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Banking Essentials - Part I

This pathway will walk us through the basics of banks, starting with some of the different types and their main functions, then starting to look at the regulation faced by the banks, both before and after the Global Financial Crisis.

Greenwashing

Greenwashing is the act of distributing false information about something being more environmentally friendly than it actually is.

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Tackling the Cost of Living Crisis

In this video, Max discusses the cost-of-living crisis currently enveloping the UK. He examines its impact on households as well as the overall economy.

CSR and Sustainability in Financial Services

In the first video of this two-part video series, Elisa introduces us to sustainability. She begins by looking at the difference between sustainability and corporate social responsibility, two terms that can be easily confused.

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Mergers & Acquisitions (M&A) Valuation Methodologies I

Mergers & Acquisitions (M&A) Valuation Methodologies I

Josephine Tan

20 years: M&A

Valuations are undertaken to determine how much an asset or a company is worth either today or in the future. Jo explains how to approach these valuations and the key metrics typically used to assess a company’s value.

Valuations are undertaken to determine how much an asset or a company is worth either today or in the future. Jo explains how to approach these valuations and the key metrics typically used to assess a company’s value.

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Mergers & Acquisitions (M&A) Valuation Methodologies I

10 mins 35 secs

Key learning objectives:

  • Explain the ‘market valuations’ methodology and which companies it is best suited to

  • Explain the ‘comparable company trading multiples’ method, its applications, pros and cons?

  • Define valuations

Overview:

Valuations are undertaken to determine how much an asset or company is worth and are conducted for a number of purposes: acquisitions, sales (including IPOs), joint ventures, liquidations, for taxation and financial reporting. Knowing the valuation’s purpose, whose perspective it is being conducted from and its premise (e.g. is the company a going concern, is it for liquidation or fire sale) is key. Introducing the ‘market valuations’ and ‘comparable company trading multiples’ valuation methods.

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Summary

What are valuations used for and how to approach them?

Valuations are conducted for a number of purposes, including:
  • Acquisitions
  • Company sales (including IPOs)
  • Joint ventures
  • Liquidations
  • Taxation and financial reporting purposes

Explain the ‘market valuations’ methodology and which companies it is best suited to

The market valuations method is relevant for valuing companies listed on a stock exchange; it reflects the value determined between willing buyers and sellers of shares. It is important to distinguish between Equity Value (i.e. the value of the shares of the company, often known as Market Capitalisation) and Enterprise Value (EV) i.e. the total value of the company taking into account equity and debt. Typical metrics used for market valuation are:
  • The current share price – EV calculated using the last closing share price
  • The 52-week trading range – EV calculated using the lowest/highest share price over 52 weeks
  • The 3, 6 and 12-month volume average weighted price (VWAP) – the EV calculated from the average share price over a chosen period weighted by the daily trading volume over that period.
  • The range of price targets published by analysts – EV calculated from a range of price targets

Explain the ‘comparable company trading multiples’ method, its applications, pros and cons?

The comparable company trading multiples method values companies using key metrics or multiples of comparable companies. The first step is establishing the peer group: similar-sized companies in the same sector in similar geographies with similar products, services, customers and markets. The next step is determining the metric or multiple to use, usually applying a valuation metric (e.g. market cap or EV) to a financial performance metric. The most common financial multiples used include:
  • EV/EBITDA – enterprise value divided by earnings before EBITDA
  • P/E –market capitalisation or equity value divided by net income
  • EV/sales – enterprise value divided by sales (used where companies do not generate any profit)
With the chosen multiple calculated for the selected peer group, a judgement can be made as to the appropriate multiple range to apply to a company’s financial metrics to arrive at a valuation range. Pros:
  • Easy to calculate
  • Data is usually widely available
  • Trading comps should provide a reasonable valuation range
Cons
  • Can be influenced by temporary market conditions rather than fundamentals
  • It is not useful when there are few or no comparable companies
  • It is not useful if comps are thinly traded

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Josephine Tan

Josephine Tan

Josephine has spent the last 20 years working in corporate finance in a number of different roles – as an investment banker, corporate adviser, private equity investor and in publicly listed companies. More recently, Josephine has been leading the corporate finance function of a publicly listed mining company.

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