Valuation Mergers, Buyouts and Restructuring

by Arzac, Enrique R.

• ISBN13: 9780470128893
• ISBN10: 0470128895
• Edition: 2nd
• Format: Hardcover
• Copyright: 2007-11-09
• Publisher: WILEY

Summary

Praise for Valuation for Mergers, Buyouts, and Restructuring "Enrique Arzac has provided an excellent analytical framework for the LBO business."--William T. Comfort, Chairman, Citigroup Venture Capital "Enrique Arzac has created a masterpiece--his work combines the theoretical with the practical. He has created an invaluable reference guide that is thoughtful, complete and very user friendly. He provides insight into the theory behind core valuation, LBO's, and options pricing, which creates the foundation for mergers, buyouts and restructuring. In addition to the theoretical, he provides practical insight into deal structuring and deal dynamics. His work should be standard material for all incoming associates."--James P. McVeigh, Managing Director, Corporate & Investment Banking, Banc of America Securities "This first-rate book of applied financial theory provides the tools for financial institutions and capital market participants seeking a methodology for comparing, contrasting, and evaluating investment opportunities and options. By inc orporating over 30 years of research, teaching, and practical experience, Professor Arzac has created a text that us not only timely, but timeless in its usefulness to anyone interested in learning the applications of financial theory for the best and most useful allocation of the scarcest economic resource in the world--capital."--William W. Priest, Co-Managing Partner, Steinberg, Priest and Sloane Capital Management and Former Chairman and CEO of Credit Suisse Asset Management "There are two important aspects in graduate business education. The first is acquiring a thorough understanding of the theories of modern finance and the second is acquiring an appreciation for how these theories can be applied to important decisions. Enrique Arzac has taken on this task and made it a successful venture for readers of this book. Unlike other texts on valuation, he explains the reasons for the process and sequence that he recommends rather than just providing the ingredients and the recipe without explanation. This is a welcome addition to the literature in applied corporate finance."--Joel M. Stern, Managing Partner, Stern, Stewart & Co.

Author Biography

Enrique R. Arzac is Professor of Finance and Economics at the Columbia University Graduate School of Business, Director of the Merger, Buyouts, and Restructuring program for executives at Columbia Business School, and Co-Director of the Merger and Acquisitions program for executives at London Business School. He is the author of many academic articles in financial economics and has been consultant to corporations and financial institutions in North and South America and Europe. He is a director of the Adams Express Company, Petroleum and Resources Corporation and Credit Suisse Asset Management funds.

Table of Contents

The Tools of Valuation

A User's Guide

Valuation of Stand-Alone Firms and Business Units

Free Cash-flow Valuation

Cost of Capital

Valuation Multiples

Economic Value Added

Valuation with Changing Capital Structure

Valuation in Developed and Emerging Markets

Mergers and Acquisitions

Deal Design and Special Offer Structures

Leveraged Buyouts

Recapitalization of Troubled Companies

Asset Restructuring

Real Options: Valuing Entry and Exit Options

Financial Options

Technical Notes and Problems

Valuation Aids and Deal Modeler r Software

Forecasting and Valuation of Free Cash Flows

Free Cash Flows

Building a Financial Model

Enterprise Valuation

Continuation Value

Forecast Consistency

Forecasting FCF T

A Wrong Way to Forecast Continuation Value

Sensitivity to Parameter Estimates

Competitive Advantage Period

EBITDA Multiples

An Equivalent Approach: Valuing the Cash Flow to Equity

Decomposition of Free Cash Flows: Cash Flows to Equity and Debt

Equity Valuation

Debt Valuation

Financial Policy and Dividends

Some Practical Aspects

Choosing the Valuation Method

Personal Taxes and Enterprise Value

Enterprise Value in Tax-imputation Countries

Balance Sheet Adjustments

Cash and Marketable Securities

Mid-year Discounting

Dealing with Equity-linked and Other Securities in the Capital Structure

Restructuring Expenses

Analysis of Results: The Value of Franchise and Growth

Summary.Problems

The Equity Premium and the Cost of Capital

Estimating the Cost of Capital

The Cost of Equity

The Capital Asset Pricing Model Approach

Choosing the Riskless Rate

Estimating the Equity Premium: Historical Analyses

Time Varying Equity Premium

Prospective Equity Premium

The Cost of Equity of Large Capitalization Companies

The Cost of Equity and Leverage

Beyond the Capital Asset Pricing Model

The Original CAPM

The Fama-French Three-factor Model

Arbitrage Pricing Theory

Liquidity and Expected Returns

The Cost of Equity of Small Capitalization Companies

Estimating the Cost of Equity: A Detailed Example

The Cost of Debt and Other Components of the Capital Structure

Investment-grade Debt

High-yield Debt and Preferred Stock

Convertible Securities, Warrants, and Other Options

Estimation of the Cost of Capital in Practice

Summary.Problems

Metrics and Multiples

The Use of Multiples in Valuation

Using Comparables: An Example

Multiples and Continuation Value

Relationships Among Valuation Multiples

Adjusting Multiples for Leverage and Growth

The Franchise Factor in Valuation Multiples

Normalizing P/E Ratios by the Growth Rate

Summary.Problems

Economic Value Added

Measuring Value Creation

Relation to Free Cash-Flow Valuation

A Detailed Example of EVA Valuation

The Sources of Value: Franchise and Growth

Economic Value-Added and Market Value

Some Empirical Evidence

Summary.Problems

Valuation with Changing Capital Structure

Leverage Change

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