講義文稿說(shuō)明04 equity value overview

EquityValue,EnterpriseValue&ValuationMultiples:OverviewoftheEquityValueCalculation

oand etoourlessoninthismoduleonEquityValue,EnterpriseValue,EvaluationMultiples.Thistimeasyoucanseewe'regoingtobegoineranoverviewofEquityValue,andtheprocesstheyuseforcalculatingit.

ThefirstthreelessonsherewefocusedmoreontheconceptsofEquityValueandEnterpriseValue,andhowyouusethemwithdifferentvaluationmultiples,andtocreatereallydifferentvaluationmultiples,butthistimearoundwewanttofocusonsomeofthesubtlerpointswiththis,andwhyitgetsmorecomplicatedthenyoumightexpecttocalculateametriclikethis.

SointermsofourcasestudywearenowintoPartTwoonhowtocalculateEquityValue,andifyougodownhereoverviewoftheEquityValuecalculations.Sothesearesomeoftheconceptswe'regoingtobedealingwithhere.Wheretofindinformation,howmuchdetailtogointo,howmuchtimetospendonthis,andwhythisconceptofdilutedequityvaluematterssomuch.

[00:57]

SofirstI'mgoingtogiveyouthisoverview,andlyouaboutsomeofthefinerpointshere,thenwe'llgothroughafewexamplesofhowalikeVivendicanactuallycreatedilutedshares,andgetadilutedsharecount.Thenwe'lllookattheprocessforcalculatingEquityValue,andsomeoftheconsiderationsthathavetogoinhereespeciallywhenyou'redealingwithnon-standardcompanies.

We'lllookatthreedifferentmethodsforcalculatingdilutionfromsecuritiesandthenattheendwilllookatsomeofourcalculationhere,andI'mgoingtoexintoyouwherethesenumbersarecomingfromusingVivendi'sownannualandinterimfilings.

SofirstoffthisoverviewofEquityValuejusttorecaptheconceptiswhateverythingisworth,butonlytothecommonshareholdersofthe.Andinasenseit'sactuallysimplerthanEnterpriseValue,becausewedon'thavetosubtractanything,wedon'thavetoaddanything,itreallyisbasicallyjustsharesoutstanding,whereeachsharerepresentsasmallpercentageofownershipinthetimestheshareprice.SharepriceyoucouldfindonFinance,YahooFinance,Bloomberg,plentyofothersitesregardlessifyou'redealingwithU.SorInternationalcompanies.

[01:59]

Sothesharepricepartiseasy,thehardparthereisthesharesoutstanding,andhere'stheproblemwiththis.Firstoffifyoujusttrytogetthisnumberfroma 'sfilingsyou'regoingtorunimmediayintoseveralproblems,becausetheyhavemanydifferentnumbersforthesharesoutstanding.Toillustratethispint,let'sgotoVivendi'sInterimreport,andI'mgoingtoshowyousomeoftheproblemswithtryingtogetthisfromtheirfilings.

Soifyouscrolldownhere,andyougotopagefouroftheirreport,sofirstofftheyhavetheweightedaveragenumberofsharesoutstanding,andthenwehavethenumberofsharesoutstandingatoftheperiodexcludingTreasuryshares.Andifyouscrollthroughtheirfilingsyoucanfindmanyotherreferencestosharesoutstanding.That'sactuallyagoodwaytofindthisregardlesswhetherit'sanInternationaloraUS,searchforsharesoutstanding.

UsuallyforUS'sit'sonthefrontcoveroftheirreport,butforInternationalcompaniesitdiffers.Andyoucanfindalotofdifferentreferences,andalotofdifferentwaysthatthey'vecalculatedthisnumber,andyouhavetobeverycarefultoactuallycomeupwiththisnumberinthecorrectway,orelseyouarenotgoingtogettotherightresultshere.

[03:06]

Nowtypicallythewayyoudothisisyoustartwiththebasicnumbertheygiveyou.Sothisjustincludesli llythecommonsharesthathavebeenissuedbythetoemployees,toexternalinvestors,thecommonsharesthatareoutstandingthatareoutthereinthemarketbeingtradedeveryday.ThetrickyphatthenyouhavetoaddinsharesthatarecreatedfromothersourcesandthesearecalledDilutiveSecurities.Whenyouaddthemtothesharecountyougetadilutedsharecount.

Theeasiestwaytoexinhowthisworksistogiveyouaquickexampleratherthantryingtoexinthetheorybehindthis.Sohere'sanexample,let’ssaythatVivendigrantsathousandoptionstoemployeesincentivizethemtoperform,andstaywiththe.Somaybethestraightpriceoftheseoptionsis15Euros,soifVivendi’ssharepricerightnowis10Eurosthestrikepriceis15EuroswhatthismeansiswhenVivendi'ssharepricehits15Eurosnowtheseemployeescanpaytheandactuallyturntheseintoshares.SotheycanpayVivendi15Euro's,andgetsharesoftheforeachoptioninexchange.

[04:10]

Youcanseehowthiscreatesaproblemnowdependingonthe'ssharepricetheremightbeawholeofpotentialnewsharesoutthere,andthisisoneofthemostbasicreasonswhywecan'tjustusethesharecountasstatedinthefilings.Nowanotherexampleofhowadilutioncomesupiswithrestrictedstock.Soinalotofcases,companieswillgrantoptionsorstockstoemployeesbutthey'llbutanotherrequirementorrestrictiononthem,andsaytheycannotsellthesharesforacertainperiodoftime,andthisiscalledrestrictedstockorrestrictedstockunits,orRSUs.

Nowtheissuehereisthattechnicallythesesharesarenotoutstandingontheopenmarket.They'renotbeingtradedeveryday,buttheyarestilloutthere,andwhenanacquirercomesalongtobuythe,it'sgoingtoincreasethe'spricetothquire.

[04:58]

Andthesameisactuallytrueofoptionsaswell,becauseiftheacquirepays15EurosormoretoacquireallofVivendi'sshareswhenitgoestobuythe,it'sgoingtohavetopayforthoseoptionsaswell.Sobothofthesearedilutivesecurities,becausealthoughtheydon'trepresentactualsharesthatareoutstandingbeingtradedonthestockmarkettoday,theyarepotentialshares.

Andwhensomeonecomesalongandbuysthe,they'regoingtohavetopaysomethingforthemfortheoptionsiftheyareinthemoney,soinotherwordsifthepricepaidisover15Eurosandfortherestrictivestockitdoesn'thaveanexerciseprice,orstrikepricebuttheacquirewillstillhavetopayforthese.Sobothoftheseitemsincreasethe'seffectivepricetotheacquirer,andthatiswhytheyaredilutivesecuritiesandwhytheyincreasethe'sequityvalue.

NowIcreadylthatsomeoneisgoingtoaskaquestionaboutprivatecompanieshere,solet'saddressitupfront.Wehavebeenworkingundertheassumptionthat'sherehavepublicallytradedstockandpublicstockpriceswithstrikepricesthatcorrespondinsomewaytothestockprice.

[06:00]

Withprivatecompanies,theseconceptsaren'tasrelevant,becauseyoudon'thaveshareprices.Sonormallyyoudon'texactlycalculateequityvaluelikethissharepricetimessharesoutstanding,insteadwhatyouwillsyouwillcomeupwithyourownvaluationfortheprivate,andyou'lllookatEnterpriseValue,orEquityValue,youcouldgobackandforthinbetweenthembasedonthe'sbalancesheet,butthisconceptandtheseconceptsherearedefiniylessrelevant.

Nowifthisisaprivatethathasrecentlyraisedfunding,forexample,andtheyhaveacertainnumberofshares,youknowthesharecount,youcanfigureoutthesharepricefromthevaluationtheygot.Wesawthatwithoneofthethreestatementmodelingcasestudies.

Youcanfigureoutevaluationifyouknowthesharesoutstandingyoucangettoanapproximateshareprice.

Soitcouldstillcomeupbutingeneralyoudon'tgothroughthistypeofworkasmuchwithprivatecompanies.Whenaprivategetssolditisstillprobablygoingtohaveoptions,restrictedstock,andsoon,soatthatpointwhenitgetssold,youcanagaingobacktowhatitgetssoldfor,thesharesoutstanding,andusethattogettotheprivate’ssharepriceandfigureoutwhichofthesesecurities,options,restrictedstock,andsoonareactuallygoingtocreatenewsharesinthatscenario.

[07:12]

Sothat'salittlebitaboutwhythiscomesupandagainthiswillmakealotmoresenseonceweactuallygothroughtheexamplesbutI'mjustgivingtheconceptsfornow.NowtheprocessforcalculatingEquityValueso,howmuchdetailyougointoheredependsonhowmuchtimeyouhaveandthepurposeoftheysis.

Ifyouarejustmakingaveryquickcalculationandthisisjustsomethingyou'relookingattogetaroughideaofthe ’svalueorwhatitmightbeworth,don'tkillyourselfngthis.

Takethe'sdilutedsharecountfromthemostrecentinterimfilingcalledthe10-QreportforUSbasedcompanies,justcalledtheinterimfilingforinternationalcompanies,justtakethatsharecount.

Youalwayswanttogetthisfromthemostrecentfiling,becauseifQ1hasended,orQ2hasended,orQ3hasendedit'snotaccurateifyougoallthewaybacktotheannualfilingyouwantthelatestnumbers.

[08:01]

SowithVivendiforexample,ifwejustwanttodoavery,veryquickjobwiththiswecouldjustdoasearchforsomethinglikethis,andwecouldsearchforsomethinglikesharesoutstanding.Andlet'sgobacktopagefourorfiveofthis,soIcanshowyouwheretogetitthere.Andifwejustwantedtodoavery,veryquickjob,wecouldsayyouknowwhatnumberofsharesoutstandingis1,342.7thatisactuallyinbillions,sothatwouldbe1.3billion.Butlet'sjusttakethatnumber,andthat'sitwe'redone,we'redonewithourequityvaluecalculation,wejustmultiplythisbyourshareprice.

Sothatisoneapproachforngit,andthere'snothingnecessarilywrongwiththatifyou'rejusttryingtogetaquickideaofwhatthe'sworth.Theproblemthoughisthatsometimesyouhavetobemoreprecisethanthis.Andsometimesyouhavetodomoreofanindepthysis,especiallywhenthecompaniesyour,orwhenyou'reconsideringinvestinginthe,ifyou'reworkingonthebuysideofaprivateequityfirm,orhedgefundforexample,youwanttocomeupwithmoreexactnumbershere,andyouneedmoreprecision.

[08:59]

Oneothernotebeforewemoveoninlinewiththatnoteaboutprivate'shere,youmightbewonderingifthehasmultipleclassesofshareslikeBerkshireHathaway,forexample,orhasit'sonmultipleexchanges,basicallyyouhavetoaddupeverythinghere.SoiftheyhaveClassAandClassBsharesyouhavetoaddupeverything,takethesharepriceforallofthem,timesthetotalnumberforallofthem,addeverythingtogethertogettothetotalEquityValueforthe.Shouldhavementionedthatearlier,butjustbringthatupnow.

Movingonnowifthereismoreprecisionrequired,thenwhatyouhavetosgothroughthe'sfiling,andstartwiththebasicsharecounttheygiveyou,andthenfactorinthose

dilutivesecurities.Thisisavery,verycommoninterviewquestion,soit'snotjustsomethingthatI'mgivingyoutoteachyouthetheoryaround,ortoteachyouwhatyoudoonthejob,it'sgoingtocomeupininterviewsallthetime.

SowithVivendiforexample,whatwewoulddohereiswewouldnotwanttotaketheweightedaveragenumberofsharesoutstanding,becausewedon'twanta agenumberofsharesoveraperiod,wewanttheexactnumberattheveryendofaperiodsowegetexactnumbers,notaverage.

[10:03]

Sowewouldstartwiththisnumber,andthenwhatwewouldshavetogoisgohuntingthroughthefilingsandlookforinformationonoptions,onunrestrictedstock,onothertypesofdilutivesecurities.SooverhereIhavesomeoftheirinformationfromtheirannualreportactually.

ThereasonI'mgoingtotheannualreporthereisbecauseoftentimescompanieswillgiveyoutheirlatestsharecountintheirinterimorquarterlyreports,thelatestones,butthey'llonlydiscloseinformationabouttheoptionsandaboutrestrictedstock,andotherthingslikethiswhenyougototheirannualreport.Sothatissomethingthatyouwilloftenhavetodo.AndyoucanseehereI'vehighlightedinthekeyareasjusttomakeiteasierasyoureadthroughit.

Sowhatwehavetodohereisgoin,andwe'dhavetolookattheiroptionshere,thestrikepriceforthoseoptions,andfigureoutbasedonthis,howmanynewsharescouldpotentiallygetcreated,andwe'llgothroughallofthatinthese inglessons,butIjustwanttolyoualittlebitmoreabouttheprocessovernow.

[10:58]

Nowwhenyou'rengthistherearethreedifferentmethodsoffactoringindilutionfromthesesecurities,andwe'regoingtolookatthesethreeoverthenextfewlessonshere.ThefirstmethodiscalledtheTreasuryStockMethod,andthisisusedforoptions,andwarrants.Theideahereisthattheholder'shavetopaythesomething.

SointheexampleabovewesaidtheywouldhavetopayVivendi15Eurosforeachoptiontheywanttoexercisetogettheshares,theygetthoseshares,andthentherepurchasessomeofthosenewshareswithwhatevertheoption,orwarrantholdershavepaidit.We'llbelookingatthein’sandout’softhatinan inglesson,butIjustwanttolayoutthebasicideafornow.

Thenthere'swhatIcalltheallornothing,method,orsomepeoplecallittheifconvertedmethod.Youcansayeitheroneifconvertedisprobablyalittlebitmorestandard,soI'mgoingtochangethat.Nowthisoneisusedforconvertiblebonds,sometimesit'susedforperformanceshares.

Thedifferencehereisthatthere'snopaymentmadetotheandeverythingeitherconvertsittosharesoritdoesnot.Soforexample,ifthehasperformancesharesanditsaysthattheyturnintonormalsharesifthe'ssharepricehits20Eurospershare,that'slornothingscenario.

[12:04]

Noholdersofthoseperformanceshareshavetopaytheanything,they'resimplyallshares,ortheyarenothing.WithConvertibleBonds,wementionedthisbrieflyinsomeoftheearlierlessons,andmodulesinaccounting,buttheideahereisthatifthesedonotconvertintoshares,they'recountedasdebt,iftheydoconvertintosharesthey'renotcountedasdebttheysimplyaddtothedilutedsharecountinstead.

Andthenthethirdmethodhereisthestraightupadditionmethod,againthere'sprobablyamoreformalnameforthis,butthisisusedforrestrictedstock,RSUsothertypesofsharesthatarenotalreadyincludedinthesharecount,butwhiaybeavailableinthefuture.Andoverthenextfourlessonshere,we'regoingtocovertheseindepth,andgothroughalotofexamples,andpracticeexercises,soyoucangetthehangofthis.

SogoingbacktothisVivendiexamplenow,soI'vealreadyshownyouwherealotofthisinformationis,thebottomlineisthatyouwanttogetthisbasicsharesnumberasIsayhereinmycommentfromthemostrecentinterimreport.

[13:00]

Sothis1,432.7wellit'scomingstraightfromtheirinterimreportrighthereforUSbaseditlooksalittlebitdifferent,buttheystilllistthesharecountsomewhereinthebeginningofthereport.

Nowfortheothernumbershere,theoptions,theSARsnotthedisease,theseareactuallyit'sanabbreviationforstockappreciationrights,andperformanceshares,thesearealsocomingfromthissectionoftheannualreport.Note22sharebasedcompensationnsyoucanoftenfindthisinformationthere,andthenrestrictedstockthisisalsocomingfromthere.

Sowe'regoingtogothroughallthatinthe inglessons,butthatiswherewe'regettingtheinformationfrom,andthenallweswesimplytakebasicshares,justthenormalcommonshares,andthenweaddthedilutionfromalloftheseothertypesofsecuritiestoget

tothedilutedsharecount.OurbasicEquityValueisjustthecurrentsharepricetimesthebasicshares,andthenthedilutedEquityValue,commonsharepricetimesthedilutedsharesthat'sstanding,andthatwhatgetsustobasicanddilutedequityvalue.Reallydilutedequityvalueistherelevantonethatyoushouldbeusingforthemostpart.

[14:00]

Afteryougothroughthiswholeprocess,andwe'lllookatthislateron,butifyouwantedtocheckyourworkwhatyoucouldtthefollowing.YoucoulddoanothersearchforsharesoutstandinginVivendi'sfilings,solet'sdothatrightnow,andoftentime’scompanieswillactuallycalculatethesenumbersforyou.Soherethey'vecalculatedthepotentialdilutedeffectsrelatingtosharebasedcompensation,theyhave7.9,sowhatwecouldsgoandlookatournumbers,andseehowtheymatchup.

Nowinthiscaseit'sclearthatwe'reoffbyalittlebit,itlookslikewehavearoundninefromdilutedsecurities,theyhaveseven,butitisintherightballpark,soitdoesn'tmatchupexactly,butatleastweknowwe'renotoffbyahorribleamount,andtha