WMA_Presentation_3.13.14_Final.pdf

Presentation to the Finance Society of GSU

Transcript

1. Chicago, Illinois Atlanta, Georgia Portland, Oregon Willamette Management Associates Presentation to the Finance Society of Georgia State University March 13, 2014
2. Willamette Management Associates Presentation Outline 1 Section Topic Page I Curriculum Vitae 2 II Firm Overview 5 III Business Valuation Approaches and Methods 14 IV Business Valuation Example 18 V Advice/Lessons Learned 25 VI Questions 26
3. Willamette Management Associates Section I Curriculum Vitae 2
4. Willamette Management Associates Weston C. Kirk • Weston Kirk is an associate with Willamette Management Associates in the Atlanta office. • Weston has performed various types of valuation and economic analyses, including merger and acquisition valuations, fairness opinions, ESOP formation and adequate consideration analyses, business and stock valuations, litigation disputes and damages analyses, Internal Revenue Service audit rebuttals, undivided interests in real estate valuations, promissory note valuations, and gift and estate tax valuations. • He has prepared these valuation and economic analyses for the following purposes: transaction pricing and structuring; taxation planning and compliance (federal income, gift, and estate tax); ESOP transaction and financing; tender offers; stock option offers; litigation; and strategic information and planning. • Weston has experience in the valuation of various types of business entities and interests, including: private family-owned businesses, private multiple-investor businesses, employee-owned businesses, publicly-traded companies, preferred and common stock in complex capital structures, secured and unsecured notes, options and other derivative interests, conglomerates, general and limited partnership interests, limited liability company membership interests, limited company interests, professional practices, joint ventures, and foreign domiciled corporations. • He has performed business valuations in the following industries: accounting, asset management, biotechnology, commercial banking, construction, defense contracting, department stores, ecommerce, food retail, grocery stores, hedge funds, IT consulting, literary works and publishing, mining and aggregates, NGL production, petroleum, pharmaceuticals, precious metal recycling, real estate, software-as-a-service (SaaS), sports field construction, steel, temporary staffing services, timberland, trucking and transportation, and utilities, among others. PRIOR EXPERIENCE • Weston was an intern in the Atlanta office of Willamette Management Associates prior to joining the firm as associate. 3 3
5. Willamette Management Associates Weston C. Kirk, continued EDUCATION • Bachelor of Business Administration in finance, Georgia State University, J. Mack Robinson College of Business • Certification in economics, Georgia State University, Andrew Young School of Policy Studies PROFESSIONAL AFFILIATIONS • Weston is a Level I candidate for the Chartered Financial Analyst designation. Weston is also a non-CPA associate of the AICPA and a member of the AICPA section on Forensic and Valuation Services. PUBLICATIONS • “The Role of an Independent Financial Adviser in ESOP Installation Transactions,” Willamette Management Associates Insights, Summer 2013. ORGANIZATIONS • Panthers on Wall Street / Panthers in the City - London – board advisor, alumnus • Stretched Canvas, Inc. – co-founder, treasurer, director of finance • Atlanta Young Republicans – treasurer, member • MIT Enterprise Forum of Atlanta – board advisor, member • HIGH Young Professionals – member 4 4
6. Willamette Management Associates Section II Firm Overview 5
7. Willamette Management Associates Firm History • Willamette Management Associates was founded in Portland, Oregon in 1969 by a group of five security analysts and finance academics. We opened our second office in Chicago in 1991. We opened our third office in Atlanta in 1995. We serve our clients from these three regional offices. • Initially the firm specialized in providing public company securities valuations and investment advice. After the 1974 passage of ERISA, the firm started to offer closely held business valuation services. With its roots in academia and investment research, our firm has always focused on state-of-the-art analytical tools and empirical research. Accordingly, our valuations, transaction opinions, and forensic analyses are prepared to withstand rigorous contrarian review, audit and regulating examinations, and opposing expert challenges within a litigation environment. • In broad categories, our firm's professional services are about equally divided between these client needs: transaction opinions and advice, taxation-related assistance, and forensic analysis and expert testimony. 6
8. Willamette Management Associates Firm Locations • Chicago 8600 West Bryn Mawr Avenue Suite 950N Chicago, Illinois 60631 • Atlanta 1355 Peachtree Street N.E. Suite 1470 Atlanta, Georgia 30309 • Portland 111 S.W. Fifth Avenue Suite 2150 Portland, Oregon 97204 7
9. Willamette Management Associates Our Services • Willamette Management Associates is recognized as a thought leader in the fields of business valuation, forensic analysis, and transaction financial advisory services. BUSINESS AND VALUATION RELATED SERVICES • Bankruptcy and reorganization • ESOP transaction and ERISA compliance • Fair value accounting and financial reporting • Financing securitization and collateralization • Forensic analysis and collateralization • Transaction pricing and structuring • Management information and corporate planning • Not-for-profit entity transactions and opinions • Taxation planning and compliance (including income, gift, estate, and property tax) • Transaction fairness, solvency, and other financial opinions 8 8
10. Willamette Management Associates Our Services, continued FORENSIC ANALYSIS AND EXPERT TESTIMONY SERVICES • Intellectual property analysis • Commercial litigation damages analysis • Other economic damages claims analysis • Event analysis • Reasonableness of executive compensation FINANCIAL OPINION SERVICES • Mergers and acquisitions • Going private transactions • Employee stock ownership plan (ESOP) employer stock purchase transactions • Demutualization transaction of mutually owned companies • Fairness opinions • Solvency opinions • Adequate consideration opinions • Fair market value (private inurement) opinions 9 9
11. Willamette Management Associates Our Perspective and Our Standards OUR PERSPECTIVE • As an independent firm, we can offer truly objective and reliable advice. Over the years, we developed one of the most extensive specialized valuation libraries in the world, enabling us to provide independent opinions based upon accurate information. Our opinions are truly independent because we have no accounting, brokerage, banking, or other business relationships with our clients. We believe our clients are best served by this independent and objective perspective. Our independence affords an unimpeachable credibility during a contrarian review or challenge. OUR STANDARDS • Our firm has a long tradition of independence, innovation, and client service. Applying their experience, creativity, and responsiveness, our professionals are committed to the Willamette Management Associates standard—the standard of excellence. 10
12. Willamette Management Associates Our Clients and Our People OUR CLIENTS • Our clients range from substantial closely held business and professional practices to multi-national corporations and financial institutions. We have served clients in virtually every industry—as well as some of the largest governmental and regulatory agencies. Our clients include the largest law firms and accounting firms in the country. OUR PEOPLE • We are proud of the individual prominence and experience of our analysts. Many of our analysts hold graduate business degrees and such professional credentials as certified public accountant (CPA), accredited in business valuation (ABV), certified in financial forensics (CFF), chartered financial analyst (CFA), certified fraud examiner (CFE), certified valuation analyst (CVA), and/or certified business appraiser (CBA). • Our analysts regularly hold leadership positions on standards-setting committees of the American Institute of Certified Public Accountants, the Institute of Business Appraisers, the National Association of Certified Valuation Analysts, the ESOP Association, the Business Valuation Association, and similar professional organizations. And our analysts are full-time valuation, transaction opinion, and economic damages practitioners. That is, they are not part-time accountants, bankers, etc., who perform valuation or damages analysis services on an ad hoc basis. 11 11
13. Willamette Management Associates Valuation Resources INSIGHTS • Insights is published on a quarterly basis, with periodic special interest issues. It is distributed to the friends and clients of Willamette Management Associates. Insights provides a forum for the scholarly examination of the contemporary and complex issues in the areas of business valuation, forensic analysis, and financial advisory services. Each Insights issue focuses on a specific topic or theme, such as discussions related to transactions, taxation, financing, bankruptcy, litigation, and strategic planning. CONFERENCE PRESENTATIONS, WEBINARS, AND JOURNAL ARTICLES • Our analysts frequently deliver conference speeches and author journal articles on topics related to business and intangible asset valuation, forensic analysis, and financial advisory services. The presentations are delivered at seminars and conferences of national and local bar associations, national and state CPA societies, estate planning associations, taxation institutes, and valuation associations, to name a few. • Our analysts frequently publish in accounting, finance, and legal professional journals. And, our analysts frequently author technical issue white papers for professional organizations. PRESS RELEASES, UPCOMING EVENTS, OUR BLOG • We issue additional valuation resources on current events and subjects via press releases, upcoming event notifications, and our blog—Business Valuation Expert. 12
14. Willamette Management Associates Valuation Resources, continued BOOKS • Willamette Management Associates analysts have authored several respected books on topics related to business valuation, intangible asset valuation, and forensic analysis. Valuation textbooks authored by firm managing directors Robert Reilly and Robert Schweihs include: 13
15. Willamette Management Associates Section III Business Valuation Approaches and Methods 14
16. Willamette Management Associates Business Valuation Approaches and Methods 15 VALUATION APPROACHES AND METHODS • Professional appraisers use one or more approaches to estimate value. Of course, the objective of using more than one approach is to develop mutually supporting evidence as to the conclusion of value. • While the specific titles of these approaches may vary, the generic names are: • the market approach, • the income approach, and • the asset-based approach. INCOME APPROACH • The income approach explicitly recognizes that the current value of a business enterprise asset is premised on the expected receipt of future economic benefits. Indications of value are developed by discounting future net cash flow available for distribution to their present value at a discount rate that reflects both the current return requirements of the market and the risks inherent in the specific investment. • Discounted Cash Flow Method – This income approach is based on the principle that the value of the business interest is the present value of the future economic income to be derived by the owner of the business interest. This valuation method encompasses the following: revenue analysis, expense analysis, investment analysis, capital structure analysis, residual value analysis, and discount rate analysis. • Direct Capitalization of Cash Flow Method – The direct capitalization of cash flow method is an income approach method that determines an equity value for the subject company based on capitalizing the subject company’s normalized net cash flow to invested capital. The following inputs are analyzed in this method: the subject company’s normalized net cash flow to invested capital, growth rate analysis, and capitalization rate analysis.
17. Willamette Management Associates Business Valuation Approaches and Methods, continued 16 MARKET APPROACH • The market approach estimates the value of a business enterprise through an analysis of recent sales or offerings of guideline businesses or ownership interests. • Guideline Merged and Acquired Company Method – This market approach method is based on the principle that the value of the business interest is estimated by comparing the subject company to guideline companies that have been merged or acquired during a period of time reasonably near the valuation date. • Guideline Publicly Traded Company Method – This market approach method is based on the principle that the value of the business interest may be estimated based on what astute and rational capital market investors would pay to own similar business interests that are actively traded on organized exchanges. Capital market pricing multiples of guideline publicly traded companies are used to estimate the value of the subject interest. Particular attention is paid to the appropriate discounts and premiums for majority ownership control, noncontrolling ownership interests, lack of marketability, and so on.
18. Willamette Management Associates Business Valuation Approaches and Methods, continued 17 ASSET-BASED APPROACH • The asset-based approach estimates the value of a business enterprise as the value of all of the entity’s assets (both tangible and intangible) less the value of all of the entity’s liabilities (both recorded and contingent). • Adjusted Net Asset Value Method – In this asset-based approach, the value of all the subject company’s assets are discretely estimated and added. In addition, the current values of all of the business enterprise’s liabilities are estimated. The value of the equity of the business enterprise is the value of all of the assets of the business less the current value of all of the liabilities of the business. Additionally, the assets and liabilities may be adjusted to reflect fair market value as of the valuation date. • Asset Accumulation Method – This asset-based approach estimates the value of the business enterprise as the fair market value of all the business assets, both tangible and intangible, less the fair market value of all the business liabilities, current, long-term, and contingent. The asset accumulation method is a more in-depth analysis than the adjusted net asset value method, in that the analyst must use intangible asset valuation methods to estimate the fair market value of (1) the intangible assets and (2) the contingent liabilities, if any.
19. Willamette Management Associates Section IV Business Valuation Example 18
20. Willamette Management Associates Business Valuation Example Weighted Average Cost of Capital – Cost of Equity Capital 19 Cost of Equity Capital Cost of Equity Capital Weight Component Build-up Model Risk-Free Rate of Return [a] 3.72% Long-Term Equity Risk Premium [b] 6.11% Size Equity Risk Premium [c] 3.81% Industry Equity Risk Premium [d] -2.55% Company-Specific Equity Risk Premium [e] 3% Equals: Indicated Cost of Equity [Rounded] 14.1% Modified Capital Asset Pricing Model Risk-Free Rate of Return [a] 3.72% Long-Term Equity Risk Premium [b] 6.11% Industry Beta [f] 0.85 Beta-adjusted Equity Risk Premium 5.19% Size Equity Risk Premium [c] 3.81% Company-Specific Equity Risk Premium [e] 3% Equals: Indicated Cost of Equity [Rounded] 15.7% Duff & Phelps Model Risk-Free Rate of Return [a] 3.72% Long-Term Equity Risk Premium [g] 10.82% Company-Specific Equity Risk Premium [e] 3% Equals: Indicated Cost of Equity [Rounded] 17.5% Selected Cost of Equity [Rounded] 16%
21. Willamette Management Associates Business Valuation Example, continued Weighted Average Cost of Capital 20 Weighted Average Cost of Capital Weighted Average Cost of Capital Component Selected Cost of Equity Capital [a] 16% Cost of Debt Capital Pretax Cost of Debt [b] 5.4% Income Tax Rate [c] 38% Total After-Tax Cost of Debt 3.3% Optimal Market-based Capital Structure Equity in Capital Structure [d] 90% Debt in Capital Structure [d] 10% 100% Weighted Average Cost of Capital 15% Less: Terminal Year Expected Long-Term Growth Rate [e] 3% Equals: Terminal Direct Capitalization Rate 12%
22. Willamette Management Associates Business Valuation Example, continued Discounted Cash Flow Method 21 Fiscal Years Ending on or Near March 31, Terminal 2014 2015 2016 Year $000 $000 $000 $000 Present Value of Discrete Period Cash Flow Projection Projected EBITDA 60,090 54,178 45,739 45,739 Less: Depreciation and Amortization Expense (2,354) (2,379) (2,609) (3,000) Equals: Projected EBIT 57,736 51,799 43,130 42,739 Less: Provision for Income Taxes (21,940) (19,684) (16,389) (16,241) Equals: Debt-Free Net Income 35,796 32,115 26,741 26,498 Plus: Depreciation and Amortization Expense 2,354 2,379 2,609 3,000 Less: Capital Expenditures (4,902) (12,481) (8,666) (3,000) Less: Net Operating Working Capital Additions 32,054 (7,584) (11,485) (5,000) Equals: Net Cash Flow to Invested Capital 65,302 14,429 9,199 21,498 Multiplied by: Partial Period Adjustment 0.2466 1.0000 1.0000 1.0000 Equals: Adjusted Net Cash Flow to Invested Capital 16,102 14,429 9,199 21,498 Multiplied by: Present Value Factor at 15 Percent 0.9829 0.9009 0.7834 Equals: Present Value of Discrete Cash Flow 15,827 13,000 7,207 Equals: Total Present Value of Discrete Cash Flow 36,033 Present Value of Terminal Cash Flow (Gordon Growth Model) Terminal Year Cash Flow 21,498 Multiplied by: 1 + Expected Long-Term Growth Rate 3% [g] Equals: Expected Next Year Cash Flow 22,143 Divided by: Direct Capitilization Rate 12% [g] Equals: Terminal Value 184,528 Multiplied by: Present Value Factor at 15 Percent 0.7834 Equals: Present Value of Terminal Cash Flow 144,560 Value Summary Total Present Value of Discrete Cash Flow 36,033 Plus: Present Value of Terminal Cash Flow 144,560 Equals: Indicated Market Value of Invested Capital [i] 180,593 180,000 $ Equals: Indicated Market Value of Invested Capital [Rounded] [i]
23. Willamette Management Associates Business Valuation Example, continued Guideline Merged and Acquired Company Method 22 Target Target MVIC/ Transaction Company Company Revenue MVIC Revenue EBITDA Pricing Target Company Buyer Company Date $000 $000 $000 Multiples Cypress Pharmaceutical, Inc. Pernix Therapeutics Holdings, Inc. 12/28/12 139,990 47,000 (743) 3.0 Par Pharmaceutical Company, Inc. TPG Capital 9/28/12 1,977,970 1,041,037 238,310 1.9 URL Pharma, Inc. Takeda Pharmaceuticals U.S.A., Inc. 6/4/12 800,000 600,000 NA 1.3 Ascent Pharmahealth Ltd (Australia) Watson Pharamaceuticals, Inc. 1/23/12 392,730 157,092 19,539 2.5 Paddock Laboratories, LLC Perrigo Company Public Limited Company 7/26/11 540,000 200,000 NA 2.7 King Pharmaceuticals, Inc. Pfizer, Inc. 1/28/11 3,221,640 1,534,114 350,178 2.1 Generics Bidco I, LLC (India) Endo Pharmaceuticals Holdings, Inc. 11/30/10 1,175,400 309,316 58,188 3.8 High 3,221,640 1,534,114 350,178 3.8 Low 139,990 47,000 (743) 1.3 1st Quartile 466,365 178,546 19,539 2.0 3rd Quartile 1,576,685 820,518 238,310 2.8 Mean 1,178,247 555,508 133,094 2.5 Har Mean 2.2 St Dev 0.8 Coeff. Var. 32.3 Median 800,000 309,316 58,188 2.5 LTM Period Financial Metric ($000s) 107,411 Multiplied by: Selected Pricing Multiple 1.9 Equals: Indicated Value of Invested Capital 204,081 200,000 $ Equals: Indicated Market Value of Invested Capital [Rounded]
24. Willamette Management Associates Business Valuation Example, continued Guideline Publicly Traded Company Method 23 Selected Emphasis Weighted Selected Guideline Publicly Traded Company Pricing Multiples Pricing Indicated Horizon Multiple Value Value Metric Company Low High 1st Qrt. 3rd Qrt. Mean Median Multiple Value % % $000 MVIC / EBITDA: 50% 165,077 Projected Year 2 54,178 6.1 17.5 7.3 10.6 10.1 9.0 6.0 325,068 33% Projected Year 1 60,090 6.1 13.2 8.6 12.2 10.2 11.2 6.0 360,539 33% Latest 12 Months 50,809 3.2 13.0 5.9 10.8 8.3 8.5 6.0 304,854 33% MVIC / Revenue: 50% 102,082 Projected Year 2 137,766 1.6 4.1 2.3 3.4 2.8 2.7 1.6 220,426 33% Projected Year 1 137,631 1.6 4.7 2.4 3.9 3.2 3.2 1.6 220,210 33% Latest 12 Months 107,411 1.2 5.4 2.0 3.7 3.0 2.7 1.6 171,858 33% Equals: Indicated Value of Invested Capital [Rounded] 267,200 $ Less: Long-Term, Interest-Bearing Debt - Equals: Indicated Value of Equity, Noncontrolling Basis 267,200 Plus: Ownership Control Price Premium [a] 20% 53,440 Equals: Indicated Value of Equity, Controlling Basis 320,640 Plus: Long-Term, Interest-Bearing Debt - Equals: Indicated Value of Invested Capital 320,640 Equals: Indicated Market Value of Invested Capital [Rounded] [b] 320,000 $
25. Willamette Management Associates Business Valuation Example, continued Valuation Summary 24 Level of Relative Indicated Valuation Approach and Valuation Method Value Emphasis Value ($) Income Approach - Discounted Cash Flow Method [a] 50% 180,000,000 Income Approach - Direct Capitalization of Cash Flow Method [a] 30% 200,000,000 Market Approach - Guideline Merged and Acquired Company Method [a] 10% 200,000,000 Market Approach - Guideline Publicly Traded Company Method [a] 10% 320,000,000 Market Value of Invested Capital [a] 100% 200,000,000 Less: Long-Term, Interest-Bearing Debt - Equals: Indicated Value of Equity [a] 200,000,000 Nonoperating and Excess Assets/Liabilities Plus: Loan to Related Party - HSL Holdings Inc. [a] 20,000,000 Equals: Total Fair Value of Equity [a] 220,000,000 $ Divided by: Number of Shares Issued and Outstanding 117,797,180 Equals: Fair Value Per Share [a] 1.85 $
26. Willamette Management Associates Section V Advice/Lessons Learned 25
27. Willamette Management Associates Section VI Questions 26
28. Willamette Management Associates 27 Weston C. Kirk Willamette Management Associates 1355 Peachtree Street, N.E., Suite 1470 Atlanta, Georgia 30309 t: 404.475.2308 | f: 404.475.2310 e: wckirk@willamette.com w: www.willamette.com