Firm Valuation

In: Business and Management

Submitted By wanglinyue0629
Words 1734
Pages 7
Hertz Ipo Case Analysis
Executive Summary

Hertz group had initiated an IPO in July 2006 when Carlyle group, together with Clayton, Dubilier &Rice, and Merril Lynch Global Private equity , three prominent firms had filed to take the firm public. However this action has come just seven months after the three had combined to purchase Hertz from Ford Motor Company for Approx. $15 million. Berg, MD of Vandelay Capital Management debated whether to invest in this IPO.The LBO sponsors had borrowed an additional $1 billion on top of the buyout financing to pay themselves a special dividend in June 2006 , being the biggest reason why the IPO generated widespread criticism along with the speed with which the IPO was conducted . In the face of this criticism, the demand for the Hertz IPO weakened, and the offer price was reduced from the initial file price range of $16-$18 to just $15. Berg must assess whether at $15 per share, Hertz offers an attractive investment for this fund. After detailed analysis on the sponsors' returns on their investment and the attractiveness of the $15 offer price to public shareholders, along with the circumstances surrounding the IPO, it was concluded and advised not to invest.

Reasons behind the IPO
One of the obvious reasons behind the IPO was Hertz’s strong brand equity that gave it strong pricing power since it was ranked as the top worldwide general use car rental brand and one of the largest rental companies in the U.S and Canadian markets combined. Furthermore, the timing at which the IPO was taking place allowed Hertz to penetrate into the non- airport and the equipment rental business, which was a higher margin business than the car rental business. The non- airport sector provided a favorable $9 million in revenue annually and the insurance associated with rentals gave way to Insurance companies welcoming a competitor to the…...

Similar Documents

Valuation

...AMITY INTERNATIONAL BUSINESS SCHOOL ANALYSIS AND VALUATION OF EQUITY SECURITIES OF TATA CONSULTANCY SERVICES , INFOSYS AND WIPRO LTD. SUBMITTED TO: SUBMITTED BY : Ms.Vibha Singh Atreya Vyas A1802011445 Section C MBA IB TABLE OF CONTENTS S.No | Topic | Page Number | 1 | Introduction | 3 | 2 | Research Methodolgy | 4 | 2.1 | Research Objectives | 5 | 2.2 | Proposed Literature Review and Tentative Hypothesis | 5 | 3 | Data Collection | 7 | 4 | About Companies and Research | 8 | 5 | Limitation of Study | 11 | 6 | References | 12 | 1) INTRODUCTION In today’s era every company needs cash or cash equivalents to run its day to day activities smoothly. The major sources through which companies can borrow money are: * Bank Loans * Debenture * Preference Share * Equity Share. Bank Loan is the amount which companies receive after fulfilling all the required information which is mandate according to the rules of banks. Companies need to mortgage its assets as guarantee for the future repayment of its loan amt. on the loan bank charge interest which company has to pay irrespective of the fact that company is in profit or loss. Debentures are the instruments which are used to acknowledge the receipt of the debt form the debenture holders. Debenture Holders are sought lenders for the company. They...

Words: 4106 - Pages: 17

Firm Valuation

...Financial report issues and analysis 09/18/2013 Valuation of the Walt Disney Company The Walt Disney Company is an American media and entertainment Company and also the largest media conglomerate in the world. Disney was established by Walt and Roy Disney in 1923 as the Disney Brothers Carton Studio in the early stage and become a leader in the American animation industry before they diversified their business into live-action file production, television and travel. In 1986, Disney expanded their business into theater, radio, music, publishing and online media. Nowadays, Disney owns and operates in media networks, parks and resorts, studio entertainment, consumer products and interactive media in the worldwide. They created many well-known Disney cartoon characters on their movies, such as Mickey Mouse and Donald Duck. Disney Empire was not built in one day, the Disney was very successful at turning fantasies into reality. They created the dreamer, the realist and the critic in their movies, they made the movie humorous and light-hearted. They’re targeting in children, teenagers and family-oriented parents, meanwhile, their audience are customers and movies are the best advertising for their cartoon character’s product. Disney expended their business into worldwide, they opened Disney Stores around the world, as well as amusement parks and resorts. In order to have Disney products available worldwide,......

Words: 603 - Pages: 3

Valuation

...Valuation Valuation is the process and procedures used to determine the current worth of a company. Valuation is used in deciding if a company is worth investing in , what price you should pay when buying a company and even financial and dividend choices when running a company . Some elements of a valuation are Economic conditions, financial analysis, and financial statements. When a financial analysts need to value a business, they often start by identifying a sample of similar firms. (Brealey, Myers, & Marcus, 2012). They then examine how much investors in these companies are prepared to pay for each dollar of assets or earnings. (Brealey, Myers, & Marcus, 2012). Valuation determines a company’s value by using internal and external factors whereas when determining a company’s value and using financial income statement it uses internal factors only. Valuation also is a company’s market value and income statement is the book value. The definition of a stakeholder is a person, group, organization, or system that affects or can be affected by an organization's actions. The main stakeholders of a company are the employees, suppliers, investors, and customers. The Executives major goal is to create the most value for all stakeholders. This is a difficult goal. Executives know that long term value is what is best for their stakeholders especially with the economy the way it is today. However, corporate leaders are under great......

Words: 363 - Pages: 2

Valuation

...supercenters, hypermarkets, warehouse clubs, apparel stores, Sam’s Clubs, neighborhood markets, and other small formats, as well as walmart.com; and samsclub.com. Wal-Mart’s main strategy is to provide customers with everyday low prices. It is known for its discount stores. Wal-Mart’s competitors are Sears, Target, Gap, limited, Dillard’s, Macy’s and JC Penny. The major membership only warehouse competitor is Costco Wholsale. Wal-Mart became a publicly traded firm in 1970 with an initial stock price of $16.50 per share and subsequently, in March 1974, declared its first cash dividend of $0.05 per share (after two two-for-one stock splits). It had undergone 11 two-for-one stock splits, and thus, an original lot of 100 Wal-Mart shares had grown to 204,800 shares after the most recent split in April 1999. For this valuation we will be using the dividend discount model, the capital asset pricing model (CAPM) and price/earnings multiples. Dividend Discount Model (DDM) In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Dividends are the cleanest and most straightforward measure of cash flow because these are clearly cash flows that go directly to the investor. [pic] I. Dividends in Perpetuity The current stock price of Wal-Mart using this method is the present value of all expected future dividends, discounted at an investor’s required rate of return. A......

Words: 1158 - Pages: 5

Valuations

...Valuation Assumptions The models used to value the target firm SkyWest will include: I. Residual Earnings Model (REM) II. Abnormal Growth Model (AGM) III. Dividend Discount Model ((DDM) IV. Discounted Cash Flow Model (DCF) V. Method of Comparables These models have been based on some fundamental assumptions. These assumptions can be found in Appendix 1.1. I. Residual Earning Model The REM splits the intrinsic value of a company into two components; the book value and the present value of the future residual earnings. The discount rate used for future earning was the Cost of Equity found in Appendix 1.1. Through obtaining the earnings per share (EPS), book value per share (BPS) and dividends per share (DPS) from Bloomberg, it is possible to estimate the value of SkyWest. A growth rate of 2.6% (2012 financial statement) was applied. The value per a share shown in Appendix 1.2 is approximately 94 cents. II. Abnormal Growth Model The RE model anchors book value whereas, the AEG model anchors earnings. In applying the model the value per a share is equal to the capitalised earning plus the extra forecasted earning and applying a growth rate of 2.6% for the CV. In Appendix 1.3 the value per a share is $9.86. However, there seems to be a problem with the CV, through excluding the CV the value per a share is equal to approximately 33cents (0.02076/0.0636). Theoretically, the AEG and RE models should give the same valuations, but due to imperfections, the two......

Words: 499 - Pages: 2

Valuation

...VALUATION TECHNIQUES Vault Guide to Finance Interviews Valuation Techniques How Much is it Worth? Imagine yourself as the CEO of a publicly traded company that makes widgets. You’ve had a highly successful business so far and want to sell the company to anyone interested in buying it. How do you know how much to sell it for? Likewise, consider the Bank of America acquisition of Fleet. How did B of A decide how much it should pay to buy Fleet? For starters, you should understand that the value of a company is equal to the value of its assets, and that Value of Assets = Debt + Equity or Assets = D + E If I buy a company, I buy its stock (equity) and assume its debt (bonds and loans). Buying a company’s equity means that I actually gain ownership of the company – if I buy 50 percent of a company’s equity, I own 50 percent of the company. Assuming a company’s debt means that I promise to pay the company’s lenders the amount owed by the previous owner. The value of debt is easy to calculate: the market value of debt is equal to the book value of debt. (Unless the debt trades and thus has a real “market value.” This information, however, is hard to come by, so it is safe to use the book value.) Figuring out the market value of equity is trickier, and that’s where valuation techniques come into play. The four most commonly used techniques are: 1. 2. 3. 4. Discounted cash flow (DCF) analysis Multiples method Market valuation Comparable transactions method Generally, before...

Words: 11224 - Pages: 45

Valuation

...Aswath Damodaran 1 VALUATION   Cynic:  A  person  who  knows  the  price  of  everything  but  the  value  of  nothing..   Oscar  Wilde   First  Principles   2 Maximize the value of the business (firm) The Investment Decision Invest in assets that earn a return greater than the minimum acceptable hurdle rate The Financing Decision Find the right kind of debt for your firm and the right mix of debt and equity to fund your operations The Dividend Decision If you cannot find investments that make your minimum acceptable rate, return the cash to owners of your business The hurdle rate should reflect the riskiness of the investment and the mix of debt and equity used to fund it. The return should reflect the magnitude and the timing of the cashflows as welll as all side effects. The optimal mix of debt and equity maximizes firm value The right kind of debt matches the tenor of your assets How much cash you can return depends upon current & potential investment opportunities How you choose to return cash to the owners will depend on whether they prefer dividends or buybacks Aswath Damodaran 2 Three  approaches  to  valuaEon   3 ¨  ¨  ¨  Intrinsic  valuaEon:  The  value  of  an  asset  is  a  funcEon  of   its  fundamentals  –  cash  flows,  growth  and  risk.  In   general, ...

Words: 7160 - Pages: 29

Valuation

...of quality cement in Bangladesh. As per the course requirement we are told to conduct the fundamental analysis of Lafarge Surma Cement Limited. The company is a listed company and its shares are traded in the capital market. We have collected the annual reports of last couple of years and from the data we have prepared the proforma income statement, free cash flow and then ultimately the valuation of the company’s share. We have shown the market strategy of the company. They prefer differentiation that is high price for high quality. The industry life cycle indicates that Cement industry is in its growth stage. We have shown the competitive forces along with Michael Porter’s five force model. Competitive advantage and disadvantages are described there. Then the ratio analysis gives us the performance of the company. Then the prospective analysis gives us the intrinsic value of the company’s share, which is 16.79 Tk. whereas on 31 December, 2012 the market price was around 32 Tk. We have confirmed our valuation with the help of Sensitivity, Scenario and Simulation analysis. After the valuation we have found that the share is priced higher than the intrinsic value. That means the share is Overpriced. Holders of the share should sell the share or should take a short position of Lafarge surma’s’s share. Analysis of the performance of the company through ratio analysis on four dimensions against benchmark, peer and industry as well as over time has been done. Determining......

Words: 8111 - Pages: 33

Valuation

..., a private equity firm, to discuss options for the proposal. After much debating, the best option seemed to fall into two stages, “a leveraged buyout of Seagate’s disk drive operations, followed by the taxfree acquisition of Seagate’s remaining assets by VERTIAS Software Corporation” (Case 1). In the following paper, we will show the calculations that helped us arrive at our conclusions of: • • • • Selling Seagate’s disk drive operations to Silver Lake through a LBO Establishing a LBO price of $2.4 billion Performing a tax-free stock swap with VERITAS Arriving at a capital structure consisting of 40 percent debt and 60 percent equity Since this was a “pioneering transaction in the emerging area of technology buyouts,” we did not have past cases to examine and compare previous decisions and so all our decisions are based off of our knowledge and extensive research of all the topics presented (Case 2). Objectives Throughout the paper, we will comment on the presenting team’s paper content and figures. Also, we will show why the presenting team’s calculations and paper content lacked some very important issues brought up in the case, such as, shareholder concerns and the proper way to calculate the price for the leveraged buyout (LBO). Some of the main differences between their case and ours are: • How to calculate the price for the LBO o They chose to use EBITDA o After reading various articles on LBOs we feel net present value (NPV) is a better valuation......

Words: 8426 - Pages: 34

Valuation

...TAKEOVERS When analyzing investment decisions, we did not consider in any detail the largest investment decisions that most firms make, i.e., their acquisitions of other firms. Boeing’s largest investment of the last decade was not a new commercial aircraft but its acquisition of McDonnell Douglas in 1996. At the time of the acquisition, Boeing's managers were optimistic about the merger, claiming that it would create substantial value for the stockholders of both firms. What are the principles that govern acquisitions? Should they be judged differently from other investments? Firms are acquired for a number of reasons. In the 1960s and 1970s, firms such as Gulf and Western and ITT built themselves into conglomerates by acquiring firms in other lines of business. In the 1980s, corporate giants like Time, Beatrice and RJR Nabisco were acquired by other firms, their own management or wealthy raiders, who saw potential value in restructuring or breaking up these firms. In the 1990s, we saw a wave of consolidation in the media business as telecommunications firms acquired entertainment firms, and entertainment firms acquired cable businesses. Through time, firms have also acquired or merged with other firms to gain the benefits of synergy, in the form of either higher growth, as in the Disney acquisition of Capital Cities, or lower costs. Acquisitions seem to offer firms a short cut to their strategic objectives, but the process has its costs. In this chapter, we examine the four......

Words: 21338 - Pages: 86

Valuation

... do you think the acquisition is a good idea? Briefly explain your answer. Yes. First, American Cable Communication (ACC) and AirThread could help each other compete in the industry that was moving more and more bundled service offerings. Second, the acquisition could help both companies expand into the business market. Third, ACC was in a unique position to add value to AirThread’s operations because the acquisition could save AirThread more than 20% in backhaul costs. The reasons above make us believe that the synergy is positive and the acquisition is a good idea. Based on the projected cash flow information provided in the case, what is the stand- alone value of AirThread? Show the cash flow forecasts, discount rate, and your valuation model. 
(Hint: pay attention to the Working Capital Assumptions provided in Ex 1. For example, Accounts Receivable 41.67× means on average it takes 41.67 days to receive payment from customers. ) According to Jennifer Zhang’s analysis, we divide the stand-alone value of AirThread into two parts—operating value and non-operating value-- and then add the two parts together to get the result. First, when we calculate the operating value, we use the DCF model. We pick the risk-free rate from historical annual returns investments on T-bonds from 1928 to 2007 and use the geometric average, which is 5.4%, and collect the 5% equity market risk premium from the casebook. We assume the equity β as the average equity β of the industry, which is...

Words: 1388 - Pages: 6

Valuation

...value to California Pizza from a cost of capital perspective. Return on Equity The Return on Equity is rising as the firm takes on more debt, becoming more leveraged. This is true as interest payments to creditors are tax deductible and therefore the company is able to generate a higher return on fewer shares outstanding because of the repurchase. The result is that a higher proportion of debt in the firm's capital structure leads to higher ROE as earnings are spread over a reduced amount of equity. Share Price | VL=VU+T*D VL=VU+T*D PV=PMTr PV=PMTr NPV=D+PV NPV=D+PV  Share Price=EquityShares Outsanding  Share Price=EquityShares Outsanding   | |   |   |   |   |   |   |   |   |   |   |   | | | | | 0% Debt | Share Price = E/CSO | Share Price = 643 773 000/29 130 000 | Share Price = 22.10$ | | 10% Debt | Share Price = E/CSO | Share Price = 628 516 000/28 108 000 | Share Price = 22.36$ | | 20% Debt | Share Price = E/CSO | Share Price = 613 259 000/27 086 000 | Share Price = 22.64$ | | 30% Debt | Share Price = E/CSO | Share Price = 598 002 000/26 064 000 | Share Price = 22.94$ | The share price of the firm’s stock rises as it increases its debt. Share price being determined by the Total Market Value of Equity divided by the current number of shares outstanding. As the firm increases its leverage, it buys back shares, as well as reduces its equity. The rate that equity decreases is......

Words: 1638 - Pages: 7

Valuation of Equities and Firms

...VALUATION Outline Page Valuation overview 1 DCF valuation 7 47 Comparable transactions analysis 59 LBO analysis 68 Appendix VALUATI O N Comparable companies analysis 74 VAIDYA NATHAN 1 Overview “Price is what you pay. Value is what you get” VALUATI O N O V E R VI EW Value ! Price Do not confuse Price and Value. They are not the same If the Price paid is less than the Value derived, it’s a good investment VAIDYA NATHAN 2 Overview Why valuation is important? Divestitures Acquisitions How much should we pay to buy the company? How much should we sell our company/division for? Fairness opinions Research Is the price offered for our company/division fair (from a financial point of view)? Should our clients buy, sell or hold positions in a given security? Valuation Public equity offerings Hostile defense For how much should we sell our company/division in the public market? Is our company undervalued/vulnerable to a raider VALUATI O N O V E R VI EW Debt offerings New business presentations Various applications What is the underlying value of the business/assets against which debt is being issued? VAIDYA NATHAN 3 Overview The valuation process Determining a final valuation recommendation is a process of triangulation using insight from each of the relevant valuation methodologies (1) Discounted Cash Flow VALUATI O......

Words: 11608 - Pages: 47

Valuation

...Valuation M&A involves using more than one valuation technique to arrive at a valuation that we think is fair. The most common techniques used are: ➢ Comparable Publicly traded companies (“Public Comps”) – this analysis indicates how the stock markets are valuing companies that are similar to the target ➢ Precedent Comparable Transaction analysis (“Transaction Comps”) – this analysis indicates the valuations at which prior M&A transactions have been done in the same industry as that of the target. ➢ DCF analysis – is one of the most important valuation techniques ➢ Sum-of-the-parts analysis – If a target has more than one lines of business, the financial advisor will value each business separately. Therefore, each “part” might have its own Public Comps, Transaction comps and DCF (with different WACCs for each part). The total value is the sum of the parts ➢ Other –depending on the unique characteristics of the transaction, financial advisors will perform a number of other analyses to arrive at fair value like Leveraged Buyout (“LBO”) Analysis, Historical Exchange Ration analyses etc. Valuation M&A involves using more than one valuation technique to arrive at a valuation that we think is fair. The most common techniques used are: ➢ Comparable Publicly traded companies (“Public Comps”) – this analysis indicates how the stock markets are valuing companies that are similar to the target ➢ Precedent Comparable Transaction analysis......

Words: 343 - Pages: 2

Firm Valuation and Optimal Capital Structure

...FI-516 – WEEK 2 – MINI – CASE ASSIGNMENT (This should be posted in Document Sharing) Select a major industrial or commercial company based in the United States, and listed on one of the major stock exchanges in the United States. Each student should select a different company. Avoid selecting an insurance company or a bank, as the financial ratios for these financial businesses are different. Write a 7 – 8 page double spaced paper answering and demonstrating with calculations and financial data the following questions: 1. What is the name of the company? What is the industry sector? 2. What are the operating risks of the company? 3. What is the financial risk of the company (the debt to total capitalization ratio)? 4. Does the company have any preferred stock? 5. What is the capital structure of the company?: Short term portion of Long Term Debt, Long Term Debt, Preferred Stock (if any), and market value of Common Stock issued and outstanding? 6. What is the company’s current actual Beta? 7. What would the Beta of this company be if it had no Long Term Debt in its capital structure? (Apply the Hamada Formula.) 8. What is the company’s current Marginal Tax Rate? 9. What is the Cost of Debt, before and after taxes? 10. What is the Cost of Preferred Stock (if any)? 11. What is the Cost of Equity? 12. What is the cash dividend yield on the Common Stock? 13. What is the Weighted Average Cost of Capital of the company...

Words: 1858 - Pages: 8