Investment Banking Module: Valuation, Pitch Books & Careers

Copal Partners
Investment Banking Module

Index
Table of Content
Introduction to Investment Banking 3
Valuation Methodologies 14
A. Valuation Techniques 18
B. Comparable Company Analysis 21
C. Comparable Transaction Analysis 95
D. DCF Valuation 112
Pitch book Building 150
A. Profiles 154
B. Case Studies 175
C. Industry overview 187
D. Research Techniques 205
2
What is Investment Banking?
Is it investing? Is it banking? In reality, it is neither!

Investment banking, or I-Banking, as it is often called, is the term used to describe the business of advising
corporates around their financial needs and raising capital for companies
Buy & Sell securities for their clients and provide stock advice
Facilitate buying and selling of stocks, bonds, options, currencies, derivatives and
Sales and Trading other financial products (Flow & Exotic)
Clients include Institutional Investors like pension funds, mutual funds, private clients/
HNI’s and individual investors, investment arms of non-finance companies
Follow stocks and make recommendations on whether to buy, sell or hold securities
Prepare Initiation Reports, Sector Reports and also Market Reports
Provide investment ideas for the Sales & Trading Group
Equity Research
Analyze and forecast economic trends, interest rate movements and other industry
level parameters and perform valuations on companies within industry sectors they
follow
Work with clients in determining financing needs and structuring specific financial
strategies
Corporate Finance /
Provide underwriting services on issue of equity or debt securities
Advisory
Provide advice on Mergers and Acquisitions, foreign exchange, economic and market
trends, and specific financial strategies such as corporate restructurings
3
Dynamics/ Relationship between various institutions
Financing M&A
Corporate Finance Corporate Finance
Prospectus, M&A valuation,

Placement Deal structuring,
memorandums, Restructuring,
Valuation, Asset sales and
Underwriting purchase,
Synergy analyses
Equity Research Analyst Presentation Equity Research
Initiation reports Coverage report

Coverage report Coverage Report Event Report
Road shows Deal notes
Corporates
Sales & Trading Sales & Trading
Market making Market making

Proprietary Trading Proprietary Trading
Chinese Wall
4
Typical Corporate Finance Deal Team
Title Experience Education Role
Managing Directors primarily pitch ideas to

clients to source deals.
Top Undergraduate
Universities,
Managing Director 8+ Years Managing Directors spend most of their time in
bringing business to the banks, executing
Usually Top-Tier MBA
transactions for clients and maintaining existing
client relationships.
Vice Presidents are also responsible for finding
Top Undergraduate
new clients and servicing existing clients. VPs
Universities,
Vice President 3- 8 Years however spend more time managing Analysts
and Associates and in the pitch book creation
Usually Top-Tier MBA
process
Associates manage analysts’ work and are
Top Undergraduate primarily responsible for financial models and
Universities, pitch book creation. In addition, they may be
Associate 0-3 Years
involved in dealing with the MDs and going
Usually Top-Tier MBA over details of potential deals or discussing
numbers (commercial and financial DD)
Analysts perform all research and analysis,

Top Undergraduate build financial models and put together the
Analyst 0-1 Years
University pitch book (deal coordination, commercial and
financial due diligence)
5
What do they do and how do they make money?
Investment banks perform the following major functions:
Corporate Finance & Advisory services, for which they receive fees
– Underwrite securities and provide advisory services
– Provide M&A advisory
– Provide financial advisory services to companies, governments and other agencies
Sales & Trading activities, for which they earn spreads

– Trade securities and commodities
– Manage individual and institutional investor’s funds
– Provide brokerage services, invest own resources, make loans
Equity Research, they make money from two sources, primarily from investors / readers of the reports and
secondly, from firms they are covering for which they are paid a set annual fee in cash; they do not accept any
form of equity, which may cause conflicts of interest
– Provide information on market
– Conduct financial statement analysis and build financial models to derive a company's proper valuation
Investment banking activities tend to be more profitable than commercial banking activities; based on the fees rather
than interest rate differentials
6
What are Chinese Walls in Investment Banking?
Legal and physical separation between
investment banking and trading activities is
termed as Chinese Walls.
Chinese walls are necessary to separate different

departments within large financial institutions
such as investment banks that serve clients in
different capacities simultaneously, leading to
conflict of interest.
All investors in the market should play on a level

field, where no one has access to privileged
information leading to an undue advantage, due
A brief history: The Chinese wall concept in to their favorable position.
investing originated from the Glass-Steagall Act, when
the separation of investment banking from brokerage For example, the corporate finance department
operations was embraced by the securities industry of an investment bank may know of takeover bids
regulators. that are being considered, but for the bank's
trading or fund management operations to act on
Glass-Steagall Act: This Act was enacted during the this information would constitute insider trading.
Great Depression in 1933, after the1929 stock market This makes it necessary that such information is
crash, to restrict the securities activities and affiliations restricted to the departments actually involved,
of banks. The act was intended to protect banks, so that other departments can function normally.
prevent conflicts of interest and other abuses and
safeguard the financial system. This wall is not a physical boundary, but rather an
ethical and legal one that financial institutions are
This act set up a regulatory firewall between the legally bound to observe.
commercial and investment banking activities.
7
Role of Corporate Finance
To make it convenient, from now onwards by Investment Banking we would mean Corporate Finance
Corporate Finance
Financings Client Advisory
Includes:
Includes: Acquisitions
Initial Public Offerings (IPO) Private Company Sale
Secondary Offerings Public Company Sale
Debt Syndication Corporate Restructuring
Equity Private Placements Corporate Divestitures
Joint-Ventures
Bankers generally generate business through pitching transaction ideas to clients. “Pitch Books” - presentations the
bankers use for their clients, contain general information and include a wide variety of selling points they make to
potential clients. Pitch books almost always include valuation and research analysis on a number of companies
and/or industries
Pitch books again can be categorized as follows:

General : Usually, general pitch books include an overview of the I-bank and detail its specific capabilities in
research, corporate finance, sales and trading, primarily used to showcase credentials.
Deal-specific. Deal-specific pitch books are highly customized and are prepared specifically for the transactions
that bankers are proposing to their clients
8
What are the various types of groups within an Investment Bank?
There are broadly two types of groups within a typical investment bank (or investment banking division):
Product groups: The three most well known product groups are mergers and acquisitions (M&A), leveraged
finance and restructuring.
The products of an Investment Bank, are basically advisory for M&A, Financing, Restructuring, etc., hence a
Group covering any of the above activities would be a Product group
Bankers in Product groups have product knowledge and tend to execute transactions (respectively M&A
transactions, leveraged buyouts (LBO’s) and restructuring transactions/bankruptcies).
For e.g. an M&A banker would be a specialist in deal structuring (equity or cash etc.), types of deal structures,
takeover codes (legalities, regulation) in a particular country etc .
Industry groups (also called sector groups or domains): Bankers in industry groups cover specific industries and
develop expertise in a particular sector. They tend to do more marketing activity (pitching).
Examples of common industry groups include FIG (Financial Institutions Group), Healthcare, Consumer/Retail,
Industrials, Natural Resources, TMT (Telecom, Media and Technology.. Often subgroups exist within the broader
group. For example, a Healthcare group may be segregated into biotechnology, medical devices, pharmaceuticals,
etc.
9
Bulge Bracket Banks and Corporate Finance Boutiques
Bulge Bracket Banks: The term “bulge bracket” generally refers to the large investment banks that cover most or
all industries and offer most or all of the various types of investment banking services. While there is no official list of
bulge bracket banks, some examples are BAML, JP Morgan, Credit Suisse, Deutsche Bank etc.
Corporate Finance Boutiques: These are small in size, ranging from a few professionals to hundreds or even
thousands of professionals; can generally be categorized into three types:
– specializing in one or more products
– specializing in one or more industries and
– specializing in small or mid-sized deals & clients (generally less than $500 million)
Boutiques known for M&A, often compete with the bulge bracket banks for M&A transactions. A few examples
include Lazard, Greenhill, Evercore
Other boutiques offer many different products but specialize in one or more industries. Such boutiques often
compete with the bulge bracket banks on the basis of their industry knowledge and expertise. A few examples
include Cowen & Co. (healthcare), Allen & Co. (media) and Thomas Weisel Partners (technology), Avendus
(technology in India)
The third type of boutique, those that offer many products and cover many industries but compete only for “middle
market” or smaller deals include Jefferies & Co., Piper Jaffray, Raymond James. Many of these middle market
boutiques are regionally focused.
Some of the Indian boutiques are Equirus, O3, Edelweiss, Mape Advisory, Pears Capital , Numinous Consulting,
Viedea Capital
10
Top Global Investment Banks (M&A)
Worldwide Announced deals - 2010
Financial Advisor Deal Value (in $mn) Freeman Fees (in $mn) Number of Deals
Goldman Sachs & Co 425,164 1,952.8 325
Morgan Stanley 346,039 1,421.7 331
JP Morgan 330,835 1,400.3 280
Credit Suisse 327,179 1,046.4 249
Citi 299,167 729.4 185
Barclays Capital 265,094 715.6 133
Deutsche Bank AG 242,883 831.5 224
Bank of America Merrill Lynch 236,383 906.6 204
UBS 231,960 850.9 230
Lazard 188,637 845.0 259
Rothschild 127,830 746.5 245
HSBC Holdings PLC 98,194 212.0 79
Nomura 87,404 320.6 171
Evercore Partners 79,257 209.4 35
BNP Paribas SA 78,350 300.1 110
Jefferies & Co Inc 72,904 354.3 114
Greenhill & Co, LLC 70,551 202.3 47
Houlihan Lokey 61,464 349.6 167
Blackstone Group LP 54,777 169.6 41
Santander 51,225 – 47
Centerview Partners LLC 50,161 – 13
RBC Capital Markets 48,909 344.0 133
KPMG 44,578 – 327
Mizuho Financial Group 43,279 – 121
RBS 41,921 153.2 59
Source: Thomson Financial
11
Transaction Volumes
Completed Deals Worldwide: Annual Transaction Volume
Date Effective/Unconditional Deal Value (in $mn) Number of Deals
2008 1,924,659 24,890
2009 1,848,453 30,431
2010 1,893,852 32,114
2011 824,484 8,762
Industry Total 6,491,448 96,197
Excludes Equity Carveout, Exchange offers and Open Market Purchases
Source: Thomson Financial

12
Role of KPOs in the Investment banking industry
CLIENT
MARKETING
RESEARCH
& ANALYSIS
Investment Banks
DEAL
EXECUTION
KPO’s
13
Copal Partners
Valuation Methodologies
14
Valuation Methodologies
Valuation Methodologies can be categorized as under:
A. Fundamental valuation: A stand-alone valuation methodology to compute the intrinsic value of an asset
B. Relative valuation: Valuing an asset relative to its peers
A. Fundamental Valuation:
The DCF (WACC, FTE, APV) model of valuation is a fundamental method.
Value of firm (equity) is the PV of future cash flows.
Ignores the current level of the stock market (industry).
Appropriate for comparing investments across different asset classes (stocks vs. bond vs. real estate,
etc).
B. Relative Valuation:
Comparable company analysis and comparable transaction analysis are relative valuation methods
Relative valuation is based on P/E ratios and a host of other “multiples”.
Can not compare value across different asset classes (stocks vs. bond vs. real estate, etc).
Can not answer the question “is the stock market over valued?”
Can answer the question, “I want to buy a tech stock, which one should I buy?”
Can answer the question, “Which one of these overpriced IPO’s is the best buy?”
15
Fundamental Valuation Concepts
Fundamental analysis is a technique that attempts to determine a security’s value by focusing on underlying
factors that affect a company's actual business and its future prospects.
On a broader scope, one can perform fundamental analysis on industries or the economy as a whole. The term
simply refers to the analysis of the economic well-being of a financial entity as opposed to only its price
movements.
The various fundamental factors can be grouped into two categories: quantitative and qualitative.
– Quantitative – capable of being measured or expressed in numerical terms.
– Qualitative – related to or based on the quality or character of something, often as opposed to its size or
quantity.
Fundamental analysis serves to answer questions, such as:
– Is the company’s revenue growing?
– Is it actually making a profit?
– Is it in a strong-enough position to beat out its competitors in the future?
– Is it able to repay its debts?
– Is management trying to “cook the books”?
16
Relative Valuation Concepts
Relative valuation answers the question “How does the value of an asset compare with the values assessed by
the market for similar or comparable assets”
Absolute values of comparable assets are standardized for the purpose of comparison. Friendly – The Board
recommends the offer
– How would you compare a pencil priced at Rs.10 with another pencil priced at Rs. 20?
Standardized values – values with a common numerator – are called price multiples
Comparing the price multiples of comparable assets can give an indication of whether an asset is under or over
valued.
– If Rs.10 pencil lasts 10 days and Rs. 20 pencil lasts 16 days, is Rs. 10 pencil over or under valued compared
to the Rs. 20 pencil?
– Everything else being equal, which one would you buy?
17
Copal Partners
Valuation Techniques
18
Valuation Overview
Valuation is the process of determining the current worth of an asset. Valuation answers the question “How much
will it cost to acquire the asset?”
Further Valuation analysis is done to answer questions like:
– “How much should Acquirer pay to buy the target?”
– “Is the price offered for the company fair to shareholders?”
– “Is company undervalued / overvalued in the industry?”
– “What is the underlying value of the business against which debt is being issued?”
– “Should we buy/sell/hold positions in a given security?”
Thus, Investment banks perform valuation on firms, or parts of firms for several reasons:
– Contribution into a Join Venture or Mergers & Acquisitions (Buy side or sell side engagements)
– Recommended bid for an acquiring firm
– Assess Public equity offerings IPO etc
– Floatation of debt or equity or credit
Valuations are not scientific. It is highly dependent on a strong set of assumptions and inputs. A valuation is only
as good as the quality of inputs. Analyst look at a variety of valuation methods to quantify value.
19
Valuation Techniques
There are three primary methods of valuing a company:
Comparable Company Analysis (Trading Comps) – Trading Comps analyze key valuation ratios of comparable
companies that are trading in the market to give an indication of what fair value is and compares firm’s financial
performance to its market value.
Comparable Transactions Analysis (Transaction Comps) – Transaction Comps analyze value based on
historical takeout multiples of comparable targets to give an indication of what one would have to pay to acquire
the company. It also includes control premium.
Discounted Cash Flow (DCF) – Discounted cash flow analysis is based on cash flow generation potential of
business. It uses projected cash flows in the future to determine the value of company at the present time. It
involves discounting levered / unlevered cash flows by equity cost of capital or weighted average cost of capital.
20
Copal Partners
Comparable Company Analysis

(Trading Comps)
21
Index
Table of Content
Overview 23
Key Definitions 24
Source of Information 29
Selection of Comparable Companies 31
Equity and equity linked information 32
Market Capitalization 41
Balance Sheet 47
Enterprise Value 58
Income Statement 61
LTM & Calendarization 74
Understanding Multiples 78
22
Overview
Comparable Company Analysis (‘comps’) is the most basic and effective valuation tool used by investment
bankers for the analysis of publicly listed companies across various industries.
This technique is used in private market valuation, IPO valuation, comparative analyses, identifying potential
targets for M&A etc
Comps establishes value of a company and measures its performance vis-à-vis the operating and trading
statistics of the company’s peer group (“comparable companies”)
Valuation metrics and financial ratios used/ analyzed vary from project to project, depending on the industry and
information available
Trading Comps define the concept – “comparison of apples-to-apples”
A standard comp contains operational statistics containing:
– Financial performance parameters such as Revenue, EBIT, EBITDA and EPS
– Share price performance parameters such as current & 52 week high/low share price, margin and long term
growth rate
These inputs define the output Multiple sheet (the comps) containing various Enterprise Value (EV) multiples.
Common valuation multiples used are EV/Sales, EV/EBITDA, EV/EBIT, P/E, P/B
Since the comps provide multiples prevailing at a given point of time, they provide a static view of comparable
companies and can change over a period of time depending on the company’s financial performance and market
performance (stock performance)
23
Key Definitions
Market capitalization Represents the market value of all outstanding shares
Calculated as Total number of shares outstanding x current share price
Stock Options A privilege, in which the underlier is the common stock of a corporation, that
gives the buyer the right, but not the obligation, to buy or sell a stock at an
agreed-upon price during a certain period of time or on a specific date
A right granted to employees of a company to buy a certain amount of shares
in the company at a predetermined price. Employees typically must wait a
specified vesting period before being allowed to exercise the option
Warrants A derivative security or certificate that gives the holder/ bearer the right to
purchase securities (usually equity) from the issuer at a specific price within a
certain time frame
Convertibles Securities, usually bonds or preferred shares, that can be converted into
common stock at a specified conversion price
24
Key Definitions (cont’d)
Fully Diluted shares Represents the number of shares that would result if all stock options,
warrants and convertible debts were traded in for stock.
Treasury stock method is used in determining the number of shares

outstanding
Results in an increased number of shares outstanding and decreased

earnings per share
Treasury stock method The purpose of the Treasury method is to account for the cash generated by the
exercise of options and/or warrants
Treasury stock method assumes that the options and/or warrants are exercised
at the beginning of the year (or issue date if later) and such proceeds are used
to repurchase outstanding shares of common stock
Example
Current share price $ 50

Shares outstanding 400 mn
Options/ warrants outstanding 10 mn
Exercise price $ 25
Proceeds from conversion of in the money options 10 x $ 25 = $ 250mn
Stock buyback (at premium) $ 250 / $ 50 = 5 mn
Diluted Shares 400 + 10 – 5 = 405 mn
25
Key Definitions (cont’d)
Total debt Includes all interest bearing obligations both long-term and short-term such
as loans, credit facilities etc
Excludes in-the-money convertible debt
Minority Interest Represents portion of equity not owned by the majority shareholder - a
significant but non-controlling interest of less than 50%
Preferred equity Represents class of stock carrying preference over equity stake holders to
receive dividend and repayments in the event of liquidation
Capital lease A lease that transfers substantially all risks and rewards of ownership to the
lessee
Cash and cash Represents cash, marketable securities and short-term investments that can
equivalents easily be converted to cash
26
Key Definitions – Some Examples
Example 2. Which of the following statement is correct:
a) Restricted cash is always excluded from cash for calculation of net debt
b) Restricted cash, if related to debt, include in cash for calculation of net debt
c) Restricted cash, if related to Letter of credit and Bank Guarantees, include in cash for calculation of net debt
d) Restricted cash is always included in cash for calculation of net debt
Example 3. Calculate the fully diluted shares outstanding:
Shares o/s 470 mn Current price $30.00

Options o/s 10 mn Exercise price $20.00
Warrants o/s 5 mn Exercise price $40.00
a) 470 mn
b) 485 mn
c) 473.3 mn
d) 471.6 mn
27
Key Definitions – Some Examples (cont’d)
The correct answer is (c)!!!!!!!!
Current stock price $30.00

Exercise price of options $20.00
Since, the exercise price of options is less than the current stock price, the options are “In the money”
However, the exercise price of warrants is more than the current stock price, the warrants are “Out of the money”
Dilution effect of Options can be calculated as:

Amount raised from exercise of options = Number of Options X Exercise price of options
= 10 X 20 = $ 200 mn
Shares bought back at current market price = Amount raised from exercise of options / Current stock price
= 200 / 30 = 6.67 mn shares
Dilution effect of Options = Number of Options - Shares bought back at current market price
= 10 – 6.67 = 3.3 mn shares
Total number of diluted shares = 470 + 3.33 = 473.3 mn shares
28
Filings and Sources
Source all data from the Company’s official latest financial filings
Check Company Website, Investor Relation Section, look out for latest:
Annual Report (AR)
Quarterly / Interim / Half Yearly Report ( Q1, Q2, Q3, Q4 or IR )
Press Releases and Announcements
For US companies
Annual report - SEC filing - 10K (From 10kwizard.com or www.sec.gov)
Quarterly report (SEC – 10Q)
Press releases, pro forma filings, M&A announcements (SEC filing – 8K)
Prospectus (SEC filing – 424B series)
For Non-US companies listed in US stock exchange

Annual report (SEC filing – 20F, 40F )
Quarterly/ Half-yearly report (SEC – 6K )
Press releases and Announcements (SEC – 6K )
Research Reports (For Forward Estimates)
Note: (i) Always use most recent filings for EV calculation as we are looking for the current and most
recent financial position of the company
(ii) Always use the pro-forma financials in case the company has completed a major acquisition or
divestiture
(iii) Where the company has made restatements and filed restated financials, always use such
restated financials.
29
Filings and Sources (cont’d)
Stock Exchange where Company is listed

Stock exchange is a very important source and provides lot of useful information such as latest shares
outstanding, latest financials filed by the Companies, recent press releases or announcements.
Apart from Company Website and Stock Exchange, bankers also use various databases for their cross
references such as:
– Bloomberg
– FactSet
– Thomson Reuters
– Thomson One Banker
– Capital IQ
– Merger Market
– Factiva
– Hoovers
– One Source
– DataStream
Note: There are many more databases apart from the names mentioned above used by companies for
their analysis. Since these are all paid data sources, companies subscribe them according to their
work requirement.
30
Peer Group Identification
Peer Group Analysis means identifying a list of comparable companies for valuation.
The following criteria should be borne while doing the preliminary search for selecting the companies to form a
peer set:
– Similar Industry, featuring into the same sub-sector, having product categories which are related
– Same size of companies, can be identified with similar operating margins, growth rate, cash flow, number of
employees etc
– Having similar customer segmentation
– Ideally should belong to same region/country/geography
– Should not be undergoing any unusual or major strategic changes, such as an M&A, divestiture
There are various sources available for Peer Analysis such as Thomson One Banker, Bloomberg, Reuters,
OneSource, Research Report, Google Finance, Company Websites (for Description), broker reports etc.
31
Equity and equity linked information – Shares
Source Shares Outstanding from the most recent financials
Number of shares should exclude the treasury shares or own shares. Treasury shares are shares repurchased by
the company and do not have the right to dividends, have no voting rights, and should not be included in shares
outstanding calculations.
In case of companies filing with SEC, outstanding shares can generally be found on the cover page of the 10K,
10Q, 20F report. In case of Non US companies search out for filings on various sources including Company
Website, Latest Filings and Stock Exchanges of the respective country.
Where a Company has more than one class of share, with all classes being listed, input the total of all classes of
shares in shares outstanding and calculate weighted average share price
In case, one class of share is listed and the other class of shares are unlisted, input the total of listed and unlisted
shares in shares outstanding and assume the share price of unlisted shares to be equal to that of listed shares
32
Equity and equity linked information – Shares (cont’d)
In the given example of Novell Inc, the number of shares outstanding is 353.053202 mn. This is obtained from
the cover page of 10Q Jan 2011 filing
Annotation
10Q Jan 11, cover page,
Shares outstanding as of 28 Feb 2011
33
Example 4. Calculate the Market cap of ABC Co. with the available information
Particulars Details Par Value Market price
Class A Shares o/s 200 mn $10.00 $500.00
Class B Shares o/s 10 mn $100.00 Unlisted
a. $ 100,000 mn
b. $ 100,500 mn
c. $ 105,000 mn
d. $ 150,000 mn
The market cap in this case is $150,000 mn
Market Cap for Class A shares = 200 X 500 = $100, 000 mn
Since Class B shares are unlisted, we will calculate the price of class B shares as follows:
Price of Class A shares / Par value of Class A shares X Par value of Class B shares
$500.00 / $10 X $100 = $5,000.00
Market Cap for Class B Shares = 10 X 5,000 = $50,000 mn
Market Cap for the Company = $100,000 + $50,000 = $150,000 mn
34
Example 5. Calculate the latest shares outstanding
with below mentioned data: The correct answer is (a)!!!!!!!!
Since the stock split has been effected on June 30,

Particulars Date Details 2010, we will not adjust the Shares outstanding
Shares O/S 31-Dec-10 350 mn Shares Outstanding as on Dec 31 = 350 mn
Stock split 30-Jun-10 2:1
Stock dividend = 350 X 2/1
Share buyback 15-Mar-11 10 mn
= 700 mn
Stock dividend 20-Feb-11 2:1
Share buyback (March 15) = 10 mn
a) 1,040 mn Latest Shares Outstanding as on March 15, 2011=

Shares Outstanding as on Dec 31 + Stock dividend
b) 1,360 mn - Share buyback
c) 690 mn
350 + 700 – 10 = 1,040 mn
d) 1,380 mn
35
Equity and equity linked information – Options and warrants
Input information on Options (and Warrants) from latest financials. 10K or annual filings are usually the best
source
Notes to the financials should provide detailed information on total number of Options & warrants outstanding,
traunche-wise details and the weighted average strike price on them. Ensure that the equivalent number of
shares and not “number of options or warrants” are entered
Input the ‘Options Outstanding’ and weighted average exercise price of such outstanding options and NOT the
‘Options Exercisable’
Depending on the space available in the template, input options/ warrants outstanding and weighted average
exercise price tranche-wise or in aggregate.
In case options/warrants have a range of exercise price, take the average or lower of the range for maximum
dilution effect.
Read Management Discussion & Analysis and Notes to Financial statements closely and ensure all option plans/
warrants are incorporated
36
Equity and equity linked information – Options and warrants (cont’d)
In the given example of Novell Inc, the total options (equivalent shares) outstanding are 30.933 mn, with a weighted
average exercise price of USD 3.96
37
Equity and equity linked information – Convertible debt
Input information on Convertible debt (value) from latest financials. Latest financials should provide price of
Conversion or at least the conversion ratio from where the conversion price can be deduced. If not, revert to the
previous annual report for conversion price
If convertible price of the convertible debt is not given, read the relevant notes and MD&A to figure out the
conversion ratio i.e. the number of shares into which the debt will be converted. Only “in the money” debt are
considered for weighted average exercise price of the convertible debt
While convertible debt is in the money, it will be treated as equity, once it falls out of the money it will be added
back to debt
Depending on the space available in the template, input convertible debt and conversion price tranche-wise or in
aggregate.
Input a comprehensive note for the convertible debt
38
Equity and equity linked information – Convertible debt (cont’d)
Equity and equity linked information – Convertible debt
Example 6
Book value of Convertible debt $ 200 mn
Conversion price per share $ 40
Equivalent shares on conversion of in-the-money 200/ 40 = 50 shares
convertible debt
Example 7
Book value of convertible debt (par value $1000 each) $ 100 mn
Conversion ratio 16
Conversion price per share of convertible debt $ 1000/ 16 = $ 62.5
(out of money and hence added to debt)
39
Equity and equity linked information – Convertible debt (cont’d)
Example 8. If a company has convertible debt of US$100 mn with a conversion price of US$ 50.00, the company's
current price is US$ 51.00, which of the following treatment is correct:
a) Include US$ 100 mn in net debt
b) Include US$ 100 mn in Market Cap
c) Include equivalent number of shares in shares outstanding
d) Include equivalent number of shares in shares outstanding and do not include US$100 mn in net debt
The correct answer is (d)!!!!!!!
When the convertible debt is converted into equity shares, the liability for the debt is eliminated and the number of
common equity shares is increased
40
Market Capitalization
Dual Listing
When a security is registered for trading on more than one exchange. The treatment of dual listed companies
depends upon the specifications of the end user . However, the two common treatments of dual listed companies are
as follows:
Treatment 1 : In certain cases, weighted average market capitalization is calculated by adding the product of
share prices prevailing on both the exchanges & shares outstanding for respective classes of shares
Treatment 2 : Output for both the classes of securities is shown separately. Market Capitalization is calculated
using the share price on each exchange. For example, in case of Chinese companies which are also listed on
Hong Kong stock exchange, will have inflated prices on Chinese stock exchange, so it is better to analyze them
using both the classes of shares separately.
Market Cap, EV and multiples for different class of shares are calculated as:
Market Capitalization: Market Capitalization to be calculated for both class of shares using share outstanding for
each class and their respective share price
Net Debt : Bifurcate total net debt into two classes of shares based on proportion of market cap
Enterprise Value: Calculate EV (Market cap + Net debt for respective class) and EV per share for each class
Multiples: Calculate per share value of relevant financial metrics (Revenue, EBIT, EBITDA, EPS)
Calculate multiples for each class separately using EV per share for each class and per share financials as
calculated
41
Market Capitalization (cont’d)
Example 11
A Company XYZ Inc. has two Class of shares A & H.
As at 30 Apr 11 Class A Class H

Share Price (April 30, 2011) CNY 50.00 HKD 35.00
Shares outstanding 16,500 mn 3,400 mn
HKD - CNY Exchange rate 0.8955
As at 31 Mar 11
Net Debt CNY 4,250 mn
Minority Interest CNY 20,500 mn
LTM Revenue CNY 82,000 mn
LTM EBIT CNY 33,000 mn
LTM EBITDA CNY 41,500 mn
LTM EPS CNY 1.04
Calculate the relevant multiples
42
Step 1. Calculation of Market Cap, EV and Multiples for both the class of shares
Class A Class H
Share Price CNY 50.00 HKD 35.00
Shares outstanding 16,500 mn 3,400 mn
Market Cap CNY825,000 mn HKD 11,9000 mn
Market Cap (CNY) CNY825,000 mn CNY 106,565 mn (approx.)
Proportion of Market Cap 88.56% 11.44%
Net Debt (In proportion of Market Cap) CNY 3,763.8 mn CNY 486.1 mn
Minority Interest CNY 18,154.9 mn CNY 2,345.1 mn
Enterprise Value CNY 846,919 mn (approx.) CNY 109,396 mn (approx.)
EV / Share CNY 51.33 CNY 32.18
Step 2. Calculation of financials per share Multiples Class A Class H

Revenue / share CNY 82,000 / 19,900 (16,500+3,400) CNY 4.12 Revenue 12.46x 7.81x
LTM EBIT / share CNY 33,000 mn / 19,900 CNY 1.66 EBIT 30.95x 19.40x
LTM EBITDA CNY 41,500 mn / 19,900 CNY 2.09 EBITDA 24.61x 15.43x
LTM EPS CNY 1.04 P/E 48.08x 30.14x
43
Shares / Depositary Receipts

A negotiable financial instrument issued by a bank to represent a foreign company's publicly traded securities. The
depositary receipt trades on a local stock exchange.
When the depositary bank is in the U.S., the instruments are known as American Depositary Receipts (ADRs).
European banks issue European depositary receipts, and other banks issue global depositary receipts (GDRs).
Treatment of shares / DR’s

Generally, the companies which have depository receipts, are analyzed on the basis of the stock price of the
company. In that case, all the shares related information is calculated on the basis of stock price.
However, in certain cases, two individual tabs are created for the same company – in one tab, all the shares and
price related information is calculated on the basis of DR’s using the Shares-DR ratio with the price of DR’s and in
the other, on the basis of stock price. Also, in this case, the company is presented twice, once on the basis of stock
price and second, on the basis of DR.
44
Example 12.
XYZ Inc. has 250 mn shares outstanding as at 31 Dec 2010. The company’s also has its ADRs listed at NYSE
Following information is available from company’s AR Dec 10

Shares outstanding 250 mn
Price per ADR as on 25 Apr 2011 $20.00
Company made following fresh issues during the month of March:

On 10 Mar 2011 25 mn shares
On 25 Mar 2011 10 mn ADR
On 30 Mar 2011, company announced bonus issue of 1 share for every 4 shares held.
1 ADR represents 4 ordinary shares of the company
Calculate the Market cap of company as on 25 Apr 2011

a) $ 1,968.8 mn
b) $ 5,700 mn
c) $ 6,300 mn
d) $7,875 mn
45
The correct answer is (a) !!!!!
Shares outstanding as on 31 Dec 10 = 250 mn

Add Shares issued on 10 Mar 11 = 25 mn
Add ADR issued on 25 Mar 11 = 10 mn
Equivalent number of shares* = 10 X 4
= 40 mn
Shares outstanding as on 25 Mar 11 = 315 mn
Adjusted for Bonus issue (1:4) = 315*1.25

= 393.8 mn
ADR Price per share = $20.00

Market Capitalization = 393.8 X 20 / 4
= $ 1,968.8 mn
* Each ADR represents 4 ordinary shares
46
Balance Sheet
Balance Sheet Information - Source data in this section from the latest financials
Cash and Cash Equivalents
Consolidated Balance sheet as at 31 Jan 2011
Novell Inc Includes cash and bank balances
(amounts in thousands) Includes cash equivalents & marketable securities
Includes short-term investments
Cash equivalents are highly liquid short-term

investments that can be easily converted to cash
Short term investments aren't as liquid as money in
a bank account, but provide added cushion if some
immediate need arises
Cash and cash equivalents should generally
exclude restricted cash. Restricted cash represents
that portion of cash or equivalents that are
earmarked for specific purposes or restricted for the
purpose of intended use. However, if cash is
earmarked for a particular debt fund, that has been
included in total debt, then such restricted cash is
In the above case of Novell, cash and cash equivalents included in the calculation of EV
shall be:
$ 981.426 + $ 150.009 = $ 1,042.915 mn Strategic investments are not taken into
consideration
Check end user requirements for changes in
assumptions
47
Balance Sheet (cont’d)
Total Debt
Debt includes all interest bearing liabilities (long term and short term) of the Company i.e. obligations that have a
financing cost to the company (such as Bank overdrafts / Current portion of long term borrowings / short term and
long term loans / Convertible debts)
Include preferred equity, minority interest and capital leases in debt.
Consider Capital lease obligation ONLY if it is stated in the Balance Sheet. Do not confuse capital lease
obligations with the operating lease obligations. The latter is an expense item in the income statement
Read the MD&A and Notes to financial statements closely as sometimes ‘Minority Interest’ is not represented in
the Balance Sheet as a separate item but is given in the ‘Other Liabilities’
Include pension liabilities (deficit) in debt, only if specific guidelines have been given to that effect. Pension deficit
is the value of all pension obligations minus the market value of any pension assets
– In case of a US Company: US GAAP has the requirement for the company to give a separate note for Pension
assets and pension liabilities. Pension deficit is = Pension Liabilities Less Pension Assets
– For a company in UK: FRS 17 gives the accounting policy for a separate disclosure of pension deficit
– For other companies: Read the MD&A and Notes to financial statements and determine accordingly
– Always consider Net Pension Liability recognized in the balance sheet or Unfunded or Deficit in Pension Fund.
In case company reports surplus ie Pension Assets are more than Liabilities, ignore it.
Remember to exclude in-the-money convertible debt and include out of money convertible debt in total debt
48
Consolidated Balance sheet as on 31 Jan 2011
Novell Inc
(amounts in thousands)
In the given example, the total debt for EV
calculation shall be:
Senior Convertible Debenture
(Add minority interest if reported
separately)
Shareholders’ equity
Input from the latest financials the book value of shareholders’ equity or stockholders’ equity.
Remember shareholders’ equity is always excluding minority interest.
49
Long Term Investments
Read the note for Long term investment and check whether company has invested in private unquoted company
or in Quoted/ Listed/ Traded company or in mutual funds or government stocks.
Consider the long term investment in public company, mutual funds and government stocks as their market value
can be assessed easily. Ignore any invest done in private or unquoted company.
Remember for the ultimate effect, long term investment is treated as a part of cash and cash equivalents and gets
excluded from EV.
Equity Investments
Includes Investment in Affiliates / Subsidiaries / Joint Ventures / Associated Company / Equity Affiliates
Mostly Company reports equity investments as a separate line item in their balance sheet.
Consider all equity investments irrespective of short term or long term or quoted or unquoted.
Remember for the ultimate effect, long term investment is treated as a part of cash and cash equivalents and gets
excluded from EV.
50
Check the note for Non Current Investment – Long Term and consider only the portion invested in Quoted/ Listed/
Traded company or in mutual funds or government stocks.
Add Current Investment in Marketable Securities in Cash and Cash Equivalents
Also consider Investments in Associates Undertaking for valuation.
51
Balance Sheet Information – Adjustments
The latest financial publication is used to determine Enterprise value. However, there are certain corporate actions,
which if they occur subsequent to the date of the latest filing, have to be given effect as these have an impact on the
Enterprise value. A few of these adjustments include:
Stock Split : A stock split is a corporate action involving the dividing of company’s existing stock into multiple shares.
This is effected by reducing the par value of shares and increasing the number of shares. The Shareholders’ equity
remains the same. Adjustments to be effected include:.
Increase the number of outstanding shares
Check that the stock price is split-adjusted
Increase the number of equivalent shares on conversion of options and reduce (in the same ratio) the exercise
price
Similar effect on warrants and convertible debt (exercise price)
Equity issue : In case a company makes a fresh additional equity issue, the following adjustments have to be made:
Increase the number of shares outstanding by the fresh number of shares issued
Increase shareholders’ equity by issue value
Increase cash by the “net proceeds” of the issue
Check for pro forma filings
Stock Buyback : When a company repurchases the shares it had previously issued, it is called a ‘Stock buyback’.
This reduces the number of shares outstanding in the market. Adjustments to be effected include:
Decrease the number of shares outstanding by the number of shares repurchased
Decrease cash by the amount used to repurchase shares
Reduce shareholders’ equity by value of treasury stock repurchased
52
Balance Sheet Information – Adjustments
Debt Issue : A Company when in need of funds, can raise Debt as a source of funds. It may be preferable than issue
of shares as debt issue leads to no dilution of control of company. Adjustments include:
Add the ‘Net proceeds’ to Cash. Net Proceeds means proceeds received, net of any discount and expenses of
issue.
Add the face value of the debt to the Total debt
Debt Redemption or repayment of a Debt outstanding in the books.

Deduct the ‘Net outflow’ from Cash. Net Outflow means net outflow of cash including discount or premium on
redemption
Deduct the face/ book value of the debt from the Total debt outstanding before such redemption
Rights Issue: If the company decides to issue additional shares (equity) as a source of raising additional capital, it
may be obliged to first offer such shares (or rights) to the existing shareholders. In effect , the number of shares
outstanding increases. Adjustments similar to equity issue.
Bonus Issue: In the case of a bonus issue, equity shares are issued to existing shareholders for no additional
consideration. It is also called a capitalization issue. There is no effect on shareholders’ equity. Adjustments are to be
made to outstanding shares, options/ warrants and corresponding exercise prices with respect to bonus factor.
Stock Dividend: A dividend is the distribution of profits to a company's shareholders. Such distribution can be in the
form of cash or issue of stock ( i.e. Stock Dividend). In the case of stock dividend additional shares are issued to
existing shareholders without any receipt of cash from them. There is no effect on shareholders’ equity. Adjustments
are to be made to outstanding shares, options/ warrants and corresponding exercise prices
53
Example 9. A company announced a two for one stock split and a stock dividend of 25% on 10 May 2011 ( i.e. after
the release of results for Q1 Mar 2011):
Following information is available from company’s IR Mar 11

Shares outstanding 465.52 mn
Share price as on 15 May 2011 $12.00
Company bought back shares from open market as follows:

On 15 April 2011 25 mn shares
On 12 May 2011 55 mn shares
What is the share outstanding and market cap as on 15 May 2011?

a) 963.8 mn shares and Market cap $11,565.6 mn
b) 1,083.8 mn shares and Market cap $13,005.6 mn
c) 1,046.3 mn shares and Market cap $12,555.6 mn
d) 1,163.8 mn shares and Market cap $13,965.6 mn
54
The correct answer is (c) !!!!!
Shares outstanding as on 31 Mar 11 = 465.52 mn

Less Shares bought back on 15 Apr 2011 = 25.00 mn
Shares outstanding as on 15 Apr 2011 = 440.52 mn
Adjustment for Stock Split:
Shares o/s adjusted for Stock split of 2:1 = 440.52*2

= 881.04 mn
Shares o/s adjusted for Stock dividend of 25% = 881.04*1.25
Shares o/s as on 10 May 2011 = 1,101.30 mn
Less: Shares bought back on 12 May 2011 = 55 mn
Latest shares outstanding = 1,046.30 mn
Share price as on 15 May 2011 $ 12.00

Market Cap $12,555.6 mn
55
Example 10. Following information is available from company’s AR Dec 10
Short-term debt $ 50mn

Long-term debt $ 200mn
Cash and cash equivalents$ 150mn
(Convertible notes included in Long term debt $ 50mn, conversion price $20 per share)
Company did following transactions during the March 2011:

On 5 Mar 2011 Issued debentures worth $100mn (debt issue expenses $ 9mn)
On 15 Mar 2011 Redeemed senior notes of face value of $20mn
On 18 Mar 2011 Holders of convertible debt worth $ 25mn exercised their option of conversion
Calculate adjusted total debt and cash and cash equivalents
a) Cash $230mn, Debt $305mn

b) Cash $221mn, Debt $305mn
c) Cash $205mn, Debt $305mn
d) Cash $230mn, Debt $330mn
56
The correct answer is (b)
(in USD mn) Particulars Cash Short term Long Term Total Debt
debt Debt
Balance as on 31 150 50 200 250
Dec 10
5 Mar 11 Issue of debentures 91 - 100 100
15 Mar 11 Redemption of senior (20) (20) - (20)

notes
18 Mar 11 Conversion of - - (25) (25)

convertible debt
Adjusted 221 30 275 305

balance
57
Enterprise Value
Formula to calculate Enterprise Value Total Enterprise Value (TEV or EV) is the term bankers use when they
refer to the total value of a company (also referred to as Aggregate
Value)
Market Capitalization
+ Enterprise value is a measure of the actual economic value of a
company at a given point of time. It reflects what it would actually cost to
Total Debt purchase the entire company
+
Minority Interest One could believe that a possible way to calculate the value of a
+ company would be to look at the value of the assets in the company’s
balance sheet. This is a common misconception because the assets in
Preferred Stock the balance sheet are recorded using the historical value and thus it is
+ not the value the company has today
Capital Leases
Generally for public companies TEV = market value of the equity + total
-
debt (short and long term) + minority interest + preferred stock + capital
Cash & Cash Equivalents leases – cash and cash equivalents
=
Enterprise Value or The method and assumptions for calculation of enterprise value varies
“EV” with every financial institution, banker and industry
58
Enterprise Value vis-à-vis Market cap
Enterprise value
is a measure of the actual economic value of a company at a given point of time
reflects the actual purchase price anyone acquiring the company would have to pay
indicator of how the market attributes value to a firm as a whole
many investors use the current value of all of a company's outstanding shares or market capitalization, as a
proxy for its economic value
Why doesn't market capitalization properly represent a firm's value?
Although market capitalization is the key component of the actual economic value of a company, it is not the only
one. In order to calculate a more ‘Accurate value’ we need to consider the other things which come as a baggage
along with the company when it is acquired. We have to take into account all the obligations which are now to be
discharged by the acquirer
Role of Debt and Cash
In the event of a buyout, the buyer has to pay the equity value and would have to assume/ repay the company’s debt.
Of course, the buyer gets to keep the cash available with the firm, which is why cash needs to be deducted from the
firm's price
59
Enterprise Value
Example 1. What is the Market Cap & EV for the company:
B/S as on 31 Dec 2010 (in CNY mn):

Cash 200 Share Price (in HK$) 5.00
Debt 175 Shares outstanding (in '000) 5,000
Minority Interest 50
Current exchange rate for HK$ to CNY is 1.1
a) Market Cap is CNY 25 mn & EV is CNY 50 mn.

b) Market Cap is HK$ 25,000 mn & EV is CNY 25,025 mn.
c) Market Cap is HK$ 27.5 mn & EV is CNY 52.5 mn.
d) Market Cap is CNY 27.5 mn & EV is CNY 52.5 mn.
The correct answer is (d)!!!!!!!!
Share Price (HK$) 5.00
Share Price (CNY) = SP(HK$) X HKD – CNY Exchange Rate
Share Price (CNY) = 5.00 X 1.10 = CNY 5.50
Market Cap (CNY mn) = 5.50 X 5,000 / 1,000 = CNY 27.5 mn
Enterprise Value (CNY mn) = Market Cap + Debt + Minority Interest – Cash
Enterprise Value (CNY mn) = 27.5 + 175 + 50 – 200 = CNY 52.5 mn
60
Income Statement
Income Statement Information
Revenue/ Net Sales: Income from sales of goods and services, minus the cost associated with elements such as
returned or undeliverable merchandise, discounts, and allowances. Also called ‘sales revenue’, ‘net sales’, ‘net
revenue’, and ‘sales’
Other revenues: The total revenues which the company has earned may include other revenues incidental to
business. These are revenues derived from activities not directly related to the operations of the Company and
therefore should not be included in turnover. For instance, Rental income should not be included in turnover.
However, revenues of real estate companies will primarily consist of rental income. Therefore, identify the
Company’s business and decide the composition of revenues accordingly
EBITDA: EBITDA means earnings before interest, taxes, depreciation and amortization. It is an indicator of the
cash earnings that a company generates from its on going and recurrent operations regardless of its capital
structure. EBITDA can be used to analyze the profitability between companies and industries, because it
eliminates the effects of financing and accounting decisions. (EBITDA is often used as an indicator of unlevered
cash flow in case of scarce information).
EBIT: EBIT means earnings before interest and taxes. It measures the income that a company generates from its
on going and recurrent operations. Also called Operating Income or Income from Operations
Net Income: Net Income represents total earnings available to common shareholders. Net Income is derived by
subtracting all costs of doing business, depreciation, interest and taxes from revenues. Share of minorities for the
period and preferred stock dividends, must also be deducted to arrive at Net Income.
61
Income Statement (cont’d)
Income Statement Information - Normalization
Normalization refers to the process of adjusting/ removing the effect of extraordinary and one-time items from
components of Income Statement (revenues, EBITDA, EBITA, EBIT & Net Income)
For the purpose of Comps, companies have to be evaluated and compared on basis of trading / valuation metrics
and thereby it is imperative that any exceptional and non-recurring items impacting the operating results of a
company be removed and cleaned, so as to make its results comparable within its peer group
Some examples of exceptional / non-recurring items include restructuring charges, impairment, gain on sale of
fixed assets, income from divested business etc
Always read through the Notes to Financial Statements and MD&A closely to identify extraordinary items.
Details of exceptional items are generally found in the Notes to financial statements and MD&A
Rule for making adjustments
– ADD Exceptional charge, non-recurring expense or loss
– REDUCE Exceptional or non-recurring gain, one-time gains
– For adjusted net income, make appropriate tax adjustments for the tax impact of such extraordinary items. Read
the MD&A closely for actual tax impact of exceptionals, if available. If not, use the marginal tax rate for making tax
adjustments. Marginal Tax rate should be effective or statutory tax rate.
62
Let us consider the case of Novell Inc.
If you look at the Consolidated Statement of
Example: Normalized Revenue
Operations you would say that the company’s
revenue for FY 2010 would be USD 811.871 mn.
But it is equally important to check the

Management Discussions & Analysis (MD&A)
section of the Annual 10K, where you will find
the breakup of the total net revenue figure.
There you might find any exceptional item which

shall not be included as a part of core revenue
of company.
This is the reason why it is very important to

carefully review the notes to the financial
statements and the MD&A section.
Also, always consider Net revenue after

deducting sales tax and not the Gross
Revenue!!
Net Revenue = USD 811.871 mn
63
Example: Normalized EBIT
The Company states that its operating income
was USD 84.437 mn Is this equal to EBIT? No!
Look carefully at the line items above the

operating income. These include the following
expenses which are non-recurring and not
directly related to the operation of the business :
Restructuring expenses, impairment of goodwill,
impairment of intangible assets, purchased in
process research & development, gain on sale
of property, plant and equipment, gain on sale of
subsidiaries.
These items should not be included in the EBIT

calculation. We need to adjust for these “one
time” expenses or gains to get the correct EBIT
Company has not reported any amount except

restructuring expenses, hence we will adjust
EBIT for the latter.
EBIT = 84.437 + 2.774 = $ 87.211 mn 64

Example: Normalized EBITDA
EBITDA is one of the most commonly used

terms by investment banker because it is an
efficient way to understand the efficiency and
profitability of a company
EBITDA is calculated as
Normalized EBIT + Depreciation and
Amortization
Always remember to take Depreciation &

Amortization from the cash flow statement
EBITDA = 87.211 + 30.298 = USD 117.509 mn
65
Example: Normalized Net Income
In the Consolidated Statement of Operations,

the Company reports a net income of USD
377.366 mn
We need to adjust the reported Net income

figure to get the normalized net income like we
did for the previous EBIT calculation. The
company has a couple of non-recurrent and
extraordinary items which also have to be
adjusted to get the accurate net income. One of
such items is the Impairment / write down of
Investments
Now is net Income equal to:
= 377.366 -7.413+2.774= $ 372.727 mn.

Wrong!
66
Example: Normalized Net Income
Adjust for Tax : Always remember that when you are dealing with net income you have to account for the tax
implications of an increase or decrease in profits. Net income is always calculated after taxes, and in a way
expenses act as a tax shield, as the higher expenses you have the less taxes you pay.
Thus, One time and extraordinary charges have to be adjusted for tax. Here, we shall use the statutory tax rate of the
country of incorporation of the Company (which is 40% in case of Novell Inc. as it is a US company )
There are certain cases we need to remember when we charge Net Income for tax such as –
1. Always charge Exceptional or one off items for tax whenever company is reporting net profit in its books.
2. In case company is reporting net loss, tax adjustment is done only if loss turns into profit after adjusting for
exceptional items and than tax is charged on the whole figure including net loss.
3. If the resulting figure for net loss remains negative even after adjusting exceptional items, there will be no tax
adjustment at all.
4. Remember to tax-effect all adjustments to net income, if items relate to an after-tax financial statistic and are
tax-deductible. Do not tax adjust a net loss or non-tax deductible items such as goodwill
Therefore, the adjusted Net Income = 377.366 + ( -7.413+2.774)* (1- 0.40) = $ 374.582 mn
67
Example: Normalized EPS
Earnings per share (EPS) represents the portion of a company's earnings, net of taxes and preferred stock
dividends, but before equity dividends allocated to each share of the company’s common stock
Basic EPS = Normalized Net income

Weighted average
basic shares outstanding
Basic EPS = $ 374.582 / 349.741

= $ 1.071
Diluted EPS = Normalized Net income

Weighted average
diluted shares outstanding
Diluted EPS = $ 374.582 / 353.447

= $ 1.059
68
Pro-forma Financials
Companies may acquire or divest businesses during the year
Pro-forma financials means restated financials of the company adjusted to give effect to any corporate actions so
as to reflect the continuing financials position of the company going forward
Reasons for calculating Pro-forma financials:
– Acquisitions
– Mergers
– Divestitures
– Spin offs
– Capital Restructuring
69
Pro-forma Financials (cont’d)
How to identify whether Pro-forma financials to be done
Checking corporate actions (Source:

Company Press Releases, Announcements,
Stock Exchange press releases)
Table 1 FY10A FY11E FY12E
Comparing historical financials vis-à-vis

forward estimates Revenues 1400 3000 3500
EBITDA 750 2300 2450
– Exceptionally high increasing trend in EBIT 600 2050 2180
forward financials as compared to
reported financials reflect the possibility of
a major acquisition (Table 1)
Table 2
FY10A FY11E FY12E
Revenues 1400 550 610
– Similarly very steep decline in forward EBITDA 750 350 390

financials as compared to reported EBIT 600 310 380
financials reflect the possibility of a
divestiture/ hive off/ spin-off, etc (Table 2)
70
1. In case the pro forma financials
are reported by the company –
use them for your analysis to
know the current position of the
company
71
2. If pro-forma financials are not reported by the company, calculate it by adding financials of the acquired company in
case of acquisition and exclude the financials of the divested business in case of a divestiture
Question.
On 15 Dec 10, ABC Ltd announced the acquisition of XYZ plc. The acquisition was completed on 12 February 2011.
Now, in case ABC does not release proforma financials adjusted for the acquisition of XYZ for its Fiscal year ended 31
Dec 10, then we may calculate the proforma financials of the combined entity by adding the financials of ABC and XYZ
for the fiscal year ended 31 Dec 10
72
Income Statement Information – Indicative exceptional list
S. No. Line item Add Back Tax adjustment Comment
1 Joint Venture Y Y Different treatment for different purposes
2 Discontinued operations Y Y No tax adjustment if net of tax
3 Restructuring cost / expenses Y Y
4 Expenses related to merger and acquisition transactions Y Y
Write down / Impairment of assets (both tangibles and intangibles
5 Y Y No tax adjustment on Goodwill
including goodwill)
6 Impairment of leasehold expenses Y Y
7 Loss / Gain on sale of tangible & intangible assets Y Y
8 Loss / Gain on sale of investments, other than marketable Y/N Y Loss/ Gain on strategic investment is exceptional
9 Amortization of deferred compensation Y Y
10 Equity based compensation expense- stock options or warrants Y Y
11 Writing back of any provisions or reserves Y/N Y Provision is exceptional or not
12 Gain/Loss on sale of marketable securities N
13 Income from associates / affiliates Y Y
14 Litigation settlement Y Y
15 Loss / Gain on sale or termination of an operation Y Y No tax adjustment if net of tax
16 Foreign currency exchange gain / loss Y Y
17 Accounting changes Y/N Cumulative effect relating to exceptions is exceptional
18 Tax benefit from exercise of options Y N
19 Provision for doubtful accounts N N
20 Amortization of debt issuance costs Y Y
21 Expenses associated with the Sarbanes Oxley Act Y Y
22 Rental income N N To be excluded from EBIT calculations
23 Government grants or subsidies Y Y
24 Severance costs Y Y
25 Facilities consolidation Y Y Restructuring expense
26 Gain / Loss on early extinguishment of debt Y Y
27 Early retirement costs Y
28 Redundancy costs Y Y
29 Donations Y Y
30 Amortization of Negative goodwill Y N
Item can be treated as exceptional or normal depending upon the industry and analysis
73
LTM & Calendarization
Trailing Twelve Months (TTM / LTM)
A Graphical Representation There will be times when the most recent company
financial statement is a quarterly report or a half-year
LTM Results report. In such cases the results for the last twelve months/
trailing twelve months are derived.
Reported Fiscal Year- annual report LTM is calculated as under:
Input financial results of the latest complete fiscal

year
Q1 Q2 Q3 Q4 Q1 Q2
Add financial results for the accumulated current
partial year result (stub period)
Reported Reported
previous year accumulated Deduct financial results for the corresponding stub
accumulated 6 current year 6 period (partial year) of the previous year (i.e. for the
month results month results same period but for the previous year
Remember to follow all the guidelines previously

LTM = Fiscal year results discussed for income statement when inputting the
+ figures
Results of current stub period
-
Results of corresponding prior stub period
74
LTM & Calendarization (cont’d)
Example 13: If LTM Sales need to be calculated (for a company with Dec FYE) as in March‘11, calculate the
LTM sales from the below mentioned data:
Dec 09 1,200 Dec 10 1,300 Dec 11E 1,400
Mar 11 850 Mar 10 900
a) 1,200 b)1,300 c) 1,250 d) 1,350
The correct answer is (c) !!!!!
LTM Sales as on Mar’11 as:
Sales for Fiscal Year = 1300 mn
Add: Current Stub ending Mar 11 = 850 mn
Less: Prior Stub ending Mar 10 = 900 mn
LTM Sales for Mar 11 = 1300 + 850-900 = 1250 mn
75
Forward Information – Estimates

Valuation multiple can be calculated on both a latest twelve months (“LTM”) and a forecasted basis. Companies
trade most typically off expected future performance (analysts’ estimates)
Earnings estimates are obtained from various broker research reports or databases such as Bloomberg, Capital
IQ, Factset estimates. Adjust the earnings estimates for any exceptionals
For the purpose of deriving trading multiples, estimates are determined on a calendar year basis. This is done to
ensure consistency and enhance comparability within comps
In case of companies with fiscal year end other than December, the forecasted estimates are “calendarized”.
Calendarization is the process of prorating estimates that are available on fiscal year basis, to derive estimates on
a calendar year basis.
Consider the following example

Fiscal year end of company XYZ 30 September
Forecasted revenues for FY 2011 $ 1,200 mn
Forecasted revenues for FY 2012 $ 1,440 mn
Revenues for calendar year 2011 shall be determined as under:

Forecasted revenues for FY 2011 pro rated for 9 months $ 1200 x 9/12 = $ 900 mn
Add Forecasted revenues for FY 2012 pro rated for 3 months $ 1440 x 3/12 = $ 360 mn
Forecasted revenues for calendar year 2011 (Jan – Dec 11) $ 900 + $ 360 = $ 1,260 mn
76
Output currency
Find out the output currency in which the figures are to be reported. The output flows in the desired currency when
we input the relevant exchange rates ( i.e. Local currency to the desired currency). This is done to ensure
consistency and enhance comparability within comps
The following exchange rates are used for conversion:
Average exchange rate for income statement figures for the relevant fiscal years
Example: If the fiscal year of a company ends in September 2010 (Local currency being USD and Desired
currency being EUR) the exchange rate to be used will be USD - EUR average conversion rate from 1st
October 2009 to 30th September 2010
Period end exchange rate for balance sheet figures

In case the latest filling period ends on 30th Sep 2010, use USD-EUR conversion rate as on 30th Sep 2010
Current spot rate for forward estimates and market capitalization

USD-EUR spot rate as on the date of share price
Ques: Which of the following exchange rates will be used for converting Net debt outstanding as on 31 Dec 10
(FYE) for the comparable company analysis being done on 31 Mar 11
(a) Average exchange rate for FYE 31 Dec 10 (b) Spot exchange rate as on 31 Dec 10
(c) Spot exchange rate as on 31 Mar 11 (d) Average exchange rate for the quarter ended 31 Dec 10
77
Understanding Multiples
Multiples are ratios with equity value (Price) or enterprise value (EV) in the numerator and a standardizing factor
(Earnings, Sales, Book Value, etc.) in the denominator.
– Price/Earnings (PE) and variants (PEG and Relative PE)
– EV/EBIT
– EV/EBITDA
– EV/Cash Flow
– EV/ Book Value of Assets
– EV/Sales
– P / Book value
Both the value (the numerator) and the standardizing factor ( the denominator) in multiples represent the same
claimholders in the firm
– For instance, value of equity is standardized with equity earnings, and enterprise value (value of entire firm) is
standardized with EBITDA or book value of assets
For multiples to make sense, the standardizing factor (earnings, EBITDA, etc) must be computed using same
accounting rules across all firms being compared
78
Multiples – Example 1
Example 1. Please calculate Sales, EBITDA, EBIT and P/E multiple:
(all figures in US$ mn except share price)
Share Price20.00
Correct answer is (b)!!!!!!…
Market Cap10,000
Enterprise Value = Market Cap + Debt +
Debt 250 Minority Interest – Cash
Cash 400 EV = 10,000 + 250 + 100 – 400 = 9,950
Minority Interest 100 Multiples:
Cash in Escrow account 50 – Revenue = 9,950/2,500 = 3.98x
Sales 2,500 – EBITDA = 9,950/(800+200) = 9.95x
EBIT 800 – EBIT = 9,950/800 = 12.44x
D&A 200 – P/E = 20.00/0.75 = 26.67x
EPS 0.75
EV/Sales=4.00x, EV/EBITDA=10.00x, EV/EBIT=12.50x, P/E=26.67x
79
Using Multiples
In order to use a multiple effectively to pass judgment on valuation of a firm:
Know how the multiple was computed
– Same multiples can be computed differently. For instance, P/E can be computed as Price/LTM Earnings,
Price/Fiscal Year Earnings, or Price/Forward Earnings Estimate
Define the comparable asset universe of the multiple
– It can be all firms in a sector, industry, entire market, or any subset thereof
Understand the fundamentals (growth, risk, profit margin, etc. ) that drive the multiple, and the nature of the
relationship between the multiple and each fundamental variable
– These relationships explain the variations in multiple across firms
– The relationship between a fundamental (like growth) and a multiple (such as PE) is seldom linear. For
example, if firm A has twice the growth rate of firm B, it will generally not trade at twice its PE ratio
– It is impossible to properly compare firms on a multiple, if we do not know the nature of the relationship
between fundamentals and the multiple
Know the cross sectional distribution of the multiple across comparables
– Multiples have no value when looked at in isolation
80
Price/Earnings (PE Ratio)
PE = Market Price per Share / Earnings per Share
There are a number of variants on the basic PE ratio, based upon how the price and the earnings are defined
Price is usually the current price
– Though some like to use average price over last 6 months or year
EPS can have following variations
– Time variants: EPS in most recent financial year (current), EPS in most recent four quarters (trailing), EPS
expected in next fiscal year or next four quarters (both called forward) or EPS in some future year
– Primary, diluted or partially diluted EPS
– EPS before or after extraordinary items
– EPS measured using different accounting rules for outstanding shares (options expensed or not, pension fund
income counted or not, etc)
81
Example 2. Calculate the Basic P/E, Diluted P/E, adjusted Basic P/E & adjusted Diluted P/E multiple with the
following information:
(all figures in US$ mn except share data)
Share price $10.00
Shares outstanding 1,000
Wtd. Avg. shares outstanding (Basic) 950
Wtd. Avg. shares outstanding (Diluted) 990
Revenue 5,000
Restructuring charges 1,000
One-time Insurance recoveries 500
Non-recurring charges 300
EBIT 1,500
Interest Expenses 500
Reported Net Income 500
(after adjusting tax @30%)
a) P/E 19.00x, Diluted P/E 19.80x, Adj. P/E 19.00x, Adj. Diluted P/E 19.80x
b) P/E 19.00x, Diluted P/E 19.80x, Adj. P/E 8.96x, Adj. Diluted P/E 9.34x
c) P/E 19.00x, Diluted P/E 19.80x, Adj. P/E 7.31x, Adj. Diluted P/E 7.62x
d) P/E 19.00x, Diluted P/E 19.80x, Adj. P/E 4.13x, Adj. Diluted P/E 4.30x
82
Multiples – Example 2 (cont’d)
Correct answer is (b)!!!!!!!!!...
Reported net income = US$ 500 mn
Adjusted net income = Net income + Restructuring charges* - One-time Insurance recoveries* + Non-recurring
charges*
* Adjusted for tax @ 30%
Adjusted net income = 500 + (1,000 – 500 + 300)*(1-0.3) = US$ 1,060 mn
Reported Basic EPS = 500/950 = US$ 0.53 Reported Diluted EPS = 500/990 = US$ 0.51
Adjusted Basic EPS = 1,060/950 = US$ 1.12 Adjusted Diluted EPS = 1,060/990 = US$ 1.07
Reported Basic P/E = 10.00/0.53 = 19.00x Reported Diluted P/E = 10.00/0.51 = 19.80x
Adjusted Basic P/E = 10.00/1.12 = 8.96 x Adjusted Diluted P/E = 10.00/1.07 = 9.34x
83
PE Fundamentals
To understand the fundamentals, start with a basic equity discounted cash flow model
– Dividend discount model for equity price
DPS1
P0 =
r−g
– Where, DPS1 is dividends per share next year, r is equity risk, and g is perpetual growth rate
The above relationship implies that, other things held equal:
– Higher growth firms will have higher PE ratios than lower growth firms
– Higher risk firms will have lower PE ratios than lower risk firms
– Firms with lower reinvestment needs will have higher PE ratios than firms with higher reinvestment rates
84
Enterprise Value (EV) Ratios
While Price earnings ratios look at the market value of equity relative to earnings to equity investors, Enterprise
Value ratios look at total value of the firm relative to total operating earnings or free cash flows
The form of value to cash flow ratios that has the closest parallels in DCF valuation is the value to Free Cash
Flow to the Firm, which is defined as:
– EV/FCFF
– EV = Market Value of Equity + Market Value of Debt - Cash
– FCFF = EBIT (1-t) - (Cap Ex - Depreciation) - Chg in Working Cap
85
Example 3. What is the EV/EBITDA, EV/EBIT and EV/FCFF for the company:
(all figures in US$ mn)
Share Data Income Statement
Share Price $5.00 Revenue 1,000
Shares outstanding 1,000 COGS 270
Balance Sheet SG&A 200
Cash 200 R&D 50
Debt 175 Restructuring expenses 30
Minority Interest 50 EBIT 450
Tax rate 30.0%
Cash Flow Statement
Depreciation 50
Amortization of intangibles 50
Capex 100
Change in Working Capital (75)
a) EV/EBITDA = 9.14x, EV/EBIT = 11.17 & EV/FCFF = 12.88x

b) EV/EBITDA = 8.66x, EV/EBIT = 10.47 & EV/FCFF = 12.88x
c) EV/EBITDA = 8.66x, EV/EBIT = 10.47 & EV/FCFF = 12.23x
d) EV/EBITDA = 9.14x, EV/EBIT = 11.17 & EV/FCFF = 12.23x
86
Multiples – Example 3 (cont’d)
Correct answer is (c) !!!!!…
EV = (5*1,000) + 175 + 50 – 200 = $ 5,025 mn
Adjusted EBIT = Reported EBIT + Restructuring expenses
Adjusted EBIT = 450 + 30 = $ 480 mn
Adjusted EBITDA = Adj. EBIT + Depreciation + Amortization of intangibles
Adjusted EBITDA = 480 + 50 + 50 = $ 580 mn
FCFF = Adj. EBIT * (1 - tax rate) – (Capex – D&A) – Change in working capital
FCFF = 480 * (1-0.3) – (100 – 50 – 50) – (-75) = US$ 411 mn
EV/EBITDA= 5,025 / 580 = 8.6x
EV/EBIT = 5,025 / 480 = 10.4x
EV/FCFF = 5,025 / 411 = 12.2x
87
EV Ratio Alternatives
Most analysts find FCFF to complex or messy to use in multiples (partly because capital expenditures and
working capital have to be estimated) They use modified versions of the multiple with the following alternative
denominators such as EBIT or EBITDA
– EBIT: pre-tax operating income
– EBITDA: earning before interest, taxes, depreciation, and amortization
Assume that you have computed the value of a firm, using discounted cash flow models. Rank the following
multiples in the order of magnitude from lowest to highest?
– EV/EBIT
– EV/EBITDA
– EV/FCFF
88
Why use EV/EBITDA?
It can be computed even for firms that are reporting net losses, since earnings before interest, taxes and
depreciation are usually positive
For firms in certain industries, such as cellular, which require a substantial investment in infrastructure and long
gestation periods, this multiple seems to be more appropriate than the price/earnings ratio
In leveraged buyouts, where the key factor is cash generated by the firm prior to all discretionary expenditures,
the EBITDA is the measure of cash flows from operations that can be used to support debt payment at least in
the short term
By looking at cash flows prior to capital expenditures, it may provide a better estimate of “optimal value”,
especially if the capital expenditures are unwise or earn substandard returns.
By looking at the value of the firm and cash flows to the firm it allows for comparisons across firms with different
financial leverage.
89
Other Common Ratios
EV/Sales: ratio of the market value of the firm to the sales
Price/Book Value: ratio of market value of equity to the book value of equity, i.e., the measure of shareholders’
equity in the balance sheet
– If the market value of equity refers to the market value of equity of common stock outstanding, the book value
of common equity should be used in the denominator
– If there is more than one class of common stock outstanding, the market values of all classes (even the non-
traded classes) needs to be factored in.
EV/Book Value: ratio of sum of market value of equity and market value of debt to sum of book value of equity
and book value of debt
90
Choosing Between Multiples
There are dozens of multiples that can be potentially used to value an individual firm. In addition, relative
valuation can be relative to a sector (or comparable firms) or to the entire market (using the regressions, for
instance). However, since there can be only one final estimate of value, there are three options:
– Use a simple average of the valuations obtained using a number of different multiples
– Use a weighted average of the valuations obtained using a number of different multiples
– Choose one of the multiples and base your valuation on that multiple
The best approach is to choose a set of relevant multiples that make most sense for that industry or sector, given
how value is measured and created
91
Sector Multiples
Sector Multiple Used Rationale

PE, Relative PE (Firm PE Relative to
Stable industry with established
Cyclical Manufacturing Market PE); Often with normalized
fundamentals
earnings
High Tech, High Growth PEG (PE/Growth Rate) Big differences in growth across firms
High Growth, No Earnings EV/Sales, Price/Sales Zero or negative earnings
Capital intensive, with high

Heavy infrastructure EV/EBITDA
depreciation expense
Operations for these companies is

Financial Services Price/Book Value, PE borrowing and lending debt, we only
consider equity related ratios
Low margins across board, Value is

Retailing Price/Sales, EV/Sales
predominantly measured with sales
92
Things to check
Numbers across the years are in line, both historicals and forecast
Double-Check for dips or sharp increases
Figure out the reasons for the differences
– Can be because of exceptions item miss
– Pro-forma numbers – Mergers / divestitures
– Different currency
– Different company
– Consolidation status – specifically East Asian companies
– Restatements
– Accounting period changes; short periods
Any change of more than 10% has to be rechecked
Establish the reasons for difference in multiples
93
Obvious errors
P/E multiple 0.1x or 1000x
EV/Sales multiple of 500x
EBITDA multiple more than EBIT multiple
Options more than outstanding shares
Negative EV with multiples
52 week high lower than current price
Date of 52 week high/low more than a year old
No estimates after filing for company
Sales of dipping exceptionally low
No calendarisation for non-US company
EPS more than a Pound
94
Copal Partners
Comparable Transactions Analysis

(Transactions Comps)
95
Index
Table of Content
Introduction 97
Transactions Overview 98
M&A Deals Identification 99
Transaction Value 100
Type of Consideration 101
Target Financials – Sources 107
Target Financials – LTMs 109
Premium Analysis 110
Amendment of Deal Terms 111
96
Introduction
Transaction Comps is a valuation tool to look at the precedent transactions in a specific sector
Precedent transaction comps is the analysis of M&A Deals which have already taken place in past.
It involves valuing the target company based on relative prices (or multiples) paid for similar business in the past
The financial ratios and values analyzed vary from project to project, depending on the industry and information
available
A standard transaction comp contains operational statistics containing:
– Transaction overview (Announcement and closing date, Target name, Acquirer name)
– Financial performance parameters such as revenue, EBIT, EBITDA and EPS
These inputs define the output Multiple sheet containing various Enterprise Value (EV) multiples
Unlike trading comps, precedent transactions multiple contain an element of control premium paid by the acquirer
to gain control over target company
97
Transaction overview
Announcement Date
This is the day the transaction is announced by the company. The source should be the official company press
release/ stock exchange announcements/ Merger documents etc
Amendment Date / Rank Date
The date on which company revises its original offer. The source should be the official company press release/
Merger documents etc. In case of any amendment in deal, always new offer is considered for analysis.
Target Name
Company or the division of any company being acquired
Acquirer
Company that is purchasing the Target
Date Completed
Date the company announced that the transaction was successfully closed
Source should be acquirer's/ seller’s/ target’s press release or filings after the date of close of the deal
In case that the transaction has not closed, consider it “Pending”
* Note: Terminated deals are generally excluded from analysis, unless specifically required
98
M&A Deals Identification
M&A Deal Run means identifying a list of comparable precedent (which have already been done in past)
transactions in specific sector or industry for valuation or acquisition purposes. For Deal Run all targets should
belong to same industry.
Identifying Industry / Sector / Product for which comparable deals is required .
Specify Region / Country target companies should belong to. For e.g. searching out deals in Beverages Industry
on Global level or restricting search to Asia Pacific region or may be Europe only.
Other criterions can be considering a set Deal Value range. Such as deals should have Deal Value ranging from
US$100 mn to US$1,500 mn for a particular time period such as last 5 years.
There are various sources available for extracting Deal Run such as Thomson One Banker, Bloomberg.
After doing the preliminary search like understanding industry or the product for which past deals are required,
check various sources mentioned above for M&A Deal Run by doing industry specific or company specific search
and extract list of comparable past deals for transaction comps valuation.
99
Transaction Value
Offer Value is similar to Equity Value
- also called “Total Equity Purchase Price”
Offer Value =
(Total Shares Outstanding* x Purchase Price per Share)
*Total Shares Outstanding =
Basis Shares + In-the-money-options + Shares from in-the-money convertible securities)
Transaction Value =
Offer Value + Total Debt* + Pref. Stock + Minority Interest – Cash & Equiv.
*Total Debt excludes convertible securities that are assumed to convert into common shares (do not double count)
100
Types of Consideration
Consideration can be paid to the Target as:
Cash consideration per target share
Acquirer share per target share based on pre-determined exchange ratio
Lump-sum cash consideration
Lump-sum stock issued by the acquirer
Combination of cash and stock consideration (either lump-sum or per share stock and cash)
*There may be other forms of consideration like issue of loan notes or other debt instruments by the acquirer or asset swaps
101
Types of Consideration (cont’d)
I. Lump sum cash consideration
The acquiror might pay a lump sum cash to acquire the target
Example 1.
Piramed acquired by Roche

Slough, UK, 15 April 2009 – Piramed Limited (Piramed), a privately owned UK biotechnology company, today announces that it has
signed a definitive agreement with Roche that will result in Piramed being fully acquired for an upfront cash payment of US$160 million
plus a milestone payment of US$15 million, which is due upon the commencement of Phase II clinical trials for the company’s oncology
programme. The final transaction value will be adjusted by the net cash balance remaining upon closing. Closing of the transaction is
subject to standard conditions including review by anti-trust authorities.
Here equity value would be US$175 mn (160 mn+15mn) … Is it correct!!!!!!
No!!!!!
The Equity Value of the transaction is 160 mn
* Milestone payments are contingent considerations, so they are generally not considered as part of Equity Value
102
II. Lump sum Stock consideration
For Lump sum stock consideration, the Equity Value can be calculated as follows:
Number of acquirer shares issued X Acquirer's share price 1 day prior to date of announcement /
% stake acquired
Example 2.
Concord EFS and Star Systems to Merge
How will we calculate the Equity Value in this case??
MEMPHIS, Tenn.--(BUSINESS WIRE)--Oct. 9, 2008
Concord EFS, Inc. (Nasdaq: CEFT), a leading electronic
Equity Value = commerce processor, and Star Systems, Inc., the largest PIN-
secured payments network in the U.S., today announced that
they have entered into a merger agreement pursuant to which
Number of share issued as consideration = 24.75 mn Star Systems would become a wholly-owned subsidiary of
Concord. Concord currently owns the MAC(R) EFT network,
X Concord share price as on October 8, 2008 = $34.50 which provides services to over 3,300 financial institutions
primarily in the Northeast and Midwest. The STAR (sm)
network has 3,500 financial institution members, and operates
/ % stake acquired i.e. 100%
primarily in 22 states in the West, Southwest, and Southeast,
plus the District of Columbia. In connection with the closing of
Equity Value = USD 854 mn the merger, Concord will issue 24.75 million shares of common
stock for all of the outstanding shares of Star Systems' common
stock.
Other Information
Concord share price as on October 8, 2008 = $34.50
103
III. Cash consideration per target share
In case acquirer pays cash consideration per target share, the Equity Value can be calculated as follows:
Target share outstanding as on date of announcement X Cash consideration per share
Example 3.
Nokia to Acquire NAVTEQ
Calculate the Equity Value in this case??
The combined entity would create a leading global player in the
fast growing location based services market NAVTEQ to
support existing customers as before
Equity Value =
CHICAGO, Oct. 1 /PRNewswire-FirstCall/ -- Nokia and
NAVTEQ today announced a definitive agreement for Nokia to
Navteq shares outstanding = 98.8 mn acquire NAVTEQ. Under the terms of the agreement, Nokia will
+ Dilution impact of options = 4.54 mn pay $78 in cash for each share of NAVTEQ including
outstanding options for an aggregate purchase price of
Total Diluted shares outstanding =103.34 mn approximately $8.1 billion (euro 5.7 billion), or approximately
$7.7 billion (euro 5.4 billion) net of NAVTEQ existing cash
balance. The acquisition has been approved by the board of
Offer price per share = $78.00 directors of each company and is subject to customary closing
conditions including regulatory approvals and NAVTEQ
Equity value = $ 103.74 * 78 = $8,060 mn shareholders' approval.
Other Information
“Navteq” shares outstanding as on October 1, 2007= 98.8 mn
Dilution impact of options = 4.54 mn shares

104
IV. Acquirer share issued as consideration per target share
The Equity Purchase Price in this case would be:
Target share outstanding as on date of announcement X Exchange ratio X Acquirer's share price 1 day prior to
date of announcement
Example 4.
State Street to Acquire Investors Financial Services Corporation
05/02/2007
BOSTON, February 5, 2007 – State Street Corporation (NYSE: STT), the world's leading provider of financial services to institutional
investors, announced today that it has signed a definitive agreement to acquire Investors Financial Services Corporation (NASDAQ:
IFIN). In the transaction, Investors Financial Services Corporation shareholders will receive 0.906 shares of State Street common stock
for each share of Investors Financial Services Corporation common stock, based upon the closing price of State Street common stock
on February 2, 2007
Calculate the Equity value when

IFS Shares outstanding as on date of announcement = 65.99 mn
Dilution impact of options = 2.98 mn
State Street share price as on 2 Feb 07 = $71.75
Equity value =
IFS Shares outstanding as on date of announcement + Dilution impact of options = 65.99 mn + 2.98 mn = 68.97 mn
Equity Value = Total Diluted shares outstanding X Exchange ratio State Street share price as on 2 Feb 07 (last trading day
prior to announcement)
Equity value = 68.97*0.906*71.75 = $ 4,483.43 mn
105
V. Cash and stock consideration
The equity value would be combination of cash and stock offered

Example 5.
Thomson and Reuters in Discussions to Form Global Leader in Business-Business Information Services
STAMFORD, Conn. and LONDON, May 7, 2007

The boards of The Thomson Corporation (“Thomson”) and Reuters Group PLC (“Reuters”) confirm that they are in discussions for the
combination of their two businesses. Both boards believe there is a powerful and compelling logic for the combination which would
create a global leader in the business-to-business information markets. Each Reuters share would be entitled to 352.5 pence per share
in cash and an equity participation based on an equalization ratio of 0.1600 Thomson shares for each Reuters share.
Other information:
Reuters shares o/s as on May 4, 2007 1,256.56 mn
Dilution impact of options 16.05 mn shares
Thomson share price as on 3 May 07 CAD 48.46
GBP-CAD exchange rate as on 3 May 07 2.19795
Equity value = (Reuters Shares o/s + Dilution Impact of Options) X (Thomson Share price one day prior to
announcement X Exchange Ratio + Cash per share)
= (1,256.56+16.05)*((48.46/2.19795*0.16)+3.525)
Equity value = GBP 8,975 mn
106
Target Financials – Sources
Financials in case Target is Public company
We can divide transaction comps in three sections viz basic transaction data, deal consideration and financial
multiples.
Transaction comps look out for the status of target company as on the Date of Announcement i.e. what was the
EV and other relevant multiples as on that date.
For Multiple calculations, please cross check the financials or filings to be used.
Multiples vary and depend from industry to industry for which analysis is being conducted.
For calculating financials, use the latest filings available just before the Date of Announcement. For example, if
DOA is 25 April 09, consider AR Dec 08 and IR Mar 09 filings. Also, please check whether calculating LFY or LTM
multiples. The former filings will be used for calculating LTM multiples. In case of LFY multiples use IR Mar 09 for
EV calculations and consider only AR for Income Statement.
In case of Amendment, consider the latest filings available as per the Date of Amendment and not the initial date.
For Examples DOA is 17 May 08, later on deal got revised on 21 July 08, consider AR Dec 07 and IR June 08 for
financials and not IR Mar 08.
Calculation and adjustments of EV and Income Statement Normalization is similar as it is done for Trading
Comps.
107
Target Financials – Sources (cont’d)
In case the Target is a Public company
Offer Document
Annual Reports and Interim Reports prior to date of announcement
Press Releases
Stock Exchanges if target or acquirer is listed entity
In case The Target is a Private company or Unit / Division of a listed company
Offer Document
Annual Reports and Interim Reports prior to date of announcement
Acquiror’s / Seller / Target’s press releases
Stock exchange announcements
8K / 8KA (in case Target/ Acquiror / Seller is an US Company)
Seller / Acquiror’s filings
Databases (Bloomberg/ FactSet / CapitalIQ / Reuters)
Brokers Reports
General Web search
108
Target Financials – LTMs
Refers to the last twelve months financials of the target prior to the announced date. LTM is calculated as under:
Financial results of the latest complete fiscal year
+ financial results for the accumulated current partial year result (stub period)
- financial results for the corresponding stub period (partial year) of the previous year (i.e. for the same period but
for the previous year)
+/- extraordinary / non recurring items
LTM Results
LTM = Fiscal year results

Reported Fiscal Year- annual report +
Results of current stub period
-
Q1 Q2 Q3 Q4 Q1 Q2 Results of corresponding prior stub period
Reported Reported
previous year accumulated
accumulated 6 current year 6
month results month results
109
Premium Analysis
Premium (%) = (Offer Price / Target Price) – 1
Generally acquirer would offer to acquire the target a value more than its current trading price. The excess of offer
price over current trading price is the control premium for the target
Premium may depend on the strategic fit or the expected synergies
Use unaffected stock price of target for calculating the premium i.e. prior to announcement of possible acquisition
Example 6.
On May 5, 2010, A announced to acquire B for a cash consideration of USD 15 per share. B’s share price as on May
4, 2010 was USD 12. Here premium paid by the acquiror is 25%
But in this case had there been some rumor in the market since February 5, 2010, and B’s share price as on
February 4, 2010 was USD 10, then premium should be 50%
Case 1. Premium = (Offer Price / Target Price on last trading day prior to announcement) – 1
= ($15-$12)/$12 - 1
= 25%
Case 2. Premium = (Offer Price / Target Price on last trading day prior to rumor in public) – 1
= ($15-$10)/$10 - 1
= 50%
110
Amendment of Deal Terms
In case deal terms gets amended after initial announcement, use final deal terms for valuation
Target’s LTM financials will be taken with respect to date of announcement of final deal terms
Example:
On May 5, 2010, A announced to acquire B for a cash consideration of 0.5 A shares per B share. On July 6, 2010,
the consideration was increased to 0.55 A shares per B share and further increased to 0.60 A shares on October
6, 2010.
Share price as on relevant dates are as under:
A B
May 4, 2010 $18 $7.50
July 5, 2010 $20 $8.00
October 5, 2010 $19 $11.00
What should be the offer price per share?
$11.40
What is one day premium paid by the acquirer?
(a) 42.5% (b) 52.0% (c) 3.6% (d) 44.0%
111
Copal Partners
DCF Valuation
112
Index
Table of Content
Time value of money 114
Cost of capital 127
Free Cash Flows (FCF) 137
Sensitivity Analysis 138
DCF-based valuation 139
Terminal Value 145
Equity Value from Firm Value 148
Advantages and Disadvantages of DCF 149
113
Time Value of Money
Let’s review the three main concepts used in DCF-based valuation
Time value of money
– Cash flows
– Present value (PV)
– Net present value (NPV)
– Perpetuities
– Discount rate
Cost of Capital
– Cost of Equity
– CAPM
– Cost of Debt
– WACC
Free Cash Flow (FCF)
– Free cash flow to firm (FCFF)
– Free cash flow to equity (FCFE)
114
Time Value of Money (cont’d)
Which would you take?

– Rs. 2 Crore today?
– Rs. 3 Crore in exactly 5 years?
Assume again:
– Both payments are riskless i.e. it is 100% certain that you will be paid once you make a choice
Assume also that:
– Bank offers 10% interest on 5 year deposits
Value of Rs. 2 Crore in 5 years: 2 * (1 + 10%)5 = 3.22 Crore
Conclusion: Rs. 2 Crore today is greater than Rs. 3 Crore in exactly 5 years!
115
Time Value of Money (cont’d)
But how much is Rs. 3 Crore in 5 years worth today?
– Alternatively, how much money deposited at 10% today will equal Rs. 3 Crore in 5 years?
Calculation: X * (1 + 10%)5 = 3 Crore
3
X=
(1 + 10%)5
X = 1.86 Crore
The amount of Rs. 1.86 Crore is known as the Present Value of Rs. 3 Crore in 5 years
116
Present Value
A “cashflow” is time-dated money
– It consists of an amount (in some currency), a date (or a point in time), and a sign (positive or negative)
In order to compare different cashflows, we convert all future cashflows to their present values
Use:
Ct =i
PVt =0 =
(1 + rt =i ) i
PVt=0 = present value (at time zero)

Ct=i = cashflow in the future (in ith year)
rt=i = interest rate for payments in ith year (annualized) – also called discount rate
A simplification of PV formula
– Assume r is same for all time intervals (years)
Ct = i
PVt =0 =
(1 + r ) i
117
Present Value (cont’d)
Example 1: One future cashflow
What is the present value of US $100,000 received in year 10 if the discount rate (for ten-year horizons) is 12%
$100,000
Cash Flow Diagram:
PV = ?? Year 5 Year 10
100,000
Present Value Calculation: PVt =0 = = 32,197.32
(1 + 12%)10
118
Example 2: Effect of discount rate
What would you rather have:
– $10,000 today or $12,000 in exactly 2 years
Scenario 1: Discount rate = 8%
– Present value to have $12,000 in 2 years is:
12,000
PV [$12,000; Yr 2; 8%] = = $10288.0
(1 + 8%) 2
– Value of $10,0000 in 2 years is:
FV [$10,000; Yr 2; 8%] = 10000 * (1 + 8%) 2 = $11664.0
– In this case, take $12,000 in 2 year
119
Example 2: Effect of discount rate
What would you rather have:
– $10,000 today or $12,000 in exactly 2 years
Scenario 2: Discount rate = 10%
– Present value to have $12,000 in 2 years is:
12,000
PV [$12,000; Yr 2; 10%] = = $9917.3
(1 + 10%)2
– Value of $10,0000 in 2 years is:
FV [$10,000; Yr 2; 10%] = 10000 * (1 + 10%) 2 = $12100.0
– In this case, take $10,000 today
120
Example 3: Multiple future cash flows
What is the present value of $50,000 received in year 5 and $100,000 received in year 10 if the discount rate is
12%
$100,000
$50,000
Cash Flow Diagram:
PV = ?? Year 5 Year 10
T
Ct
Present Value Formula: PV = PVt =0 (C1...CT ) = ∑
t =1 (1 + rt ) t
50,000 100,000
Present Value Calculation: PV = + = 60568.67
(1 + 12%)5 (1 + 12%)10
121
Net Present Value
Net present value combines the initial investment (usually made at time zero) and the PV of expected future cash
flows
T
Ct
NPV = C0 + ∑
t =1 (1 + rt ) t
A positive NPV is a key criteria for a sound investment
What is the NPV for the following set of cash flows (assume r = 8%)
– C0 = -$100, C1 = $10, C2 = $10, C3= $110
10 10 110
– NPV = − 100 + + + = 5.15
(1 + 8%) (1 + 8%) 2 (1 + 8%)3
122
Perpetuity
A perpetual stream of equal cash flows received at equal time intervals is known as a perpetuity
Present value of a perpetuity
C C C C
PV = + + + .....
(1 + r ) (1 + r ) (1 + r )
1 2 3
(1 + r ) ∞
C
= Sum of infinite geometric series
r
Example 1: What is the PV of $10 received in perpetuity, starting in one year? Assume discount rate of 10%
– PV = $10/0.1 = $100
123
Perpetuity (cont’d)
Example 2: What is the PV of $10 received in perpetuity, starting in 6 years? Assume discount rate of 10%
$10 $10 $10 $10

PV = ?? …..
Cash Flow Diagram:
0 5 6 7 8 ∞
10
Value of perpetuity at Year 5: PVt =5 = = 100
0.1
PVt =5 100
PV today (t=0): PVt =0 = = = 62.09
(1 + r ) 5
(1.1) 5
124
Growing Perpetuity
Example 3: What is the PV of a perpetual cash flow starting at $10 in Year 1 and growing at 5% each year
subsequently? Assume discount rate of 10%
C C (1 + g ) C (1 + g ) 2 C (1 + g ) ∞
PV = + + + ...
(1 + r )1 (1 + r ) 2 (1 + r )3 (1 + r ) ∞
C
=
(r - g)
C = first cashflow
g = Growth rate of cashflows
r = discount rate
– For our case, PV = 10/(0.1-0.05) = $200
125
Discount Rate
Discount rate used for NPV calculations is the rate of return on the best alternate investment with comparable risk
It is also called the hurdle rate or the opportunity cost of capital
It often comes from the return on a traded asset such as stocks, bonds, etc. with comparable risk.
Risk-less cash flows are discounted using the current rate for US government bonds or bills as they are
considered riskless
126
Cost of Capital
Corporate capital budgeting decisions are based on expected return on investment
– Investment examples include building a new plant, launching a new product, or acquiring another company
Cost of Capital is the required return necessary to make a capital investment worthwhile
Capital is provided as either debt or equity, hence Cost of capital includes Cost of Debt and Cost of Equity
– Cost of Capital = Weighted average of Cost of Debt and Cost of Equity
The Cost of Capital determines the optimal way for the company to raise money (through a stock issue,
borrowing, or a mix of the two)
127
Cost of Equity
The cost of equity is the rate of return that investors require to make an equity investment in a firm
There are two approaches to estimate the cost of equity
– Dividend-growth model
– Risk and return model
Dividend growth model specifies the cost of equity to be the sum of the dividend yield and the expected growth in
earnings
– Useful for mature companies that distribute most of the earnings to shareholders as dividends
Risk and return model, on the other hand, tries to answer two questions:
– How do you measure risk?
– How do you translate this risk measure into a risk premium?
We will use Risk and return model to compute Cost of Equity
128
CAPM
CAPM or Capital Asset Pricing Model is a risk and return based model for computing expected return on equity
(Cost of Equity to the firm)
According to CAPM, expected return of a security or a portfolio equals the return on a risk-free security plus a risk
premium
– Re = Rf + b (Rm- Rf)
Rf: Rate of return for a risk-free security
Beta b: measure of equity risk relative to market portfolio
Rm: Expected return on market portfolio (average risk investment)
Rm-Rf: Market risk premium
Example: Compute the expected return on IBM stock, given that risk-free rate is 4%, IBM beta is 1.4, and market
risk premium is 5.5%
– Re [IBM] = 4% + 1.4*5.5% = 11.70%
– Implies that in the long-term, investors expect to earn 11.70% return on IBM stock
129
CAPM Inputs
Rf: Riskfree rate
– Usually the short-term US Govt. T-bill rate or the long-term US Govt. Security rate, since they have no default
risk
– The choice between short-term rate and long-term rate depends on the investment horizon
– Firm valuations are over a long-term horizon, so use long-term US Govt. Bond rate for firm valuation
Beta b: measure of equity risk relative to market portfolio
– = 1 ... Average risk investment (same as Market Portfolio)
– > 1 ... Above Average risk investment
– < 1 ... Below Average risk investment
– = 0 ... Riskless investment
130
CAPM Inputs (cont’d)
Computing Beta:
Approach 1: Regress the historical return on equity (Re) with historical market portfolio return (Rm)
Regression output:: Re = a + b Rm
– Where a is the intercept and b, the slope of regression, is the beta of stock and measures the riskiness of the
stock.
– This approach has several issues:
High standard error
Beta is based on historical business and leverage of the firm, either or both of which may be different in the
present
Approach 2: Bottom-up approach

– Find out the businesses that a firm operates in
– Find the unlevered betas of other firms in these businesses
– Take a weighted (by sales or operating income) average of these unlevered betas
– Lever up using the firm’s debt/equity ratio
131
Estimating Cost of Equity
Let’s estimate Intel’s Cost of Equity
– Intel equity beta: 1.36
– Current risk-free rate: 4.5% (long-term US Government Bond Rate)
– Risk premium = 5.5% (Historical value)
– Expected return on equity using CAPM:
Re = 4.5% + 1.36*5.5% = 11.98%
– Hence, Intel needs to make at least 11.98% as return for their equity investors. This is the hurdle rate for
projects, when investments are analyzed from an equity standpoint. In other words, Intel’s Cost of Equity is
11.98%
132
Cost of Debt and its Estimation
Cost of Debt is
– the market rate of interest at which the company can borrow today
– corrected for the tax benefit it gets for interest payments
Cost of debt = Rd = Interest rate on debt (1 - tax rate)
Caution: Cost of debt is not the interest rate at which the company obtained the old debt that it has on its books
Use one of the following to estimate cost of debt

– If the firm has long-term bonds that are traded, use the current yield to maturity on firm’s bonds as the interest
rate in cost of debt calculation
– If the firm is rated, use the rating and a typical default spread on bonds with that rating to estimate the interest
rate
– If the firm has recently borrowed long-term from a bank, use the interest rate on the borrowing
– If the firm is not rated and no other information about recent bank loans is available, use interest coverage
ratio (EBIT/Interest expense) of the firm to estimate a rating and use the default spread on bonds with that
rating to estimate interest rate
– Quick (and dirty) computation of cost of debt: current interest expense/book value of total debt
NOTE: The cost of debt has to be estimated in the same currency as the cost of equity and the cash flows
133
Cost of Capital (WACC)
Market Value of Equity (E) should include the following

– Market Value of Shares outstanding
– Market Value of Warrants outstanding
– Market Value of Conversion Option in Convertible Bonds
Market Value of Debt is more difficult to estimate because few firms have only publicly traded debt. There are two
solutions:
– Assume book value of debt is equal to market value
– Estimate the market value of debt from the book value?
134
Cost of Capital (WACC) (cont’d)
A firm’s Cost of Capital is calculated by taking a weighted average of the firm’s cost of equity and cost of debt.
WACC represents the investor’s opportunity cost for investing in a particular business instead of others with a
similar risk.
Cost of capital so computed is called Weighted Average Cost of Capital or WACC
E D
WACC = * Re + * Rd (1 − Tc )
V V
Re = cost of equity
Rd = cost of debt
E = market value of the firm's equity
D = market value of the firm's debt
V=E+D
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tc = corporate tax rate
WACC is used as the discount rate for all cash flows with risk that is similar to that of the overall firm
135
Cost of Capital (WACC) (cont’d)
Example: Compute IBM’s WACC, given:
Re = cost of equity = 11.7%

Rd = cost of debt = 8%
E = market value of the firm's equity = $150 billion

D = market value of the firm's debt = $50 billion
Assume Tc = 35%
V = E+D = $200 billion
E D
WACC = * Re + * Rd (1 − Tc )
V V
150 50
WACC[ IBM ] = *11.70% + * 8%(1 − 35%)
200 200
= 10.08%
IBM’s Cost of Capital: 10.08%
136
Free Cash Flow – FCF
Free Cash Flow to Firm (FCFF) is the cash flow that is generated by company’s operations and available to all
the company’s capital providers (investors), including both debt and equity
Computed as operating income less expenses, taxes, and changes in net working capital and investments
Measures company's profitability after all expenses and reinvestments
FCFF is also equal to the sum of CFs paid to or received from all the capital providers (interest, dividends, new
borrowing, debt repayments and so on)
FCFF = CF available to all investors = EBIT – taxes – increases in working capital +/- deferred taxes + D&A - Capex
Free Cash Flow to Equity (FCFE) is the portion of FCFF that is available to company’s equity investors.
This is a measure of how much cash can be paid to the equity shareholders of the company after all expenses,
reinvestment and debt repayment
FCFE = CF available to equity investors only = Earnings after interest and taxes – increases in working capital +/-
deferred taxes + D&A - Capex
137
Sensitivity Analysis
Sensitivity Analysis aim at showing the value impact if changing individual key assumptions or the main value
drivers. Following is an example of valuation sensitivity to assumptions regarding cost of capital and terminal
growth.
Sensitivity Table
Few factors that are subject to sensitivities are:

– Revenue growth, price , Volume
– EBIT, EBITDA, PE Margins
– Capex, Cost of Capital
There are many lot many other potential sensitivity variables. However, the focus on those factors which have the
greatest uncertainty or the greatest value impact.
138
DCF – based Valuation
DCF-based valuation analysis discounts projected (expected) “cash flows” of a firm with an appropriate “discount
rate” to determine firm’s value in present time
The fundamental choices for DCF-based valuation
– Cash flows to Discount
Free Cash Flows to Equity (FCFE)
Free Cash Flows to Firm (FCFF)
– Discount Rate
Cost of Equity
Cost of Capital (WACC)
– Base Year Numbers
Current Earnings / Cash Flows
Normalized Earnings / Cash Flows
139
DCF – based Valuation (cont’d)
Firm / Equity Valuation Overview
There are two approaches to valuation: A firm can be valued from two different perspectives –
Firm valuation (Enterprise Value or Transaction Value) – represents the value of all capital invested in business
EV = Equity Value + Net Debt
Equity valuation (Market Value or Offer Value) – Value attributable to owners of the company after paying debt.
Firm valuation vs. equity valuation
Firm
Firm valuation values the entire
business including both debt
Debt (D)
and equity claims thereby giving Assets
Claim holders
value of the company to debt (A)
Equity (E)
holders and shareholders.
A = D+E
Equity valuation values just the equity claim in
business i.e. value of a company to shareholders
140
Equity vs. Firm Valuation
Equity Valuation: value just the equity stake in the business

t =n
FCFEt
– Obtained by discounting expected cash-flows to equity (FCFE), ValueEquity = ∑
i.e., the residual cash-flows after meeting all operating t =1 (1 + Re )t
expenses, tax obligations, interest and principal payments, and
reinvestment needed for future growth
– Discount rate used is the Cost of Equity
t =n
FCFFt
Firm valuation: value the entire business, including, besides ValueFirm = ∑
equity, the other claimholders in the firm t =1 (1 + WACC ) t
– Obtained by discounting expected cash-flows to the firm (FCFF),
i.e., the residual cash-flows after meeting all operating n = life of the company
expenses, taxes, and reinvestments needed for future growth,
but prior to debt payments
– Discount rate used is the weighted average cost of capital

(WACC)
141
DCF-based Firm Valuation

Common steps:
Compute firm’s WACC
– WACC can be in nominal terms or real terms, depending upon whether the cash flows are nominal or real
– WACC can vary from year to year depending on changes in cost of equity or cost of debt
Obtain latest financial statements for the firm

– You may want to normalize the earnings and cash flows
Project future earnings and cash flows (FCFF) for 5-7 years by estimating an expected growth rate in sales and
earnings during this period
Growth rate may also vary from year to year
For fast growth companies, estimate when the firm will reach “stable growth” and what characteristics (risk & cash
flow) it will have when it does
For mature companies, estimate a nominal growth rate for cash flows beyond the projection period. This is usually
equal to the growth rate of the economy
142
DCF-based Firm Valuation
Value of Firm
=
Present value of operating FCFF during explicit forecast period (5-7 years)
+
Present value of cash flow after explicit forecast period (Terminal Value)
143
Computing FCFF
Start with EBIT
Less: Taxes on EBIT
Plus or minus: change in deferred taxes
= NOPLAT (Net Operating Profits less adjusted taxes)
Add: Depreciation and Amortization
Plus or minus: Change in Working Capital
Less: Capital Expenditure
=Operating Free Cash Flow
Plus or minus: Cash flow from Non Operating Investments
=Cash Flow available to investors (FCFF)
NOTE : FCFF does not include any of the financing related cash flows such as interest expense or dividends
n
FCFFt
PVFCFF = ∑
t =1 (1 + WACC ) t
144
Terminal Value
Two ways for estimating terminal value:
Assume that the firm will generate the last forecast year cash flows in perpetuity
– Can also assume a modest growth rate (usually equal to the GDP growth rate)
Cn (1 + g ) Cn = FCFF in the last year of forecast

Terminal Value =
WACC − g g = cash flow growth rate in perpetuity
Compute terminal value as a multiple of EBITDA in the last year of forecast

– Use current EV/EBITDA multiple to estimate terminal value
EVcurrent n = last year of forecast

Terminal Value = EBITDAn *
EBITDAcurrent
145
DCF Worksheet Example
146
Cash Flow Considerations
Capital Expenditures:
– Treatment of R&D expenses
– Treatment of operating leases
– Acquisitions
– Other capitalizable expenses
Normalization of earnings and cash flows

– Treatment of one-time/unusual/restructuring expenses
Tax rate:
– Marginal tax rate vs. Effective tax rate?
Treatment for Minority holdings, Preferred Equity or Pension Obligations
Options, Warrants, and equity value portion of convertible debt
Revenue and earnings growth rate
147
Equity Value from Firm Value
Steps:
Compute present value of all operating cash flows during projected years
Add: Present value of terminal value
Add: Present value of minority interests
– Total value of firm
Less: Value of outstanding debt
Less: Value of outstanding options
Less: Value of outstanding warrants
Less: Value of equity portion of convertible debt
– Total Equity Value
Divide by: Number of number of outstanding shares
– Value of equity per share
148
Advantages and Disadvantages of DCF Approach
Advantages
– Theoretically, the most sound method of valuation.
– Since it provides intrinsic value as opposed to market value, hence less influenced by temperamental market
conditions economic or other factors
– Can value components of business or synergies separately from the business
– Very helpful to capture businesses in transition
– It allows a detailed assessment of alternative strategies through formulation of alternative cash flow
projections.
Disadvantages:
– Present value obtained are sensitive to assumptions and methodology
– Terminal value represents a significant portion of value and is highly sensitive to valuation assumptions.
– Need realistic projected financial statements over at least one business cycle or until cash flows are
normalized.
– Sales growth rate, margins, investment in working capital, capital expenditures and terminal value
assumptions along with the discount rate assumptions are key to the valuation.
149
Copal Partners
Pitchbook Building
150
Introduction & Types of Pitch book
What Does Pitch book Mean?

A sales book created by an investment bank/firm that details the main attributes of the firm. The pitch book is
used by the firm's sales force to aid it with selling products and issues, and generating new clients.
Usually there can be the following types of book, depending on the purpose :
A. Market Overviews / Bank Introductions: Introducing the bank and giving updates to potential clients.
B. Deal Pitches: Sell-side M&A, buy-side M&A, IPOs, debt issuances, and so on
C. Management Presentations: Used for pitching to the existing client
D. Execution Pitch books: Prepared by the bank for a particular client:
151
Pitch book Building
A. Market Overviews / Bank Introductions: generally small in size, showcasing the bank’s credentials, having
the following elements
Slides showing the bank’s organization, the different departments
Several “tombstone” slides that show recent deals the bank has done in a particular sector.
Along with these, there can be “league table” slides that show how the bank ranks in different areas like
tech M&A deals, equity issuances, and so on
“Market overview” slides showing recent trends and deals in the market and data on how similar banks
(“comps”) have been performing lately.
B. Deal Pitches: These pitch books are long and most complex, and are basically focused on idea generation,
they talk about all the aspects of the selected deals/deal. These are in response to invitations from the clients.
e.g. RFPs & RFIs (colloquially called beauty parade)
Bank Overview: Update about the bank and the introduction of deal team
Situation / Positioning Overview : Information on what makes the company attractive. It also includes the
update about the market
Preliminary Valuation analysis: Valuation of the company using various valuation techniques discussed
before
Then you show individual methodologies such as public comps, precedent transactions, and a DCF.
Primarily based on public information
Potential Buyers: an exhaustive list of everyone who could potentially buy this company, strategic acquirers
(normal companies) and financial sponsors (PE firms and hedge funds).
It contains a summary slide in the beginning followed by detailed descriptions (“company / asset profiles”)
afterward.
Summary / Recommendations: The bank’s advice and recommendation to the company.
152
Pitch book Building
C. Management Presentations: These pitch books – created for real clients instead of prospective clients – are
less quantitative and are more focused on the client’s strengths. The common elements of this book would be
the following:
Executive Summary / Company Highlights
Market Overview
Products & Services
Sales & Marketing
Customers
Expansion Opportunities
Organization Chart
Historical & Projected Financial Performance
D. Execution Pitch books: These books are prepared only once the bank has been mandated by a particular
client(company):
Highly focused on ongoing deals
Primarily based on the primary information given by the client (company)
Normally include detailed valuation analysis (key assumptions, detailed operating model output, updates
on the deal’s progress)
153
Copal Partners
Profiles
154
Index
Table of Content
Overview 156
Business Description 157
Key Customers/Partners 158
Key Investors 159
Shareholders’ Structure 160
Key Management 161
Recent News 162
Products and Services 165
Broker’s Rating 166
Share Trading Analysis 167
155
Overview
A profile is the most basic presentation tool for research used by investment bankers
It gives a brief overview of a company, clearly laying out key details to enable the reader to form a judgment over
its operation, financial and strategic health
Company Profile describes a company in concise form focusing on
– Business description
– Key customers/partners/investors
– Shareholders’ structure
– Management
– Recent news
– Products and services
– Key financials (Refer to Trading Comps Module)
– Brokers rating
156
Business Description
Company description gives a snapshot of a

company providing information such as what a
company does, its products & services, geographic
presence, number of employees etc.
It is the crux/summary of information provided in

other sections of a profile
Since description constitutes a starting point of any

profile and is the first thing an investor reads, it
needs to be crisp, accurate and concise
A company description normally contains the

following:
– What a company does
– Briefing on its products and services
– Industries, the company caters to
– Key customers Company website
– “About us” section of the website is the
– Partners/strategic alliances best source
– Location and geographic presence Sources – Company’s fillings, reports and
– Founded date and listing presentations can also be used
– Number of employees Other databases such as Capital IQ,
Bloomberg, Reuters etc
157
Key Customers/Partners
Reflects the Company’s relationships in the industry i.e.
strong association with large size companies guarantees
future contracts
This section includes a list of the company’s key
customers/partners in alphabetical order
– Can also include the logos of key
customers/partners; Logos should be properly
aligned and sized, with no loss of clarity
Always mention a few names (preferably familiar
names)
If the number of customers/partners is available, the
same should be included
Full name of the customer/partner should be avoided
(Microsoft Corporation can be mentioned as Microsoft,
ignoring Corporation)
Company website
– “About us” section of the website is the best source
– Company’s fillings, reports and presentations can also be used
Sources – Press releases
Other databases such as Capital IQ, Bloomberg, Reuters etc
In the absence of any information, do a web search, for example
“company+ customer” and “company+partner”
158
Key Investors
Provides information about the owners of the Financing Summary
Company i.e. who owns the majority stake, what Amount Post-Money
type of investors are they (strategic or financial) Round Raised Valuation
Round Type Date ($MM) ($MM) Company Stage
Applicable for a private company, the section 1 NA 12 / 93 0.05 NA Startup / Seed
provides information on the Company’s various 2 NA 01 / 94 2.0 7.8 Early Stage
financing rounds 3 NA 04 / 96 3.0 17.7 Expansion
4 NA 03 / 00 4.3 32.4 Later Stage
Also provides the list of investors who have 5 NA 06 / 02 21.2 35.2 Expansion
invested in the Company
6 NA 05 / 03 4.2 21.2 Expansion
7 NA 02 / 05 2.5 NA Later Stage
Information includes the round number, round type,
date, amount raised ($m), post-money valuation
($m) and company stage
If information is not available on financing rounds,

include the logos of the investors
Company Filings
Sources – Press releases
Other databases such as Capital IQ, VentureSource, Thomson etc
159
Shareholders’ Structure
Provides information about the owners of the Company i.e. who
owns the majority stake, what type of investors are they
(strategic or financial)
This section provides the top shareholders of the Company by

number of shares held & % held
Details include name of shareholder, shares held and

percentage ownership
The top shareholders are calculated by considering all the

shareholders (institutional, insider and float)
In case of Multiple class of shares (MSH), shareholding of the

primary listing is considered
Private Companies
In case of private companies, ownership is included in the form

of a pie chart or qualitative text writing
Company Website or Filings

Sources
Other databases such as Capital IQ, Thomson, Bloomberg etc
160
Key Management
Gives an overview about the key decision makers of the
Company. Their affiliations provides additional information
of the experience they have in the relevant industry
Includes the list of the top management team (C-Level) as
per the following hierarchy
– Founder
– Chairman
– Vice/Deputy Chairman
– President
– CEO
– CFO
– COO
– CIO
– CTO
Always mention all the designations applicable for every individual e.g. if CFO is also SVP, Finance; the
designation should be written as CFO & SVP, Finance
Abbreviations such as CFO, CTO, CIO, COO, SVP, EVP etc need not be expanded
Always cross check the Executive Management with the Company’s news section; sometimes a management
change is announced but not updated on the website
State the management names in the format, <First Name> <Last Name>, preferably; Exclude middle names,
nick-names, initials and titles (Mr. , Sir, etc.)
Company website (Management/Board/Executives section)

Sources Company filings (Proxy filing/AR), presentations
Other databases such as Capital IQ, Bloomberg etc
161
Recent News
Recent news section reflects the key happenings in the company, and its economic and regulatory environment
Primary objective is to give a quick snapshot about recent developments in the company in the past few months
Acquisitions
Mergers
Types of news to be included
Divestiture
Management changes
Stock buyback/split, IPO
Follow-on offering
Customer contracts
Partnerships/strategic alliances
Organizational changes
Product launches
Funds raised
Financial news
DO NOT include news
Dividend declaration (a normal feature; usually declared

every quarter)
Award wins Company Website
such as
Participation in conferences Other databases such

Sources
Launch of updated versions of any products, if the as Capital IQ, Factiva
updates are too frequent etc
Law suits
162
Recent News (cont’d)
Examples
News Headline
News details Post formatting
Partnered with Novell Inc. to deliver

hybrid options for high-performance
computing, enabling users to balance
server workloads using both SUSE Linux
Enterprise Server and Windows HPC
Server
163
Recent News (cont’d)
Examples
News Headline
News details Post formatting
Announced the retirement of Robbie

Bach from his position of the President,
Entertainment and Devices division of
the Company
164
Products and Services
Helps understand the business of the
Company and its reporting structure
This section describes the products,

services and solutions of the company
Each product/service should be briefly

explained in 1-2 sentences focusing
on what that product does/is used for
Provide explanation in a meaningful

manner
If the list of products is too long to

categorize, look for the same in the
annual report/10K, which categorizes
the products in a more suitable
manner
Services, if ‘not very’ relevant (e.g.

24x7 support, training etc) can be
mentioned in a single sentence
On the other hand if the company has

4-5 main product categories and each
one of them includes 1-2 sub
categories, briefly explain all the
products including the sub categories
Also pictures provides better
Sources
understanding, Use as much as Presentations
possible
165
Broker’s Rating
Reflects the market / broker views on fundamentals of the Company i.e. a higher rating reflects strong
fundamentals & hence low level of risk and a lower rating reflects weak fundamentals & hence high level of risk
Indicates the analyst consensus
The Broker’s rating chart gives the breakup of the total number of Buy, Hold and Sell recommendations over an
last twelve months (LTM) period
The section on Analyst Commentary provides commentary on the company from the analyst’s research reports
– The commentary highlights the strengths of the company and how it has been able to benefit from these
strengths. It may also include the Company’s recent developments and which may have affected the share
price and/or the analyst recommendation of the company
Sources Databases such as Bloomberg, FactSet, Capital IQ, Thomson etc
166
Share Trading Analysis
Share trading analysis provides an overview of the share price and the various trends related to capital markets
This section is key to any of the books prepared
The purpose of this section is to understand and analyze the share price and capital market movements with
respect to the chosen company
Various types of charts prepared
– Relative share price performance
– Annotated share price performance
– Volume at price and liquidity analysis
– Overview of Research analyst ratings
– Development of Consensus Estimates
– Broker Comment Frequency Analysis
– Valuation methods used by research analysts
167
Share Trading Analysis (cont’d)
Relative share price performance
Used to compare the performance of the company’s
share with respect to the primary index in the market
Points to remember
– Always consider closing price of the stock instead

of the last traded price
– The closing price to be considered should be of a

day prior to the date on which it is created
– The index should always be rebased to the

company’s share price in order to have an apples
to apples comparison
Stock exchange
websites
Sources Databases such as

Bloomberg, FactSet,
DataStream, Capital
IQ etc
168
Annotated share price performance
Prepared exactly as a normal share

price performance chart with the
only difference being the inclusion
of news that reflect the changes in
the share price movement
Always look for dates where there

has been a drastic change in the
share price movement vis-à-vis its
primary index. Thereafter look for
news that have triggered those
changes in the share price
Press releases from company website
Sources Stock exchange websites
Databases such as Bloomberg, FactSet, DataStream, Capital IQ etc
169
Volume at price and
liquidity analysis
Objective is to show in a
chart how has traded
volume of the share been
distributed between
different price ranges
Stock exchange websites

Sources
Databases such as Bloomberg, FactSet, DataStream, Capital IQ etc
170
Overview of Research analyst ratings
Gauges different analysts’ perception of the stock and what kind of recommendation they are making on it
The purpose is to understand the view of the market on the stock
Research reports
Sources
Databases such as Bloomberg, Capital IQ etc
171
Development of Consensus Estimates
Gauges the consensus estimates on Revenues, EBITDA and EPS for the future years and how they evolve
Consensus estimates represent the market perception on the future operational results of the company
Always calendarize the estimate to have a constant point of reference
Sources Databases such as Bloomberg, Reuters, Capital IQ etc
172
Broker Comment Frequency Analysis
Conduct a qualitative analysis of the perception of

the stock in the market, identifying key and
recurrent themes in the different analyst reports
Categorize these themes as positive and negative

to indicate analyst comments
Key themes may include: trends in the industry,

technological trends, extraordinary events, risks,
challenges etc
Sources Research reports
173
Valuation methods used by research analysts
To describe the valuation methods used by the research analysts covering the stock
Information to be included:
– bank/broker name
– main valuation methods used
– main comparable companies used for valuation purposes
– key comments on the valuation of the company
Sources Research reports
174
Copal Partners
Case Studies
175
Index
Table of Content
Introduction 177
Types of Acquisition 178
Transaction Types 179
Overview 181
Target Business Description 182
Transaction Overview 183
Transaction Highlights 184
Transaction Rationale 185
Market /Broker’s perception 186
176
Introduction
Mergers and Acquisitions (M&A) are a big part of the corporate finance world. Every day, Wall Street investment
bankers arrange M&A transactions, which bring separate companies together to form larger ones.
M&A are a combination of two or more companies, or the acquisition of a part of a corporation for which some
payment is given in compensation. This payment can be in stock, cash or a combination of the two.
Investors in a company, that are aiming to take over another one, must determine whether the purchase will be
beneficial to them. In order to do so, they must determine how much the company being acquired is really worth.
The success of a merger is measured by whether the value of the buyer is enhanced in medium to long term, by
the action.
A transaction case study aim at analyzing the merger and acquisition deal that has taken place.
177
Types of Acquisition
An Acquisition can take the form of a purchase of stock and other equity in the target entity or the purchase of all or a
substantial portion of its assets
Share Purchase – In a share/stock purchase, the seller transfers shares in the target entity to the acquirer in
exchange for an agreed-upon consideration. The acquirer takes on the target company with all its assets and
liabilities
Asset Purchase – In an asset purchase, the acquirer buys all or a substantial portion of the assets of the target
company. An advantage for the acquirer in an asset purchase is that it can cherry-pick the assets it wants and
leave assets and liabilities that it does not want to purchase
178
Transaction Types
Some common types of deals
Leveraged Buyout – An LBO is essentially a strategy whereby the acquirer gains control over the target’s stock
or assets through significant amount of borrowed money, making the acquired company’s new capital structure
highly levered; for e.g. - Kohlberg Kravis Roberts & Co. and Texas Pacific Group’s acquisition of TXU Corp
Secondary Buyout – The management team, in conjunction with a private equity fund, acquires the business,
allowing the existing private equity supplier to exit from its investment. Thus, it is an exit mechanism whereby one
investment firm sells its position in a venture on to another; for e.g. - The sale of textile and cleaning group Elis by
French buyout firm PAI Partners to rival Eurazeo
Public to Private Buyout – This involves the management or a private equity provider making an offer for the
listed shares of a public quoted company, then taking the company private; for e.g. - Blackstone Group’s
acquisition of German chemical maker Celanese
Management Buyout – Existing management of a company buys the Company from its owners; foe e.g. -
A.T.Kearney’s management buy-out
Tender Offers – A formal offer of determined duration to acquire a public company’s shares made to equity
holders. The offer is often conditioned upon certain requirements such as a minimum number of shares being
tendered; for e.g. - Sanofi-Aventis’ tender offer to acquire all outstanding shares of Genzyme for $69 per share in
cash
Divestiture – A deal which results in the loss of majority control, such as sale of subsidiary; for e.g. - Kodak’s
sale of Health Group to Onex
Privatization – Sale of a government-controlled entity to a single or consortium of bidders or by floatation of stock

via public offering; for e.g. - Rosneft privatization
179
Transaction Types (cont’d)
Deal Attitude
Represents the recommendation of the target company’s Management or Board of Directors on the transaction
– Friendly – The Board recommends the offer
– Hostile – The Board officially rejects the offer (but the acquirer persists with the takeover)
– Neutral – The Management has nothing to do with the transaction
– Not applicable – The attitude of the Board is not applicable, i.e. open market repurchases, spin-offs
– Unsolicited – The offer is a surprise to the target’s board, and it has yet not given a recommendation.
Deal Consideration
There are three common ways to pay for a M&A Transaction
– All Cash
The acquirer pays a lump sum cash consideration to purchase shares/assets in the target
The acquirer offers per share cash consideration for every target share
– All Stock – The acquirer offers its own shares in consideration for each share of the target
– Stock & Cash – The acquirer makes payment for the target partly by issuing its own stock and partly in cash
Additionally, the deal consideration may also include provision for Earnouts. Earnout is a method of
compensating a seller based on the future earnings of the acquired entity. It is the contingent portion of the
purchase price
180
Overview
Case studies focus on different M&A transactions and include the following information regarding the deal:
– Target/Acquiror Business Description
– Transaction Highlights
– Transaction Overview
– Transaction Rationale
– Implied Multiples (Refer to Trading/Transaction Comp Modules)
– Market/broker’s Perception
181
Target Business Description
Give a brief description of the target company
– Include main business of the company, major product categories, geographic presence and other details like
brands, headquarter, listing, employees
In case only one division or segment of the company is being acquired then focus on that particular segment or
division
Also, include data related to the market position of the Target (for example: largest produce of chemicals in China;
one of the leading provider of software solutions etc)

Sources
Other databases such as Capital IQ, Thomson, Factiva etc
182
Transaction Overview
This section captures the various news items that have been released regarding the transaction
Start from the first mention of the deal (rumors date) or management’s wish to get acquired
It might be the first bid by the acquirer or a competitive bid
Move in ascending order to the latest available news on the deal
Try to capture all news regarding the deal including
– Market rumors
– Other bidders
– Revised bids
– Change in value of the deal
– Search for partners

Sources
Other databases such as Bloomberg, Capital IQ, Thomson, Factiva etc
183
Transaction Highlights
Covers a summary of all events that took place in the course of the deal, starting from the announcement of the
deal includes:
– Items such as the %age held, final price, dividends declared, financing details, advisors, etc. and Information
regarding the terms and conditions of the deal
– Management and shareholding changes, post transaction, if any
– Status of the deal, pending or completed
– Any other post transactions plans
– Compliance requirements with governing agencies
Company Website: Fillings, presentations and press releases

Sources
184
Transaction Rationale
Rationale for Seller/Target: Mention benefits which the seller/target is expecting from the deal or why they want to
sell off the Company
Synergy: Overall synergy benefits expected out of the joint entity post merger. The functions of synergy allow for
the enhanced cost efficiency of a new entity made from two smaller ones - synergy is the logic behind mergers
and acquisitions
Focus on various strategic benefits of the deal such as combining the product portfolio of current target with its
existing portfolio companies and entering a new geography with the current acquisition
Include potential synergies, increase in market share, enhancement in product portfolio, geographic expansion,
financing further growth and divesting non-core activities
Company Website: Fillings, presentations and press releases

Sources
185
Market /Broker’s perception
The section provides commentary on the company from the analyst’s research reports; try to include comments
from the brokers who have made commentary on the deal
– Also, in some cases, the commentary includes quotes by Key management of the target and acquirer on the
deal
The commentary highlights the attractiveness of the target, deal rationale, comments on valuation or future
predictions of the deal
In case of private companies, try to find out analyst’s comments on the deal through web search
Try to incorporate broker comments on target/acquirer and seller for the deal
Research reports pertaining to the transaction

Sources
Other databases such as Bloomberg, Press etc
186
Copal Partners
Industry Overview
187
Introduction
Industry overview analysis presents a snapshot of the industry and its competitive landscape
This is provided to gauge the current positioning of the particular company and identify certain strategic areas that
the company may consider, including M&A options
Broadly, the following sections exist in this overview
– Industry snapshot
this section details the current state of the industry
provides figures relating to market size and growth rates
also details how the industry is structured in terms of various segments
the current and expected trends are then highlighted to understand the future outlook for the industry
– Evolution
briefly highlight the evolution of the industry, and analyze any specific pattern
competitive landscape
briefly describe the competition in each segment highlighting large players and their positioning
– Company’s positioning
given the industry trends, future outlook and competition, highlight the company’s competitive positioning
and suggest any specific strategic actions (this may include a SWOT analysis)
– Options
present a case for various strategic options that could be possible given the industry scenario, competitive
landscape and the current state of the company
188
Introduction (cont’d)
An industry analysis should answer the following questions:
– What are the industry dominant economic traits?
– What competitive forces are at work in the industry and how strong are they?
– Which companies are in the strongest/weakest competitive position?
– Who’s likely to make what competitive moves next?
– What key factors will determine success or failure?
– How attractive is the industry in terms of its prospects for above average profitability?
– What are the forces of change in the industry and what impact will they have?
189
Industry’s dominant economic traits
Covers
Market size (Small markets don’t attract big fish)
Scope of competitive rivalry
Market/industry growth rate (life cycle)
– Fast growth breeds new entry; slowdowns lead to increased competition
Number of rivals and their size
Number of buyers and their size
Level of backward and forward integration
Technological change (rate and scope)
Level of differentiation between firms’ products
Opportunities for economies of scale
Ease of entry and exit
Capital requirements
190
Forces of change in the industry
The most dominant forces that cause the industry to change are called driving forces
– Task 1 - identify the driving forces
– Task 2 - assessing their impact on the industry (few are important, generally)
Common Driving Forces
– Changes in long term industry growth rate
– Changes in who buy the products and for what reason
– Product innovation
– Technological change
– Marketing innovation
– Increasing globalization
– Regulatory changes
– Changing societal concerns, attitudes and lifestyles
191
Companies in the strongest/weakest competitive position
Identify strongest/weakest
competition using strategic
group mapping: two
dimensional representation
according to the competitive
characteristics of the
competitors in the industry
– Identify competitive
characteristics
– Plot firms on a 2 variable
map
– Assign firms to strategic
groups
– Circle groups proportional
to size
Product line/merchandise mix
Variables:
– Axes should not be
correlated
– Expose differences in rival
strategies
– Need not be quantitative or
continuous
The closer the circles, the
stronger the rivalry
192
Variables in identifying competitors
How do other firms define the scope of their market?
– The more similar the definitions of firms, the more likely the firms will view each other as competitors
How similar are the benefits the customers derive from the products and services other firms offer?
– The more similar the benefits, the higher the level of substitutability between them
How committed are other firms to the industry?
– To size up commitment of potential competitors to industry, reliable intelligence data are needed concerning
potential resource commitments
193
Common mistakes in identifying competitors
Overemphasizing current and known competitors while ignoring potential entrants
Overemphasizing large competitors while ignoring small ones
Overlooking potential international competitors
Assuming competitors will continue to behave in same way
Misreading signals indicating a shift in focus of competitors
Overemphasizing competitors’ financial resources, market position, and strategies while ignoring their intangible
assets
Assuming all firms in industry are subject to same constraints or are open to same opportunities
194
Who’s likely to make what competitive moves next?
In order to outmaneuver your competition you have to evaluate the competitors’ future moves
Identify competitors strategies
Evaluate who are the current major players
– Which are strong and which are weak
Evaluate who will be the major players?
Predict competitors’ move
– Strategic changes
– Moves into new markets
– Acquisition – targets or movers
195
Key factors that determine success or failure
Key success factors (KSF) are crucial elements that lead to success
Technology related KSFs
– Scientific research expertise (important in such fields as pharmaceuticals, medicine, space exploration, other
"high-tech" industries)
– Production process innovation capability
– Production innovation capability
– Expertise in a given technology
Manufacturing related KSFs
– Low-cost production efficiency (achieve scale economies, capture experience curve effects)
– Efficiency / Quality of manufacturing (fewer defects, less need for repairs)
– High utilization of fixed assets (Asset Turnover) (important in capital intensive/high fixed-cost industries)
– Low-cost plant locations
– Access to adequate supplies of skilled labor
– High labor productivity (important for items with high labor content)
– Low-cost product design and engineering (reduces manufacturing costs)
– Flexibility to manufacture a range of models and sizes/take care of customer orders
196
Key factors that determine success or failure (cont’d)
Distribution related KSFs
– A strong network of wholesale distributors/dealers
– Gaining ample space on retailer shelves
– Having company-owned retail outlets
– Low distribution costs
– Fast delivery
Marketing related KSFs
– A well-trained, effective sales force
– Available, dependable service and technical assistance
– Accurate filling of buyer orders (few back orders or mistakes)
– Breadth of product line and product selection
– Merchandising skills
– Attractive styling/packaging
– Customer guarantees and warranties (important in mail-order retailing, big ticket purchases, new product
introductions)
197
Key factors that determine success or failure (cont’d)
Skills related KSFs
– Superior talent (important in professional services)
– Quality control know-how
– Design expertise (important in fashion and apparel industries)
– Expertise in a particular technology
– Ability to come up with clever, catchy ads
– Ability to get newly developed products out of the R&D phase and into the market very quickly
Organizational capability related KSFs
– Superior information systems (important in airline travel, car rental, credit card, and lodging industries)
– Ability to respond quickly to shifting market conditions (streamlined decision-making, short lead times to bring
new products to market)
– More experience and managerial know-how
What they are now? What they will be?
198
Attractiveness of the industry in terms of its prospects for above average profitability
Can be judged by the following parameters:
Growth potential
Impact of prevailing driving forces
Potential entry or exit of major firms
Stability of demand
Trend of competitive forces
Severity of problems confronting industry
Future risk and uncertainty
Competition and its impact on the industry’s future
199
Data gathering
Four considerations to be kept in mind:

Determine what information is needed
– Define the topic
– Consider the goals to be reached and how much information is needed to
achieve them
– Identify the key words or central concepts in the research question
– Develop a standard research form to use
Determine where you are going to look
– Consider who might produce the type of information you have defined in
step 1
– Sources to look at:
Trade association
Trade publications
Business broker
Print media i.e. newspapers, magazines, journals etc
Periodical databases
Reports by industry analysts
200
Data gathering (cont’d)
Develop a Search Strategy
– Using the Internet to search for business valuation information is
potentially one of the most efficient ways
– Boolean logic is the basic logic system used for online searching; uses
three logical operators: AND, OR and NOT
The AND connector means that all search terms connected by the
AND must be present
The OR connector requires either term to be present
The NOT connector returns records where the designated term
does not appear
– Another helpful search logic tool is truncation. Truncation, also known
as wild card searching, allows searching of word variations
Wild cards can vary from database to database but usually are
either the “*” or “?”
Evaluate Information
The following questions should be asked for evaluation:
– Who authored this information? - Is the author’s name and affiliation
disclosed? Is there an e-mail address so that you can inquire further?
Is the author the creator or the compiler of the information?
– Who is publishing this information? - Can the producer be identified
and contacted? Is it a professional organization? Does the
organization have a particular bias? Who is the intended audience?
– What can you determine about the content? - How complete is the
information? Is it an abstract of the complete text? Are the references
documented, current and relevant?
201
Creating an analysis structure
Providing an overview and describing a situation
– Always start with the subject familiar to the target audience
– Establish facts about the subject
– Prove it is a profitable venture for investment
Highlighting opportunities arising out of the situation
– Identify and state the factors that are creating opportunities
– Establish facts and future prospects of the available opportunities
– Compare available opportunities
Tapping opportunities through M&A
– Show how M&A can help in tapping opportunities
– Prepare a supply/value chain showing benefits of the transaction to both the

acquirer and the target
Appendix
– Should contain all necessary definitions of the jargons used in the presentation
– Include profiles of the selected target companies
– Include previous transactions & comps for that industry
202
Project execution
Insights through primary research

– Using insights from industry personnel will help in a deeper understanding of the
industry on which you are working
– Create a call list within 1-2 days so that the questions that arise from the
hypothesis are sent to these contacts
– Assign 1 or 2 persons to check for information on companies, industry
associations and their contact details
– Send the interview requests by email at the beginning of the study. This allows
for the process to get started while the team conducts the secondary research
– The same set of questions should not to be sent to all persons in the mailing list.
Queries sent to different persons should be pertaining to their respective areas
of operations
Do not just write an email for information request and wait for people to
respond. Be proactive, keep calling until you get the desired data from
external and internal contacts
Follow a reasonable caution while calling up external sources
203
Project execution (cont’d)
Apply “So what” analysis to convert a data dump into a storyline

For all facts and information on each slide, always ask yourself “so what”
Always present in a way that forces reader to prompt “so what” and then answer it in the next section. Keep doing
this unless no such question arise
If the implication of a slide comes out clearly, it transforms a ‘data dump’ into a ‘value-added analysis’
Key questions:
“So what does this mean”?
“Will this affect the sector, economy or the region being analyzed”?
“Will the impact be positive or negative”?
“Is the rate of change fast or slow”? (Will the impact be strong and immediate or not?)
“Does this get you closer to proving or disproving your current hypotheses”?
204
Copal Partners
Research Techniques
205
Introduction
There are a lot of research methodologies used to prepare an Industry piece. The most extensively used techniques
are as follows:
A. SWOT Analysis
B. PESTEL Analysis
C. Porter’s Five forces model
206
SWOT Analysis
A. SWOT Analysis: An analysis of STRENGTHS,WEAKNESSES, OPPURTUNITIES and THREATS. Extremely

useful tool for understanding and decision-making
– Applicable in all businesses and organizations
– Provides a framework for reviewing strategy, position and direction of a company or business proposition, or
any other idea
– Can be used for business planning, strategic planning, competitor evaluation, marketing, business and
product development and research reports
– Presented as a grid, comprising four sections, one for each of the SWOT headings
– SWOT analysis can be used to assess:
company (its position in the market, commercial viability, etc)
method of sales distribution
product or brand
business idea
strategic option, such as entering a new market or launching a new product
opportunity to make an acquisition
potential partnership
changing a supplier
outsourcing a service, activity or resource
an investment opportunity
207
PESTEL Analysis
B. PESTEL Analysis
– PESTEL is an acronym for Political, Economic, Social, Technological, Environmental and Legal
– PESTEL Analysis helps analyze factors in the macro-environment that affect the decisions of the managers of
any organization
Examples include: Tax changes, new laws, trade barriers, demographic change, government policy
changes etc
– Helps analyze the many different factors in a firm's macro environment
It is important not to just list PESTEL factors because this does not in itself tell much
Need to find out, which factors are most likely to change and which ones will have the greatest impact on
the company i.e. each firm must identify the key factors in their own environment
208
Porter’s Five forces model
C. Porter’s Five forces model
– It is designed to explain the relationship between the five dynamic forces that affect an industry’s performance;
these are the:
intensity of competitive rivalry;
threat from new entrants;
threat from substitutes;
bargaining power of buyers;
bargaining power of suppliers.
– The Five Forcers Analysis model tries to identify what factors shape the character of competition within an
industry.
– Targets the assessment of the structural attractiveness of the analyzed industry.
– Finally the Five Forces Analysis pinpoints strengths and weaknesses in a company and discovers
opportunities or threats within the industry
209
Competitive forces at work in the industry
210

Investment Banking Module: Valuation, Pitch Books & Careers

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Copal Partners

Investment Banking Module

Introduction to Investment Banking 3

B. Comparable Company Analysis 21

C. Comparable Transaction Analysis 95

D. DCF Valuation 112

Pitch book Building 150

B. Case Studies 175

C. Industry overview 187

D. Research Techniques 205

Is it investing? Is it banking? In reality, it is neither!

Prospectus, M&A valuation,

Equity Research Analyst Presentation Equity Research

Initiation reports Coverage report

Market making Market making

Title Experience Education Role

Managing Directors primarily pitch ideas to

Analysts perform all research and analysis,

Sales & Trading activities, for which they earn spreads

Chinese walls are necessary to separate different

All investors in the market should play on a level

Financings Client Advisory

Pitch books again can be categorized as follows:

Industry Total 6,491,448 96,197

Excludes Equity Carveout, Exchange offers and Open Market Purchases

Source: Thomson Financial

Valuation Methodologies can be categorized as under:

B. Relative valuation: Valuing an asset relative to its peers

– Quantitative – capable of being measured or expressed in numerical terms.

Fundamental analysis serves to answer questions, such as:

– Is the company’s revenue growing?

– Is it actually making a profit?

– Is it in a strong-enough position to beat out its competitors in the future?

– Is it able to repay its debts?

– Is management trying to “cook the books”?

– Everything else being equal, which one would you buy?

Further Valuation analysis is done to answer questions like:

– “How much should Acquirer pay to buy the target?”

– “Is the price offered for the company fair to shareholders?”

– “Is company undervalued / overvalued in the industry?”

– “Should we buy/sell/hold positions in a given security?”

– Recommended bid for an acquiring firm

– Assess Public equity offerings IPO etc

– Floatation of debt or equity or credit

There are three primary methods of valuing a company:

Comparable Company Analysis

Selection of Comparable Companies 31

Equity and equity linked information 32

LTM & Calendarization 74

Trading Comps define the concept – “comparison of apples-to-apples”

A standard comp contains operational statistics containing:

– Financial performance parameters such as Revenue, EBIT, EBITDA and EPS

Treasury stock method is used in determining the number of shares

Results in an increased number of shares outstanding and decreased

Current share price $ 50

d) Restricted cash is always included in cash for calculation of net debt

Example 3. Calculate the fully diluted shares outstanding:

Shares o/s 470 mn Current price $30.00

The correct answer is (c)!!!!!!!!

Current stock price $30.00

Dilution effect of Options can be calculated as:

Total number of diluted shares = 470 + 3.33 = 473.3 mn shares

For Non-US companies listed in US stock exchange