unlevered free cash flow in last year of the projection
Does the terminal value make sense?
109
Step 3: WACC Discount Rate Overview

The Weighted Average Cost Capital (WACC) is the recommended discount rate to be
used in the unlevered discounted cash flow valuation of an asset.
The WACC should be thought of as the opportunity cost of capital, the long-term return an
investor expects to earn in an alternative investment of equivalent risk
The WACC to be used in a DCF analysis is specific to the business or asset being valued. It
does not necessarily depend on the buyers or sellers overall cost of capital
WACC is used by firms as the hurdle rate for a project or division, as a performance benchmark
for return on capital calculations, to determine desirability of stock repurchases or issuance, or
for valuation purposes
Mathematically, WACC is expressed as:
After-tax Proportion of Debt Cost of Proportion of Equity

WACC
(1)
= Cost of Debt x in Capital Structure + Equity x in Capital Structure ;
Cost of
Equity
(2) =
Risk-Free
Rate + Levered
Beta
x Equity Market Risk Premium ;
Levered Unlevered 1 + (1 - Tax Rate) x (Debt/Equity Ratio)

= Beta x
Beta (3)
(1) Assumes capital structure is only debt and equity. Other sources of capital, such as preferred stock, would need to be included if present.
(2) Based on the Capital Asset Pricing Model.
(3) Assumes companys debt is risk-free. In certain limited situations, an adjustment can be made to this formula to account for the riskiness of the companys debt.
110
Step 3: WACC Target Capital Structure

The weights applied to the costs of equity and debt used in computing WACC for an asset represent the
theoretical optimal capital structure for that asset
Finance theory (Modigliani-Millers three propositions) suggests that in the absence of taxes and financial
distress/bankruptcy costs, changing leverage has no effect on WACC, and therefore no effect on firm value
However, in a world with taxes and financial distress, increasing leverage is predicted to result in a
decrease in the cost of capital, permitting the determination of a theoretically optimal capital structure
Common applications of WACC do not directly factor in financial distress costs, thus they underestimate
WACC at high levels of leverage
Another shortcoming of WACC is that it assumes capital weights (i.e., leverage) are held constant
through time
(%)
Cost of Equity
Weighted Average Cost of

Capital (WACC)
Cost of Debt
Debt as a % of Enterprise Value
Prior to calculating the cost of equity and debt for the company you are valuing, you need to define a target
capital structure that reflects the debt to equity ratio that is expected to prevail over the life of the business.
111

Calculate the current market value-based capital structure for the company
To estimate the market value of equity (market capitalization), multiply the stock price by the
shares outstanding. Exercisable stock options that are in-the-money should be included in the
equity value to the extent the current stock price exceeds the exercise price. If the company is not
public, you can estimate the equity value by some alternative method.
To estimate the market value of debt, look to see if the debt is publicly traded; if so multiply the
trading price by the number of securities outstanding. If the debt is not traded, estimate the market
value by comparing with similarly rated publicly traded debt. Book value of debt is sometimes
used as an approximation if value of bonds is close to par (issue price)
Typically convertibles that are out-of-the-money are treated as debt at book value.
Convertibles that are in-the-money are converted into shares of common stock at the
conversion price and treated as equity. Theoretically, convertibles consist of both equity
and debt components, but rarely do Wall Street firms break them into separate parts for
WACC analysis
Include capital leases in the total debt calculation. Operating leases require case-specific
judgment - they are frequently converted into capital leases by applying a multiple
(typically 6x - 8x) to the annual operating lease payments
For companies with captive finance subsidiaries, we typically exclude finance company-
related debt
You can use a combination of the following three approaches to estimate the appropriate
target capital structure.
112

Review the capital structures of comparable companies
Assess the average market capital structure prevailing in the companys sector
Review managements financing philosophy
When possible, discuss with management of the company that you are valuing their
financing policy and their explicit or implicit target capital structure on a normalized basis.
If you dont have access to management, look for any statements in the press, research
reports, annual report, etc. that give hints on the companys medium to long-term
financing objectives
113
Step 3: WACC Cost of Equity

Typically, the Capital Asset Pricing Model (CAPM) is used to estimate the cost of equity; there
are other approaches that are occasionally used in valuation, including:
Rate of return required by private equity investors in the market (i.e., LBO or venture capital
transactions)
Arbitrage Pricing Theory
Fama-French three factor model
An investor may obtain a risk-free rate by investing in governmental bonds. By purchasing
equities, he or she assumes general market risk and therefore will expect a certain premium for
doing so. CAPM quantifies the relationship between risk and return in a well functioning market
To implement the CAPM approach, you need to estimate three factors that determine the
Security Market Line: the risk-free rate, the market risk premium and the levered beta
Security Market Line
20
Expected Return (in percent)
15
M
Market
Return
10 Risk Premium
Risk-free
Rate
5
0
0.0 0.5 1.0 1.5
Beta
114
Step 3: WACC The Risk-Free Rate

Finance theory recommends using a true risk-free rate that has the same term as the cash
flows projected
Since long term bond rates have intrinsic interest rate risk factored in, some theorists have
suggested making a liquidity adjustment to the long bond rate representing the term premium
implicit in those rates
However, this is rarely done in practice by Wall Street professionals
At CS, we typically use the 20-year treasury bond for the U.S. risk-free rate, as it matches the
risk-free rate used in the calculation of the equity risk premium
Ibbotson uses the 20-year because there has only been a 30-year bond since 1977 and
their data analysis goes back to 1926
There is no longer a 20-year bond issued by the U.S. Government, so you must look for a
30-year bond that has been outstanding for 10 years or use interpolated yields from
Bloomberg (type ICUR20 and hit GO) or another source
Treasury strips typically are not used but may be appropriate if the asset being valued
provides a single payoff at the end of a specified term
To access current yields to maturity on U.S. Government bills, notes and bonds on Bloomberg,
type T and the Government key and hit GO
115
Step 3: WACC The Equity Risk Premium

The equity risk premium (ERP) is the difference between the expected rate of return on the market portfolio and
the risk-free rate
Proper methodology for estimating the equity risk premium is the subject of much debate in academia
Equity premia ranging from as low as 3% to as high as 8% are used on Wall Street
CS IBD uses estimates for ERP from Ibbotson Associates; the current ERP figure is 7.1%
This figure is calculated by looking at stock market returns relative to returns on long-term government
bonds from 1926 through 2005
Some argue that use of this period over-estimates the risk premium, and that data over a more recent
period would suggest a lower premium
Also, some argue that using historical data presents a conundrum - equity returns over the last 20 years
have been significantly higher than returns on government bonds, however the performance of the equity
markets may have been, in part, driven by a reduction in the equity risk premium
Nevertheless, most (if not all) major Wall Street firms rely on the Ibbotson data for their cost of capital
analyses
Where applicable, the WACC must be adjusted to reflect fact that betas for small companies do not account for
all of the risks faced by investors in those companies. The following size premia (Ibbotson, 2006) should be
added to the cost of equity calculation where appropriate:
Mid-Cap ($1,729 million to $7,187 million) = 1.02%
Low-Cap ($587 million to $1,729 million) = 1.81%
Micro-Cap (Below $586 million) = 3.95%
The equity risk premium is a critical element of WACC and DCF analysis that is often the
subject of intense debate.
116
Step 3: WACC Beta

CAPM holds that investors are only rewarded for bearing systematic risk and are not rewarded for bearing
unique or unsystematic risk. It is assumed that investors can eliminate unsystematic risk on their own through
portfolio diversification
Beta represents a measure of the systematic risk that exists in an asset, and is central to CAPM
Beta = COV[Rasset, Rmarket] / VAR[Rmarket], or equivalently
= CORR[Rasset, Rmarket] x STDasset / STDmarket
High volatility is not necessarily an indication of high beta
Historical betas of publicly traded equity securities can be calculated based on an analysis of the actual returns
on the security vs. the actual market returns over the same period
Unfortunately, historical betas can be poor predictors of expected beta, which is what we need in our
analysis
BARRA, a financial research firm, computes predicted betas for most public companies
Use a portfolio or average of peer company betas where available because significant error can exist in
individual betas
R-Squared (R2) measures the goodness of fit of the regression line, and describes the percentage of
variation in the dependent variable that is explained by the independent variable. R2 may vary from 0 to
1 with 1 meaning that the independent variable explains 100% of the variation of the dependent variable,
although R2 for individual equity betas seldom rise above 0.2
Observed betas reflect both the business and financial risk of the company. Betas are unlevered to measure
only the business risk of a company and then relevered to the target capital structure of the company that is
being valued to reflect both business and financial risk
Increasing leverage will, according to theory, increase the beta of a firms equity and hence its cost of
equity
L
U = L = U [ 1 + D (1-T) ]
D (1-T) E
1+
E
117
Step 3: WACC Cost of Debt

The cost of debt is measured as the expected return on the companys long-term debt securities
The cost of debt is dependent on both the general interest rate environment in the economy and the
credit quality of the business or asset being valued
The cost of debt is measured on an after-tax basis because interest payments are tax deductible in the U.S.
The tax rate to be used is the companys marginal tax rate, typically 40% in the U.S.
The cost of debt can be measured in several ways:
If the company has public debt outstanding, take the weighted average of current yields to maturity or yields to
worst on all issues in the target capital structure
The yield to maturity (or for callable bonds, the yield to worst) embodies the markets expectations of
future returns on debt and should be used instead of the coupon rate
Average cost of debt (not marginal) may be more appropriate when the entire enterprise is being valued
Include short-term and medium-term debt (along with long-term debt) if it is expected to be part of the
permanent capital structure going forward
Talk to Debt Capital Markets (DCM) if debt securities are only thinly traded or if it is difficult to obtain a
market price
Risk-free rate + current corporate spread over treasuries of selected comparable credits
Must either use the bond rating given to the company by Standard & Poors or Moodys, or estimate the
companys bond rating by comparing the companys financial ratios (i.e., Debt / EBITDA, EBITDA /
Interest) to those of its peers who have such ratings
Be wary of debt securities that have options attached (e.g., convertible bonds or callable bonds) that affect the
overall yield to maturity and thus may not reflect the true cost of straight debt securities
118
Step 3: WACC Cost of Capital Build-up

Small Cap Foreign
Stocks Stocks
Foreign Stock
Size Premium
Large Cap Premium
Stocks
Corporate
Bonds
Long-Term Default
Premium
Treasury Equity Equity Equity
Bonds Risk Risk Risk
Premium Premium Premium
Long Horizon Long Horizon
Premium Premium
Treasury
Bills
Inflation Inflation Inflation Inflation Inflation Inflation
Real Riskless Real Riskless Real Riskless Real Riskless Real Riskless Real Riskless
Rate Rate Rate Rate Rate Rate
119
Step 3: CS U.S. WACC Methodology

In practice, we typically make the following assumptions at CS:
Target Capital Structure

Average of ratio of debt and equity market capitalization of selected comparable companies
Risk Free Rate:
20 year US Treasury coupon bond yield (Bloomberg: ICUR20)
Tax Rate:
Estimated future marginal tax rate (usually 40%)
Equity Market Risk
Ibbotson equity market premium (currently 7.1%), calculated based on historical (arithmetic) return of
Premium: equity market relative to 20 year treasury bond
Beta:
Take predicted levered betas of comparable companies (use Barra predicted betas), unlever them
according to capital structure, average the unlevered betas, and re-lever the average to the target
capital structure of the company being valued
Cost of Debt:
Risk-free rate + current corporate spread over treasury for comparable credits
In general, WACC calculation is not a science; there are no exact answers, judgment and reality
checks are essential
Typically, discount rate ranges centered around a best estimate for WACC are used in
DCF valuations
Small differences in WACC/discount rate can have huge impacts on value
120
Step 4: Present Value

Time Value of Money
A dollar today is worth more than a dollar tomorrow.
Discounting
Discounting is the process of finding the present value of a future sum
Very Simple Example
Assumes the discount rate is 10%; uses end of period discounting for all cash flows
2003 2004 2005 2006 2007
Free Cash Flow $10 $15 $20 $24 $89
Period 1 2 3 4 5
1 1 1 2 1 3 1 4 1 5
Discount Factor /1.10 /1.10 /1.10 /1.10 /1.10
Discount Factor 0.9091 0.8264 0.7513 0.6830 0.6209
Present Value $9 $12 $15 $16 $55
The total present value at December 31, 2002 is equal to the sum of the present values of the
individual cash flows ($108)
Mid-year Discounting
The above example assumes end of the period discounting, that is it assumes all of the
cash flows come at the end of each period. A more accurate method may be mid-year
discounting, which assumes that the cash flows come in the middle of each period (this is
essentially equivalent to evenly spreading the cash flows throughout the period)
When performing mid-year discounting, one must still discount the terminal value from the
end of the forecast period
121
Step 4: Present Value

Valuation
To calculate the value of a business using DCF analysis, the projected free cash flows over the
forecast period are discounted to the present over the appropriate range of discount rates
A range of terminal values for the business is added to the cash flows in the last year of
projections and discounted to a present value
The resulting values represent the total or enterprise value of the business, including both debt
and equity. To calculate the value of a companys equity, subtract the companys net debt from
its enterprise value
In addition, the enterprise value should be adjusted by adding other unusual assets or
subtracting liabilities to reflect the companys fair equity value
DCF pointers
Assumption Summaries: Write up summaries of the key assumptions underlying your cash flow
projections
Sensitivity Analysis: It is useful to vary some of the important assumptions (e.g., sales growth
rate, margins) to determine how sensitive your value range is to key determinants of future
results
Calculator Check: Always check Excel numbers with a calculator
122
Step 5: Corporate Adjustments

DCF analysis calculates the Enterprise Value (also known as Adjusted Market Value) of a
company
The Equity Value of a company is equal to its Enterprise Value less Corporate
Adjustments
Corporate Adjustments include the companys net debt plus other obligations, less other assets
not included in the DCF analysis or financial forecasts
Long
term debt (including current portion) Contingent
liabilities
Short term debt
Excess Cash

Minority interest
Value of other assets not in DCF

Capitalized leases

The Equity Value per diluted share is equal to the Equity Value divided by the number of net
fully-diluted shares outstanding
Number of net fully diluted shares = Basic shares + net shares underlying in the money
options / warrants + net shares from the conversion of in the money convertible debt and
convertible preferred stock
Incremental common-equivalent shares are typically calculated using the treasury stock method
Note that this is a circular calculation the treasury stock calculation depends on an
assumed share repurchase price, which is dependent upon the number of net fully-diluted
shares outstanding
Outstanding vs. exercisable options
(1) Note that out of the money options, while not converted per the treasury stock method, represent a cost that is not captured in the analysis (typically this error is a small one).
123
Sample Discounted Cash Flow Valuation

($ in millions)
2005E 2006E 2007E 2008E 2009E

EBITDA $250.7 $278.5 $307.2 $317.6 $328.2
Less: D&A (113.6) (121.6) (130.3) (134.2) (138.2)
EBIT $137.1 $156.9 $176.9 $183.4 $190.0
Less: Tax Effect (52.1) (59.6) (67.2) (69.7) (72.2)
Unlevered Net Income $85.0 $97.3 $109.7 $113.7 $117.8
Plus: D&A 113.6 121.6 130.3 134.2 138.2
Less: Capex (103.2) (110.5) (118.4) (122.0) (125.7)
Plus: Changes in WC (13.7) (7.2) (7.7) (3.2) (3.2)
Unlevered Free Cash Flow $81.7 $101.1 $113.9 $122.7 $127.1
Source: Wall Street research projections and Credit Suisse estimates.

Terminal Value EBITDA Multiple
Discount Rate 4.50x 5.00x 5.50x 6.00x
(99.3) (99.3) (99.3) (99.3) Less: Net Debt
$1,278.2 $1,384.9 $1,491.6 $1,598.2 Equity Value
(1)
(99.3) (99.3) (99.3) (99.3) Less: Net Debt
$1,224.0 $1,325.9 $1,427.8 $1,529.7 Equity Value
(1)
876.6 974.0 1,071.4 1,168.8 Present Value of Terminal Value
(99.3) (99.3) (99.3) (99.3) Less: Net Debt
$1,172.5 $1,269.9 $1,367.3 $1,464.7 Equity Value
26.2% 36.1% 45.9% 55.8% Implied Premium / (Discount) to Current (1)
(1) Based on share price of $32.44 as of 02/04/05. 124
WACC Schedule
Industry Statistics
(in millions)
Total Mkt Debt / Tax Levering Unlevered
Company Beta (1) Debt Equity Mkt Equity Rate (2) Factor (3) Beta (4) Assumptions
Arkansas Best Corp 0.83 15 1,069 1.4% 40.1% 1.01 0.82 Target Marginal Tax Rate 38.0%
Cnf Inc 0.89 714 2,457 29.1% 41.0% 1.17 0.76 Risk Free Rate (5) 4.330%
Old Dominion Freight 0.62 81 885 9.2% 39.1% 1.06 0.59 Equity Risk Premium (6) 7.20%
Overnite Corp 0.95 127 850 14.9% 40.0% 1.09 0.87 Size Premia ("Sp") (7) 1.59%
Scs Transportation Inc 0.63 123 354 34.7% 37.6% 1.22 0.52
Yellow Roadway Corp 1.00 728 2,769 26.3% 39.1% 1.16 0.86
Mean 0.82 19.3% 39.5% 1.12 0.74

Median 0.86 20.6% 39.6% 1.12 0.79
Schedule A (Sensitivity of Capital Structure)

Debt / Debt / Average Levering Levered Cost of Pre-tax Cost of Debt
Capital Mkt Equity Unlev'd Beta Factor Beta (8) Equity (9) 5.0% 6.0% 7.0% 8.0% 9.0% 10.0%
0.0% 0.0% 0.74 1.00 0.74 11% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2%
10.0% 11.1% 0.74 1.07 0.79 12% 10.7% 10.8% 10.9% 10.9% 11.0% 11.1%
20.0% 25.0% 0.74 1.16 0.85 12% 10.3% 10.4% 10.5% 10.6% 10.8% 10.9%
30.0% 42.9% 0.74 1.27 0.93 13% 9.8% 10.0% 10.1% 10.3% 10.5% 10.7%
40.0% 66.7% 0.74 1.41 1.04 13% 9.3% 9.5% 9.8% 10.0% 10.3% 10.5%
50.0% 100.0% 0.74 1.62 1.19 15% 8.8% 9.1% 9.4% 9.7% 10.0% 10.4%
Schedule B (Sensitivity of Unlevered Beta)

Debt / Debt / Levering Unlevered Pre-tax Cost of Debt
Capital Mkt Equity Factor Beta 5.0% 6.0% 7.0% 8.0% 9.0% 10.0%
0.0% 0.0% 1.00 0.65 10.6% 10.6% 10.6% 10.6% 10.6% 10.6%
10.0% 11.1% 1.07 0.70 10.5% 10.5% 10.6% 10.7% 10.7% 10.8%
20.0% 25.0% 1.16 0.75 10.3% 10.5% 10.6% 10.7% 10.8% 11.0%
30.0% 42.9% 1.27 0.80 10.2% 10.4% 10.5% 10.7% 10.9% 11.1%
40.0% 66.7% 1.41 0.85 10.0% 10.2% 10.5% 10.7% 11.0% 11.2%
50.0% 100.0% 1.62 0.90 9.8% 10.1% 10.4% 10.7% 11.0% 11.3%
(1) Barra US equity Book predictions (7) Cost of equity premia based on equity market capitalization.
(2) Based on marginal tax rate low-cap ($797mm - $1,167mm) = 1.59%. Amounts per 2004 Ibbotson.
(3) Levering Factor: 1 + [ ( 1 - Tax Rate ) * ( Debt / Equity ratio ) ] (8) Levered Beta: (Beta * Levering Factor)
(4) Unlevered Beta: ( Beta / Levering Factor ) (9) Cost of Equity: Rf + B * ( Rm - Rf ) + Sp, or the risk-free rate plus the beta * the eq
(5) Yield on Interpolated 20-Year US treasury Bonds which corresponds to Ibbotson's long-term equity (10) WACC: Rd = Return on Debt; Re = Return on Equity
risk premium (as of 2/04/05). Source: Bloomberg. [ Rd * (1 - tax rate) * (D / (D + E) ) ] + [ Re * (E / (D + E) ) ]
(6) The average historic period between the return on stocks and L-T bonds (2004 Ibbotson Associates).
125

Resources
F. Merger Consequences Analysis
126
Summer Assignment Accretion / Dilution

Evaluate the transaction consequences of McClatchy buying Knight Ridder:
100% Cash, 0% Stock
50% Cash, 50% Stock
0% Cash, 100% Stock
What are the Income Statement consequences?
Accretion / Dilution impact
What are the Balance Sheet consequences?
Total Debt / Total Capitalization
Total Debt / EBITDA
EBITDA / Interest
Other consequences?
Ownership
Helpful Hint: We use all outstanding and exercisable shares due to change of control. If you properly
filled in the option schedule on the input tab, this should be a quick manual fix.
Key Takeaways
1. Is an acquisition accretive or dilutive
2. How do premiums paid, financing and level of synergies affect accretion / dilution
3. How is accretion / dilution tied to the relative P/E multiples of the acquiror and target
4. Can an accretive deal be achieved given the DCF and comp valuations?
127
Agenda
1. Overview of Merger Consequences
2. Recent Developments in Merger Accounting
3. Earnings Per Share Defined
4. Introduction to Modeling an Acquisition
USF Corporation: Sample Merger Consequences Yellow Roadway buys USF Corporation
128
Mergers and Acquisitions: Whats the Difference?
Acquiring company purchases a part or all of the assets of the Target

company
Asset Acquisition
Target remains in existence post-transaction, as does Target
ownership structure
Requires that each asset and liability acquired be separately conveyed
contractually
More complicated and time consuming than transfer of stock
Acquiring company buys the stock of the Target company from

Stock Acquisition stockholder(s)
Stockholders may be a parent company or individuals
Corporate shell of Target survives in Acquirors hands
Two or more corporations combine such that one of the combining

corporations remains in existence while the other participating
Statutory Merger corporation(s) disappear
Frequently follows a stock acquisition
129
What are the Consequences of a Merger?

Income Statement Balance Sheet Social
Consequences Consequences Consequences
Corporate performance Leverage & Coverage ratios Stock options / Golden
yardstick impacting stock price Debt/Total Cap Parachutes
Earnings per share impact of Debt/EBITDA Management/Board composition
a transaction
EBITDA/Interest Pro Forma Ownership
Quality of earnings growth,
volatility, customer
concentration, etc.
Antitrust Consequences Regulatory Consequences

Does the combined firm have Would a variety of regulators
market power in any particular (e.g. FCC, FAA, state insurance
market? commissioners) permit the
Evaluate stand-alone and merger to take place?
pro forma market shares in Market power concerns
all affected markets similar to FTC
Must some business units Other regulatory concerns
be sold?
Will the FTC block the
merger (e.g., Staples / Office
Depot)
130
Accounting Treatments
Old Purchase Accounting New Purchase Accounting
Excess of purchase price over fair market value Excess of purchase price over FMV of identifiable
(FMV) of identifiable assets less liabilities is assets and liabilities is recorded as goodwill
recorded as goodwill
Goodwill not systematically amortized. Instead,
Goodwill amortized by the straight line method subject to an impairment test at least once per
over a period not exceeding 40 years year and on an interim basis as warranted
No more systematic income statement hit
Because goodwill is not amortized but most other

intangible assets will be, FASB wants companies
to separately identify more intangible assets rather
than simply allocating such amounts to goodwill
The Financial Accounting Standards Board (FASB) has modified the existing purchase
accounting rules and has eliminated the way we treat Goodwill.
131
Earnings Per Share
Corporate Performance yardstick
Growth Stock price

Stability Executive compensation
Cornerstone in merger consequences
2 Earnings per share (EPS) measures:

Basic EPS
Diluted EPS
Basic EPS Net

Income Shares Outstanding
Diluted EPS Accounting

concept only
Factors
in impact of options and convertible securities, if dilutive
Option: right to buy a share from the Company at a predetermined price
Convertible Security: Preferred Stock or Bond whose owner has right to
surrender security for a certain number of common shares
Options
Treasury Method
Convertible
Securities If-Converted Method
Shares
outstanding calculated via Treasury Method frequently used to
calculate equity market value of a company
132
Earnings Per Share The Treasury Method
Key Information
Standalone EPS calculations - Use Options Exercisable from 10-K
Stock Price (P) = $10.00
Basic Shares (B) = 20.00 Acquisition Target - Options Outstanding from 10-K
Options (N) = 3.00 Change of Control usually leads to accelerated vesting for all
Strike Price (K) = $8.00 options
Net Income (NI) = $50.0
NI $50.0 Single Option intrinsic value

1. Basic EPS = = = $2.50
B 20.00
Intuition:
NI
2. Diluted EPS =
Diluted Shares 1. Company issues one share for each option = 3.00
shares
Max (0, P K) x N
2. Company collects strike price of 3.00 X $8.00 = $24.00
Diluted Shares = B +
P
3. Company uses $24.00 to repurchase shares at market
Max (0, 10.00 8.00) x 3.00 price of $10.00
= 20 +
10.00 Shares repurchased: $24.00 = 2.40
= 20 + 0.60
$10.00
= 20.60 shares 4. Incremental shares = Shares Issued - Shares
Repurchased
$50.0
Diluted EPS =
20.60
= $2.43 3.00 - 2.40 = 0.60
Accounting Convention
Diluted shares not ACTUALLY outstanding
Allows for consistent treatment of options
and computing EPS
133
Earnings Per Share Convertible Securities

Convertible Bonds and convertible preferred securities are bonds and preferred shares from an
economic perspective as well as in terms of their impact on financial statements until holder
exercises his option to convert into common shares
Diluted EPS calculation follows a different logic the If-Converted method
Compare Diluted EPS on a converted and not converted basis, and choose the lower of the
two
Convertible Preferred Convertible Bonds

If converted test: If converted test:
Add back preferred dividend to net income Add back after-tax interest to net income
[I x (1-t)]
Add the number of common shares the
convertible converts into to the basic share Add the number of common shares the
count convertible converts into to the basic share
count
Compute EPS
Compute EPS
Is EPS lower than Basic EPS?
Is EPS lower than Basic EPS?
134
Accounting for Investment in Equity Securities

METHOD OF ACCOUNTING BALANCE SHEET INCOME STATEMENT
Cost Method Investment is shown at cost. Dividends received from target

(less than 20% in a non- Changes in value (from original are shown as dividend income
marketable security) cost) are reported only as realized
Fair Value Investment account is shown at Dividends received from target

(less than 20% ownership fair value. Changes in fair value are shown as dividend income.
in a marketable security) are reported as a separate Losses are also realized upon
component of shareholders equity recognition of permanent
until realized impairment
Equity Method Investment account is shown at Equity in targets net income is

(generally when voting ownership cost plus share of targets net shown as investment income in
percentage is at least 20 percent income less share of targets period during which target earns
but not more than 50 percent) dividends since acquisition income
Consolidation Method Consolidate 100% of individual 100% revenues and expenses of

(generally when voting ownership assets and liabilities of subsidiary. subsidiary are combined with
percentage is greater than 50 Minority interest in subsidiarys net those of acquiror. Minority
percent). Tax consolidation assets is shown between liabilities interest in subsidiarys net
requires at least 80% voting and and equity income is shown as a subtraction
value ownership
M&A Purchase Accounting
Control
If own less than 100%,
recognize minority interest
135
Purchase Accounting Framework
Acquiror Target Adjustments NewCo
Income Statement Income Statement 1. Synergies Pro Forma Income

Statement
2. Transaction expenses
Balance Sheet Balance Sheet 3. Capital Structure
Pro Forma Balance
Acquisition Debt Sheet
Cashflow Statement
+ Cashflow Statement
+ Common shares =
issued Pro Forma Cashflow
Refinancing Statement
existing debt
Other
4. Goodwill &
Depreciation
5. Date acquisition closes
136
Purchase Accounting
Determine buyer
Group that receives the most voting shares of post merger company is presumed to be the
accounting acquirer; regardless of the legal acquiror
If no definitive share count, other factors are:
Board of Directors
Management
Relative size
Determine acquisition cost
Valuation of securities
Earnings contingency
Share price contingency
Closing date
Target financials combined with Acquiror financials as of the closing date
Allocation of Purchase Price
Allocate to identifiable assets acquired and liabilities assumed to reflect fair value at date of
acquisition
Include any newly identified intangible assets
Excess of cost of acquired company over the FMV is recorded as goodwill
137
Purchase Accounting Balance Sheet Impact

Accounting: Acquisition of stock (Carryover basis) Goodwill
Purchase Price $100MM
50% stock, 45% debt, 5% cash on hand GOODWILL
Closing Date: December 31, 20XX Purchase Price $100.0
$5MM in synergies Less: Book Value 5.0
Excess Purchase Price 95.0
Question to class: Why is there a deferred tax
liability? Less: Asset Write-ups 30.0
Goodwill $65.0
Asset step-up: $30MM
Step-up amortization: 15 years
($ in millions)
ACCOUNTING FINANCING
ACQUIROR TARGET ADJUSTMENT ADJUSTMENT PRO FORMA
Cash $30.0 $5.0 $(5.0) $30.0
Other Assets 10.0 5.0 20.0
Goodwill 0.0 0.0 65.0 92.0
Total Assets $40.0 $10.0 $142.0
Debt 0.0 0.0 45.0 45.0
Other Liabilities 5.0 5.0 10.0
Deferred Tax Liability
Total Liabilities
0.0
$5.0
0.0
$5.0
2.0
$57.0
=
Equity 35.0 5.0 (5.0) 50.0 85.0
Total Liabilities & Equity $40.0 $10.0 $142.0
138
Purchase Accounting Income Statement Impact

($ in millions)
ACCOUNTING FINANCING
ACQUIROR TARGET ADJUSTMENT ADJUSTMENT PRO FORMA
Sales $150.0 $100.0 $250.0
EBITDA 30.0 21.0 5.0 56.0
Depreciation 5.0 1.0 2.0 6.3
Amortization 0.0 0.0 0.0 0.0
EBIT 25.0 20.0 49.7
Net Interest Expense (Income) (1.5) (0.3) 4.8 3.0
PBT 26.5 20.3 46.7
Tax 10.6 8.1 18.7
Net Income 15.9 12.2 28.0
Tax % 40% 40% 40%
Diluted Shares 10.00 2.50 (2.50) 0.67 10.67
EPS $1.59 $2.62
EPS Accretion / (Dilution) $ $1.03
Stock Price $75.00 $40.00 ?
Implied Cost of Funds
Cost of Cash 5% x $5.0

Cost of Debt 10% x $45.0
Total Interest $4.8
Shares Issued = $50.0MM $75.00 = 0.67
139
The P/E Ratio Shortcut

If the P/E of your acquisition currency is higher than the P/E of the stock of the Target at the
price you propose to pay, the acquisition will likely be accretive, and vice-versa
Robust rule of thumb in the absence of goodwill amortization / impairment
KEY DATA
ACQUIRER TARGET
Price $10.00 $5.00
Net Income $1.00 $1.00
P/E 10.0x 5.0x
# of Shares 1 1
Int. rate 10%
Tax Rate 40.0%
Example 1 Acquirer pays for Target with Acquirer Stock

1. Target Purchase Price $5.00 x 1 share = $5.00
Purchase Price $5.00
2. Acquirer Shares Issued = = = 0.50 shares
Acquirer Stock Price $10.00
3. Combined Net Income = $1.00 + $1.00 = $2.00
4. New Share Count = 1 + 0.5 = 1.5
5. Earnings per Share = $2.00 / 1.5 = $1.33
6. New EPS of $1.33 greater than Acquirer EPS of $1.00 transaction is accretive
Example 2 Acquirer pays for Target with Borrowed Money

1 1
P/E of Cash = = = 16.7x
Rate x (1 t) 10% (1 40%)
Acquirer NI + Target NI After Tax Interest Cost $1.00 + $1.00 [$5.00 x 10% x (1-40%)]
Pro forma EPS = =
Acquirer Shares 1
= $1.70
140
The Incremental Method

Useful for AcquirCo and TargetCo Debt is not
refinanced
Preliminary Analysis
Transaction closes 12/01
Limited Information
No Synergies
Multiple Companies / Permutations
Purchase Price Book value = Excess
Purchase Price: $100MM; Book Value: $80MM Purchase Price
50% Stock / 50% Debt Financing 2002 FMV adjustment: $10.0
+
AcquirCo Net Income
TargetCo Net Income
$50.0
20.0
} Deferred Tax Liability = $4.0
Goodwill = $14.0
Incremental D&A 0.5
Goodwill Amortization 0.0
} Tax deductible or non-deductible
After-Tax Interest Exp. 3.0
}
Asset vs. stock transaction
= PF Net Income 66.5
New Debt x int. x (1 tax)
Initial AcquirCo Diluted Shares 10.00 50.0 x 10% x (1 40%) = 3.0
Pro forma AcquirCo Diluted Shares 15.00
Stand-alone EPS (Diluted) $5.00 Per Treasury Method
Pro forma EPS (Diluted) $4.43 Shares issued = Equity issued AcquirCo
EPS Accretion (Dilution) $ $(0.57)
Stock Price
EPS Accretion (Dilution) % (11.4%)
= $50.0 / 10.00 = 5.00
141
Merger Consequences:
Yellow Roadways Buys USF
For Knight Ridder project show:
3 Considerations (100% Cash, 50%/50% Cash Stock and 100% Stock)
3 Premiums (10%, 20% and 30%)
($ in millions)
50% Cash / 50% Stock Consideration
Premium to Share Price 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0%
Price Per Share $32.44 $34.06 $35.68 $37.31 $38.93 $40.55 $42.17 $43.79 $45.42
Equity Value $918 $966 $1,014 $1,062 $1,111 $1,160 $1,210 $1,259 $1,309
(1)
Net Debt 99 99 99 99 99 99 99 99 99
Enterprise Value 1,017 1,065 1,114 1,162 1,210 1,259 1,309 1,358 1,408
2005E Stand Alone Diluted EPS $5.25 $5.25 $5.25 $5.25 $5.25 $5.25 $5.25 $5.25 $5.25
2005E Pro Forma Diluted EPS 5.59 5.53 5.48 5.43 5.38 5.33 5.28 5.24 5.19
2005E Accretion / (Dilution)
Acc / (Dil) $ $0.34 $0.28 $0.23 $0.18 $0.13 $0.08 $0.03 ($0.01) ($0.06)
Acc / (Dil) % 6.4% 5.4% 4.4% 3.5% 2.6% 1.6% 0.7% (0.3%) (1.2%)
Pre-Tax Breakeven Synergies $1.3 $6.1
(2)
Pro-Forma Debt / LTM EBITDA 1.6x 1.7x 1.7x 1.7x 1.8x 1.8x 1.8x 1.9x 1.9x
Debt-to-Capitalization (at closing) 45.28% 45.36% 45.45% 45.53% 45.61% 45.69% 45.76% 45.83% 45.91%
% Shares issued as currency 14.2% 14.9% 15.5% 16.1% 16.7% 17.3% 17.9% 18.5% 19.1%
ProForma Ownership% 85.8% 85.1% 84.5% 83.9% 83.3% 82.7% 82.1% 81.5% 80.9%
Source: Wall Street Projections, Credit Suisse Estimates.
(1) Net Debt numbers as of 12/31/04.
(2) Based on LTM EBITDA of $697mm.
142
These materials have been provided to you by Credit Suisse ("CS") in connection with an actual or potential mandate or engagement and
may not be used or relied upon for any purpose other than as specifically contemplated by a written agreement with CS. In addition, these
materials may not be disclosed, in whole or in part, or summarized or otherwise referred to except as agreed in writing by CS. The
information used in preparing these materials was obtained from or through you or your representatives or from public sources. CS
assumes no responsibility for independent verification of such information and has relied on such information being complete and accurate
in all material respects. To the extent such information includes estimates and forecasts of future financial performance (including
estimates of potential cost savings and synergies) prepared by or reviewed or discussed with the managements of your company and/or
other potential transaction participants or obtained from public sources, we have assumed that such estimates and forecasts have been
reasonably prepared on bases reflecting the best currently available estimates and judgments of such managements (or, with respect to
estimates and forecasts obtained from public sources, represent reasonable estimates). These materials were designed for use by specific
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CONFIDENTIAL

PRELIMINARY | SUBJECT TO FURTHER REVIEW AND EVALUATION

3 Weekly Assignments and Resources

Anna Golynskaya Phil Kohn

Miriam Roshan Jeff Volling

1. Overview of Valuation Project

Overview of Valuation Project

Project Schedule and Key Dates

Date Session Details Next Steps

Session 4 July 27 Merger Consequences Evaluate transaction consequences including

PRESENTATION August 6 Present final projects Good Luck!!

USF Corporation Company Profile

Company Overview Management and Board of Directors

Recent News Ownership

USF Corporation (Contd)

Stock Price Performance Market and Trading Data

Stock Price (2/4/05) $32.44

Comparable Company Analysis

Mean 0.7x 0.6x 6.0x 5.2x 16.3x 12.9x 14.2% 91.6%

Source: Public filings and Wall Street research reports.

Selected Precedent Transactions

Source: Securities Data Corporation, public filings and news reports.

Mean 0.82 19.3% 39.5% 1.12 0.74

Schedule A (Sensitivity of Capital Structure)

Schedule B (Sensitivity of Unlevered Beta)

Discounted Cash Flow Analysis

2005E 2006E 2007E 2008E 2009E

($ in millions, except per share data)

Potential Merger Assumptions

Merger Consequences Analysis

2005E Accretion / (Dilution)

3. Weekly Assignments and

Summer Assignment PIB

Be prepared to answer questions like:

1. Where do I go to get the latest SEC filing?

Public Information Book Resources

3. Annual Report Company Website

3. Weekly Assignments and

Summer Assignment Company Profile

Creating a general two page company profile

Keys to a successful acquisition ideas presentation

Keys to a Successful Acquisition Ideas Presentation

Use a Systematic Approach

Remember the Formula: Strategic Fit + Availability = A Good Idea

Demonstrate Industry Knowledge

Revisit Old Ideas Selectively

Stimulate Discussion and Ask Questions

Summarize Conclusions and Develop Follow-up Plan

Considerations in Determining Fit

Strategic General Financial

Signals of Availability / Lack Thereof

Acquisition Screening Information Sources

Equity analyst research

Competition sections of prospectuses and 10-Ks of comparable companies

Value Line for Client and its competitors

S&P Tear Sheets (with word search)

Industry trade association lists

WorldScope database (Global Buyers List)

FactSet comp builder

SDC M&A summaries

Creating a General Company Profile

Business section of 10K / Annual Report

Creating a General Company Profile