Valuation and Deal Structuring (5 days)

Day 6 a.m. - Valuation Fundamentals

The session lays the foundations to build a solid understanding of corporate valuation in the context of investment banking. The most common valuation methodologies are introduced, explaining the difference between a company's fundamental value, and how much an acquirer would pay for the business. The concepts of enterprise value and equity value are explained, using simple but rigorous exercises. Finally, the basics of multiple valuation and discounted cash flow valuation are introduced. Exercises are used throughout the session.

Key topics:

• The importance of valuation in the investment banking industry
• Fundamental value versus how much an acquirer will pay
• Overview of the major valuation methods
• Trading comparables analysis
• Discounted cash flow analysis
• Transaction comparables analysis
• LBO analysis
• Enterprise versus equity value
• Book values versus market values
• How to calculate enterprise value using market values
• How to calculate enterprise value using a fundamental valuation approach

Day 6 p.m. - Trading Comparables Fundamentals

Once participants understand the different approaches to valuation they are then introduced to the details of comparable company analysis. Multiples are calculated on both a historical and forecasted basis and participants will assess the value of the case company based on a given set of comparables. Public information books (“PIBs”) are used throughout the session.

Key topics:

• Calculating the company’s value
• Number of shares and value of share options
• Equity value
• Net debt calculations
• Enterprise value
• Calculating the earnings numbers
• Cleaning non-recurring items from earnings
• Calendarization issues
• Last-twelve months analysis
• Calculating a range of forward looking and historical earnings multiples
• Revenue
• EBITDA
• EBIT
• PE
• PEG
• Other value driver metrics
• Applying the results

Day 7 - DCF Valuation

Participants learn how to build a discounted cash flow valuation model. The session starts with an overview of the valuation methodology, and the steps required in setting up a valuation model. We then focus on the calculation of free cash flow. A detailed ratio analysis is used to establish the reasonableness of the forecasts and to identify when the target company reaches steady state. We analyze the weighted average cost of capital, breaking it down into its components. We complete the valuation model by calculating terminal values, using both the exit multiple method and the perpetuity growth method. The free cash flows are discounted to arrive at enterprise values and the implied share price. Once the valuation is complete participants perform several checks on the analysis using key ratios, and sensitivity and scenario analysis.

Key topics:

• Calculating unlevered free cash flows
  • Drivers of cash flow
  • Ratio analysis
• Weighted average cost of capital
  • Optimal capital structure using peer analysis
  • Establishing the company’s forward looking cost of debt
  • Cost of equity: understanding the risk free rate, the equity risk premium and beta
  • Unlevering and relevering the beta
  • Calculating WACC for the case company
• Calculating the terminal value
  • Perpetuity growth (Gordon Growth model) method
  • Exit multiple method
• Building a discounting model
  • Mid-year adjustments
• Calculating enterprise and equity values
• Sanity checks
  • Reinvestment rate and ROIC
  • Implied multiples and growth rates
  • Percentage of value in the terminal period

Day 8 a.m. - Transaction Comparables

Participants are introduced to preparing a transaction multiples matrix using LTM earnings. The rationale and components of control premium and its impact on valuation are discussed. The practical issues that are commonly met are flagged, using actual deal documentation. A comparable transaction analysis is performed on the case industry.

Key topics:

• Difference between trading multiples and multiples from precedent transactions
• Selection of transactions and information gathering
• Change of control issues
  • ­Share capital and equity linked instruments
  • ­Pensions
  • ­Poison pills
• Control premium and synergies
• Practical issues with transaction comparables
• Analysis and summary output

Day 8 p.m. - LBO Valuation

Participants are introduced to the basic concepts underlying leveraged buyouts. The session starts by establishing why private equity firms can create value through leveraged buyouts and how the levered valuation fits into the valuation roadmap. Using a simple free cash flow forecast, participants establish how much a financial buyer could pay for the target company. Participants then build a simple LBO model.

Key topics:

• What an LBO is and how it can create value
• LBO valuation as an alternative valuation methodology
• Characteristics of suitable LBO candidates
• Estimating cash flows available to capital holders
• Estimating debt capacity
• Simplified debt / equity split for entry capital structure
• Sources and uses of funds
• Debt structure
• Estimating the exit value
• Calculating the IRR
• Sensitizing the model

Day 9 - Valuation Issues

This session covers the more advanced areas of multiples and DCF valuation. Noncontrolling / minority interests, equity method investments (associates/affiliates), leases, pensions, stock based compensation and provisions are covered and slotted into the valuation roadmap. Both enterprise value and income statement adjustments are addressed, using case company examples.

Key topics

• Restricted cash
• Financial investments
• Equity method investments and how to value these appropriately
• Preference shares
• Noncontrolling / minority interests and how to value these appropriately
• Operating leases
• The implications of pensions for valuation
• Stock based compensation and the valuation implications
• Debt like provisions and relevant earnings adjustments
• Contingent liabilities
• Derivative assets and liabilities

Day 10 a.m. - M&A Accounting

During this session participants learn the accounting rules to incorporate equity investments in the consolidated accounts and work on several examples by preparing proforma financials for a variety of cases. Complexities such as noncontrolling interests and equity method investments (associates/affiliates), and their impact on earnings and cash flows are also covered.

Key topics:

• Accounting rules for equity investments
  • ­Fair value through profit and loss investments
  • ­Available for sale investments
  • ­Equity method investments (associates/affiliates)
  • ­Proportional consolidation
  • ­Full consolidation
  • ­Noncontrolling interest
• Consolidation of balance sheet and income statement
• Impact of an M&A transaction on earnings
• Goodwill calculations
• Goodwill impairment test
• The impact of deal financing

Day 10 p.m. - M&A Analysis and Modeling Fundamentals

This session covers the basic steps of analyzing an acquisition – covering the impact of a deal on the financial statements with a particular focus on EPS, PE and contribution analysis. The M&A module starts by looking at how to estimate the accretion/dilution from an acquisition using equity and debt PE multiples. The next step is to build an accretion and dilution model using EPS forecasts and acquisition assumptions, proforma leverage ratios and a proforma balance sheet.

Key topics

• Big picture: what is the transaction impact on acquirer and target shareholders?
• Preparing key acquisition data
• Building a flexible funding structure
• Modeling acquisition adjustments
• Calculating the accretion/dilution effects of the deal
• Understanding the significance of relative P/Es
• Calculating and understanding contribution analysis
• Ownership issues
• Income statement contribution
• Credit issues and leverage ratios
• The strategic implication of different financing alternatives
• Synergies and synergies needed to break even
• Proforma balance sheet
• Sensitivity and scenario analysis