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Valuation Primer

Valuation and Introduction to Financial Analysis

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Valuation is one of the major responsibilities of an investment banker. It is crucial to know how much a company is worth BEFORE an M&A or IPO transaction or debt offering. Each valuation method yields a range of values. Though there are many ways to value a company, we will focus on the most common methods asked in interviews:

Discounted Cash Flow (DCF)
Leveraged Buyout (LBO)
Comparable Companies
Precedent Transactions

Discounted Cash Flow (DCF)
A DCF valuation is referred to as the intrinsic value of a company, because it is based on the cash flows of the company and is not market-based. Sometimes synergies are incorporated into the analysis, typically resulting in a higher value than the LBO analysis and, sometimes, comparable companies analysis.

Leveraged Buyout (LBO)
An LBO valuation yields the value a financial buyer (private equity firm) would pay for the firm, given their high required rates of return (25% IRR or more) and capital structure. Given that and the fact that the analysis does not incorporate any synergies, the LBO valuation typically yields the lowest valuation range.

Comparable Companies
Also called public comps, this analysis yields a valuation range based on where similar public companies are trading.

Precedent Transactions
Also called M&A comps, this analysis yields a valuation range based on what similar companies were bought and sold for. Because it includes a control premium, it tends to be on the higher end of the valuation range.

Typical Valuation Ranges (Football Field)
Amounts in $Millions

Equity vs. Enterprise Value
Equity Value: Value of the firm to shareholders
Enterprise Value: When you buy a company, you also assume its debt. Enterprise value is the total cost of buying a company and includes net debt, minority interest and preferred stock.
Net debt: Total Interest Bearing Debt minus Cash

Uses of Valuation:

  • Mergers & Acquisition
  • Buy-side: To determine how much to pay for a target company
  • Sell-side: To determine the price at which to sell the company
  • Divestitures: To determine the price at which to sell a division of the company
  • Debt Offering
  • Equity Offerings – (e.g. IPO’s, follow-ons)
  • Equity Research – In the case of a public company, valuation helps determine stock valuation