Forget excel models, just use a pocket calculator to do your valuations!

a PAC-MAN's picture
Rank: Baboon | 159

I am interning with a boutique corporate advisory firm in an APAC emerging market when I saw this (peculiar?) incident:

A client came in one morning looking to sell a majority stake in his private company. Being the eager beaver intern, I quickly started to look into the company's financials, research about their target segments, revenue drivers, debt structures etc. and started to build a basic model to value the company. After some elbow grease I produced the standard football field to present to my VP, feeling rather pleased with my analyses.

He didn't even look at it.

Forget excel models, my VP just used a calculator (his phone) to do some simple multiple valuations or even simple mathematical proportions to arrive at a selling price based on the asking premiums of the client, which he found a few investors willing to take up the offer. After some minor tweaks, negotiations legal DD lasting a few months, the deal went through. No questioning projection assumptions, no teasers, no CIMs,....boom, deal done and the company gets paid.

I was just wondering, is this informal process commonplace where you are working? or is there some other background work that i am not aware of? or it it just a practice in emerging markets where these financial transactions are still nascent?

Comments (18)

Sep 28, 2017

I've interned at an investment bank that deals with lower middle market firms (like $1-5mm EBITDA) and my MD never needed a model. He just told me to build models just for my own good (he's a really nice guy) so that he can teach me, but he just used an EBITDA multiple that he thought the company was going to sell at. He was previously a MD at HW/William Blair/Lincoln though, so his experience might be enough to win clients of these size.

But I did have to create teasers, CIMs, and bunch of other things necessary in the deal process, just not valuations.

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Sep 29, 2017

I see, thanks for sharing! The deal was indeed in the lower middle market region.

Sep 29, 2017

Did you get to do DCFs or bottom up approaches for comps?~assuming this is private companies

Sep 29, 2017

From an analyst's perspective, it makes more sense to use DCF because it provides the intrinsic value of the company based on free cashflow. For private companies in emerging economies, the lack of information in the market makes comps rather inaccurate (theoretically).

But (IMO) from an investor's perspective, industry multiple expansions/contractions simply provides a barometer to sense investor opinions and provide a macro-view of the industry. Ultimately, beyond industry reports and market studies, in an economy where info is a scarcity, the most effective multiple is the one in the buyer's mind.

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Best Response
Sep 28, 2017

How did you think this business works?

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Oct 2, 2017

You really only need to do "sound" valuation work to prove to investors why the value of something they already own is not correct or will never be higher, and for the people selling the company to have a third party to point to so that they can claim no conflict of interest.

At the end of the day, owners will not sell for a price they don't like and so long as the sellers do not commit fraud, the buyers will pay whatever they think is fair and makes economic sense to them.

Your VP did what I described above - that is, he knew what would get the deal done, and based on his market knowledge proved it out as a reasonable valuation.

Oct 12, 2017

Really depends who you're selling for, and who you're selling to.

MD's friend, small company, private deal, great, they probably have an idea of what it's worth, from the "how much will someone pay for this" view. Further, the smaller the company, the more BS the assumptions going into the model.

Other side: Selling a public company to PE vehicle, buckle up, that's a wall of paperwork you're speeding towards. PE needs to paper down everything for CYA with the Investment Committee. Public company needs evidence that the deal was 'fair', board papers need to go through, everything needs to be lawyered up.

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Sep 29, 2017

You made an interesting point about how assumptions becoming less valid due to the size of the company. I would add that this observation extend to quite a number of firms/transactions in APAC EMs. Especially if ratios were used, the difference in market conditions, demographic behaviors and regulation makes it such that much of the financial literature and wisdom from more advanced economies rarely applies. Everything has to be customized, a problem which is exacerbated by a dearth of information in a nascent market.

I suppose it is under such conditions, the art of deal-making becomes more significant than number crunching.

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Oct 12, 2017

I guess now instead of models and bottles, it'll just be pocket calculators and bottles

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Oct 13, 2017

Because carrying your calc around is a surefire way to ward off attractive women?

Oct 12, 2017

Dude, between compliance making everything fun harder to do, and comp getting squeezed, it's going to be pocket calculators and happy hour specials within a generation.

Oct 12, 2017

I would still build models despite it. You never know if you lateral out if the skill comes handy.

Oct 12, 2017

@a PAC-MAN, you should still practice financial modeling because this is a skill that is very important for lateraling and M&A interviews in general.

That being said, no one actually cares what the model itself says. Deals are never completed because a merger model says the deal is Accretive or because the DCF says the target is drastically undervalued or because the LBO shows that a PEG could realize a 40% IRR. The entire purpose of the model is for when shit hits the fan. It's so that, as some other poster pointed out, we can show our board and investors that we properly valued the target. It is so that we can show investors that we received a fair deal for our divestiture. It is so that our IB can show our investors that they actually did their job. But when it comes time to sell the actual business, the market will price the business independant of what some model says. This is why M&A is an art form, not a science. This is why an MD will ask you to tweak your model to match what he/she wants it to spit out.

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Oct 13, 2017

At my bulge bracket we'd look at LTM and NTM trading and M&A comps in a few related sub-industries to get a general sense of value / make sure we weren't leaving any money on the table. The operating model, DCF, and lbo models were more to sanity check and also get a sense for how much changes in certain assumptions would move the needle on value. Comps were always the most important though. DCFs in particular are very fudgeable and so not to be taken too seriously, especially given the outsized impact of the discount rate and the terminal value assumptions.

The one situation I ran into where accretion / dilution was truly make-or-break for a deal was synthetic capital raises, where a company is acquired below book value to be book value Accretive, so the 1-2 year BVPS and EPS bumps mattered more.

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Oct 13, 2017

A company is only worth what someone is willing to pay for it. A model shows a single case scenario with many assumptions around revenues, discounts, risks, etc - great for having a fall-back number to support your position but not the real value of the transaction.

Lower MM is especially dismissive of models because the companies carry such high risk and low overall valuations that a few simple multiples will get you "close enough".

That being said, I have had a few situations now where shit has gone haywire in the last few days before a close, and the only saving grace was the model that kept everyone calm and rational.

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Oct 12, 2017

I can make the model say whatever we want, depending on if we want to bring the price up, or push it down.

Off the cuff:
1. Adjust the total synergies to be recognised, and schedule for synergy realisation to tweak EV by a few points up or down
2. Justify transaction value based upon post transaction re-rating
3. Add a control premium to the cost to justify valuation
4. Insert 'Pricing Premium Achieved' based upon the market control exerted by the proforma company to boost DCF

That said, we were negotiating a sale of a stake in an asset to an infra fund, where we actually went back and forth arguing the minutia of the model for weeks, including a session with about ten bankers, ten to fifteen people from their respective companies, and a translator, which lasted almost five hours.

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Oct 13, 2017

Was your client by chance Indonesian or Malaysian? I hear interesting things about some of these folks running large, privately held oil and agri businesses from friends.

Gimme the loot

Nov 29, 2017
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