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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
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