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Valuation Methods in
Fairness Opinions
Gilbert E. Matthews, CFA
Organismo Italiano di Valutazione
4th Annual International Conference
30 November 2015
SUTTER SECURITIES GIL@SUTTERSF.COM
1 -415-352-6336
2
SUTTER SECURITIES
INTRODUCTION
This presentation will discuss valuation methods used in
U.S. fairness opinions, as disclosed in publicly available
documents filed with the S.E.C.
It is based on our initial published study of fairness opinions
in cash transactions and our study in progress of fairness
opinions in stock-for stock mergers
I will also critique some of the methods and analyses that
were used
3
SUTTER SECURITIES
THE STUDY OF CASH TRANSACTIONS
We reviewed valuation methods used in 352 fairness opinions in
315 U.S. cash transactions *
We searched the SEC's EDGAR database for fairness opinions
rendered in all-cash acquisitions of U.S. companies during two
12-month periods (Sept. 2007 – Aug. 2008 and Sept. 2010 – Aug. 2011)
Transactions in which any portion of the consideration was
contingent were excluded
294 of the opinions were in 271 arms’-length transactions
58 opinions were in 44 related party transactions, which we
assessed for possible differences in valuation approaches
____________________________________________
* In 36 transactions, there was more than one opinion.
4
SUTTER SECURITIES
DATA REVIEWED
Each fairness opinion description was reviewed to obtain the
following information:
•Name of target company •Methodologies applied *
•Industry of target company •Discount rates used in DCF calculations
•Date of filed document •Whether WACC was expressly used
•Fairness opinion provider •Terminal values:
•Fairness opinion date oBased on growth rate or multiple?
•Nature of transaction oWhat growth rate or multiple was used?
oRelated party? oData point to which growth rate or
multiple was applied
oChange of control?
•Transaction price •Data points used for guideline company
and guideline transaction calculations•Shares outstanding
____________________________________________________________
* If a method was described as used “for informational purposes only,”
it was not counted as a method applied by the opinion provider.
5
SUTTER SECURITIES
VALUATION METHODS USED
As would be expected, the dominant methods were DCF and
the market approach (guideline companies and guideline
transactions) [see Table 1]
99% of the opinions relied on more than one
method
[see Table 2]
•Three opinions for financially troubled companies used only a
liquidation analysis
6
SUTTER SECURITIES
TABLE 1: PRINCIPAL VALUATION METHODS
USED IN FAIRNESS OPINIONS IN CASH TRANSACTIONS
Valuation Method Used Opinions Percent
Discounted cash flow (DCF) 307 87.2%
Discounted dividend model (DDM) (a) 15 4.3%
Income approach 321 (b) 91.2%
Guideline companies 330 93.8%
Guideline transactions 312 88.6%
Market approach 337 (c) 96.0%
Premiums paid in other transactions 167 48.3% (d)
Total number of opinions 352
(a) Because DDM is a variant of DCF, DDM numbers are combined with DCF numbers in other
Tables except in Tables 10 and 11.
(b) 1 opinion used both DCF and DDM.
(c) Most opinions used both methods.
(d) 8 opinions were for entities whose shares were not traded or did not have an active market.
7
SUTTER SECURITIES
TABLE 2: COMBINATIONS OF PRIMARY VALUATION METHODS
USED IN FAIRNESS OPINIONS IN CASH TRANSACTIONS
Primary Valuation Methods Used Opinions Percent
DCF, guideline companies and guideline transactions 281 79.8%
DCF and guideline companies, but not guideline transactions 22 6.3%
DCF & guideline transactions, but not guideline companies 7 2.0%
Guideline companies and transactions, but not DCF 23 6.5%
DCF only 11 3.1%
Guideline companies only 4 1.1%
Guideline transactions only 1 0.3%
None of the three primary methods 3 0.9%
Total 352
8
SUTTER SECURITIES
The following points will be addressed ahead:
Almost half the fairness opinions employed the questionable
“premiums paid” method
Supplemental approaches such as a leveraged buyout model
and asset value were applied in 40% of the opinions
In going-private transactions, guideline transactions were used
less frequently than in other transactions and premiums paid
were used more often
COMMENTS ON
VALUATION METHODS USED
9
SUTTER SECURITIES
WHEN WAS DCF NOT USED?
DCF was used whenever there were adequate management projections
DCF was used in the 307 opinions with management projections for
three or more years *
There were 45 opinions with no management projections or with
projections for only one or two years
In 13 opinions, DCF calculations were performed with projections
extrapolated by the valuator
In 12 opinions, the proxy statement explicitly stated that DCF was not used
because adequate projections were unavailable
In the other 20 opinions, the proxy statement lacked any management
projections and, most likely, no adequate projections existed
_________________________________________________
*
Statistics for DCF include the discounted dividend model (DDM), which was
used primarily for financial institutions.
10
SUTTER SECURITIES
WHEN WAS THE MARKET APPROACH
NOT USED ATALL?
Only 14 (4%) of the 352 opinions did not use either form of
the market approach
The market approach was not applicable in 6 of these
omissions
•3 biotech companies were valued based on present value of
future royalties
•3 troubled companies were valued at asset or liquidation
value
The other 8 omissions were unexplained
11
SUTTER SECURITIES
WHEN WAS ONLY ONE OF THE MARKET
METHODS USED? (1)
34 (10%) of the opinions used only one of the two market
methods
26 used guideline companies but not guideline transactions
8 used guideline transactions but not guideline companies
11 of these 34 opinions appropriately explained why the
omitted method was not applied, e.g., no applicable
guideline transactions
12
SUTTER SECURITIES
WHEN WAS ONLY ONE OF THE MARKET
METHODS USED? (2)
23 of the 34 opinions provided no explanation
The omission of a second market method appears to have been
unjustified in 8 of these opinions
In 6 transactions where two different firms rendered opinions, one
firm omitted guideline companies and/or guideline transactions,
yet the other used both methods
In 4 of these opinions (including 2 of the above), industry
transactions were clearly available – they were used for premiums
paid but not used for a guideline transaction analysis
15 others were not explained; the omission seems questionable
in many of these because adequate data appears to have been
available
13
SUTTER SECURITIES
WHEN WERE “PREMIUMS PAID” USED
The “premiums paid” method compares the premium over market
price in the subject transaction with average premiums over market
paid for public companies in other transactions, often in unrelated
industries
A
majority of the major investment banks, as well as Houlihan Lokey
(a leader in fairness opinions), seldom or never employed the
premiums paid method, apparently recognizing the method’s flaws
Firms that issued eight or more opinions (other than Goldman and
Morgan Stanley) collectively used premiums paid in only 16% of their
opinions
14
SUTTER SECURITIES
MOST MAJOR FIRMS USED “PREMIUMS PAID”
LESS THAN SMALL FIRMS
In contrast to other major firms, Goldman Sachs and Morgan Stanley
applied the premiums paid method in 60% and 73%, respectively, of
their opinions
The data showed no correlation between their use of the method and
the premium in the subject transaction, indicating that their use of the
method was not selective
Firms issuing less than four fairness opinions (mostly small firms)
used the method in 69% of their opinions
15
SUTTER SECURITIES
WHY THE “PREMIUMS PAID” METHOD
ISFLAWED
The data underlying the premiums paid method is comprised of
companies that the buyer deemed to be undervalued in the
market and for which the buyer was willing to pay a premium
This universe by definition excludes the great majority of
companies that buyers consider fairly priced or overvalued and
thus unattractive as acquisition targets
Thus, the data has a substantial built-in upward bias
An acquiror determines a company’s value and generally bids no
more than that amount; it does not first select a premium and
apply that premium to a target's fluctuating market price
A premium is the result, not the cause, of a bid
16
SUTTER SECURITIES
SUPPLEMENTAL VALUATION APPROACHES
USED IN FAIRNESS OPINIONS
Approaches in addition to the primary methods and the
premiums paid method were used in 40% of the fairness
opinions [see Table 3]
Two or more such approaches were used in 11% of the
opinions
Asset or liquidation value was used in only 6% of the
opinions, primarily for troubled companies
oThis figure does not include opinions that used multiples of book
value in guideline company and guideline transaction analyses, a
common method for valuing financial institutions
17
SUTTER SECURITIES
TABLE 3: SUPPLEMENTAL VALUATION METHODS
USED IN FAIRNESS OPINIONS IN CASH TRANSACTIONS
Supplemental Method Used: Number Percent
Present value of projected future price 64 18.2%
Target prices of security analysts 43 12.3%
Leveraged buyout model 48 12.6%
Value available in recapitalization 51.4%
Asset or liquidation value 22 6.3%
Regression model 82.3%
Rule of thumb (value per ton of steel) 10.3%
Premium over corporate repurchases 10.3%
Note: Some opinions used more than one supplemental approach.
18
SUTTER SECURITIES
“SIGNATURE APPROACHES”
Some firms utilized “signature approaches,” i.e., supplemental
approaches used in a majority of their fairness opinions
“Present value of future stock price”:
oGoldman Sachs – 85% of its opinions
oMorgan Stanley – 53%
oall others collectively – 7%
Transaction price compared to analysts' target prices:
oThree firms collectively – 62%
oall others collectively – 7%
LBO analyses:
oThree firms collectively – 72%
oall others collectively – 11%
19
SUTTER SECURITIES
RELATED PARTY TRANSACTIONS
VS. ARMS'-LENGTH TRANSACTIONS
The methods used in fairness opinions for related party
transactions were generally the same as for arms’-length
transactions [see Table 4]
Related party transactions include transactions in which:
•the minority shareholders are bought out by the principal
shareholder[s] and there is no change of control, or
•a third party, such as a private equity firm, acquires control and
the principal shareholders and/or management have interests
adverse to other shareholders because they would receive
consideration that would be different in whole or in part
20
SUTTER SECURITIES
TABLE 4: METHODS USED INARMS’-LENGTH
VS. RELATED PARTY CASH TRANSACTIONS
Related Party Arms'-length
Total number of opinions 58 294
Discounted cash flow 89.7% 86.7%
Discounted dividend model 1.7% 4.8%
Income approach 91.4% 91.2%
Guideline companies 93.0% 93.9%
Guideline transactions 77.2% 90.8%
Market approach 93.0% 96.6%
Asset or liquidation value 15.5% 4.8%
Regression model 0.0% 2.7%
Asset approach 15.5% 7.5%
Premiums paid 52.6% 47.9%
21
SUTTER SECURITIES
GOING-PRIVATE TRANSACTIONS VS.
OTHER RELATED PARTY TRANSACTIONS
However, there were 4 notable differences in related party
transactions with no change of control (going-private transactions)
[see Table 5]
3 of the 4 differences in the going-private transactions can be
explained
The premiums paid method was used much more often –
smaller firms (which were more likely to use this flawed method) gave
many of the opinions in this category
DCF was used less often – many of the companies lacked projections
The asset approach was used somewhat more often – an anomaly
reflecting the nature of some of the companies
22
SUTTER SECURITIES
TABLE 5: METHODS USED IN RELATED PARTY TRANSACTIONS
WITHOUT AND WITH CHANGE OF CONTROL
No Change of Control Change of Control
Total number of opinions 30 28
Income approach 83.3% 100.0%
Guideline companies 93.3% 92.9%
Guideline transactions 66.7% 89.3%
Market approach 93.3% 96.4%
Asset approach 20.0% 10.7%
Premiums paid 69.0% 35.7%
23
SUTTER SECURITIES
GUIDELINE TRANSACTIONS ARE RELEVANT
IN GOING-PRIVATE TRANSACTIONS
The fourth difference is that guideline transactions were used less often –
improperly
Only one proxy statement for a going-private transaction stated why
guideline transactions were not used, but the reasoning was unsupported:
“[A]n analysis of multiples paid in change of control transactions . . . [was] considered not
relevant by Lehman Brothers and Morgan Stanley as the transaction being considered by the
special committee did not involve a sale by the Dolan Family Continuing Investors of their
interest in Cablevision.” [Cablevision Systems proxy statement, 14/9/07, p. 29
The bankers’ explanation – their view that multiples of guideline transactions
are inapplicable to a transaction with no change of control – contrasts with the
fact that most other firms consider guideline transactions in going-private
opinions [see Table 5]
Minority shareholders in a squeeze-out are entitled to a pro rata share of
equity value
24
SUTTER SECURITIES
DISCOUNT RATES USED IN
313 DCF ANALYSES
We reviewed the discount rates used in each of 313
fairness opinions that used the income approach and
disclosed the discount rate used
As would be expected, discount rates declined as the size of
the company increased [see Table 6]
Tables 6 though 14 are in the Appendix to this presentation
25
SUTTER SECURITIES
WACC USED IN MOST DCF ANALYSES
187 opinions explicitly used WACC [see Table 7]
Only 12 opinions expressly disclaimed the use of WACC
1 used the build-up method
11 arbitrarily selected a discount rate, asserting that their
selection was “appropriate” or was based on the “judgment,”
“experience” or “expertise” of the investment bank rendering
the opinion
121 opinions did not explicitly discuss how the discount rate
was determined; however, some of these may have utilized
WACC without specific disclosure
26
SUTTER SECURITIES
WIDE RANGES OF DISCOUNT RATES
Although WACC was widely used, most of the discount rates
had wide ranges [see Table 7]
In 73% of the opinions, the high end of the range of discount
rates was at least 2% above the low end (e.g., 10% – 12%)
In 26%, the difference was 4% or more
27
SUTTER SECURITIES
WIDE RANGES OF DISCOUNT RATES
RESULT IN WIDE RANGES OF VALUE
Wide ranges of discount rates necessarily result in wide
valuation ranges
As an example, assuming 3% growth, DCF value calculated
with a 10% discount rate is about 50% higher than the DCF
with a 14% discount rate
Moreover, there is a lack of precision in the discount rates,
illustrated by the fact that the high and low discount rates in
most opinions were rounded to an integer, and most of the
others were rounded to a number ending in .5
28
SUTTER SECURITIES
TERMINAL VALUE:
GROWTH RATE OR MULTIPLE?
We looked at the approaches used to determine terminal value
41% used growth rates; 65% used multiples [see Table 8]
•6% used both growth rates and multiples
When a growth rate was used, it was always applied to free cash
flow (except for financial institutions) [see Table 9]
•58% of opinions used growth rates of 2%-3%, 13% used lower growth
rates and 29% user higher growth rates [see Table 10]
When a multiple was used, it was almost always applied to EBITDA
(except for financial institutions) [see Table 11]
•EBITDA multiples used varied materially depending on the industry,
but a majority were in the area of 8x [see Table 12]
29
SUTTER SECURITIES
TERMINAL VALUE MULTIPLES AFFECTED
BY MARKET CONDITIONS
Inputs used to calculate terminal value were affected by
market conditions
Growth rates selected in the 2010-11 period were materially
lower than in 2007-08
•The median growth rate fell 17% from 3.0% to 2.5%
•The arithmetic mean fell 26% from 3.4% to 2.5%
Average EBITDA multiples chosen in the 2010-11 period were
lower than in the 2007-08 period
•The median multiple fell 6% from 8.0x to 7.5x
•The harmonic mean fell 10% from 7.9x to 7.1x
30
SUTTER SECURITIES
WIDE RANGES OF INPUTS INTO
TERMINAL VALUE
Many fairness opinions used excessively wide ranges of
growth rates or multiples in calculating terminal value
The high end range of growth rates used for terminal values was
at least 2% more than the low in more than half of the opinions
[see Table 13]
The high end range of EBITDA multiples used for terminal values
was 25% or more above the low in about half of the
opinions
[see Table 14]
31
SUTTER SECURITIES
WIDE RANGES OF GROWTH RATES
RESULT IN WIDE RANGES OF VALUES
A 4% growth rate results in a terminal value 20% higher
than a 2% growth rate at a 15% discount rate
The effect is exacerbated at lower discount rates – a 4%
growth rate results in a terminal value 36% higher than a
2% growth rate at a 10% discount rate
32
SUTTER SECURITIES
RANGES OF EBITDA MULTIPLES
A terminal value using an 8x EBITDA multiple is 33%
higher than using a 6x EBITDA multiple
The high and low EBITDA multiples in most opinions were
rounded to an integer or to a number ending in .5, but the
resulting valuations are incongruously more precise
33
SUTTER SECURITIES
LEVERAGE WIDENS
THE VALUATION RANGES
When a company is leveraged, the valuation range
necessarily widens at the equity level
For example, if the enterprise value is $85 million to $115
million – a 35% difference – and the company has net debt
of $50 million, the equity valuation is $35 million to $65
million – an 85% difference
34
SUTTER SECURITIES
WIDE RANGES OF VALUE AFFECT
CREDIBILITY OF OPINIONS
When valuation ranges used in fairness opinions are wide,
they are of limited utility in assessing fairness
The credibility of fairness opinions is deleteriously affected by
wide valuation ranges
If the price offered to shareholders is near the low end of a
wide range, how can that data point be an indicium of
fairness?
35
SUTTER SECURITIES
PRINCIPAL MULTIPLES USED IN
GUIDELINE COMPANY ANALYSES
In valuing companies (other than financial institutions) using
guideline companies, most analyses used at least two
multiples [see Table 15]
85% of the analyses used EV*/EBITDA
56% used P/E and 41% used EV/Revenues
EV/EBIT, P/BV and other ratios were seldom used
___________________________________________________
* Enterprise value is generally defined as equity plus
interest-bearing debt minus cash. It also includes
preferred stock and other relevant items, if applicable.
36
SUTTER SECURITIES
TABLE 15: PRINCIPAL MULTIPLES USED IN
GUIDELINE COMPANY ANALYSES
Multiple Financial Companies All Other Companies
EV/Revenues Not applicable
to financial
institutions
122 41%
EV/EBITDA 252 85%
EV/EBIT 22 7%
P/E 32 94% 167 56%
P/BV and/or TBV 32 94% 16 3%
Total (a) 34 296
(a) Most opinions used more than one multiple.
37
SUTTER SECURITIES
PRINCIPAL MULTIPLES USED IN
GUIDELINE TRANSACTION ANALYSES
The principal differences between guideline transactions
analyses and guideline companies analyses were:
The EV/Revenues ratio was used in 50% of the
analyses
[see Table 16]
The P/E ratio was used in only 12% of the analyses
The strikingly low use of P/E ratios in guideline transaction
analyses is inexplicable, since EPS data was available for
most acquisitions of public companies
38
SUTTER SECURITIES
TABLE 16: PRINCIPAL MULTIPLES USED IN
GUIDELINE TRANSACTION ANALYSES
Multiple Financial Companies All Other Companies
EV/Revenues Not applicable
to financial
institutions
139 50%
EV/EBITDA 229 83%
EV/EBIT 20 7%
P/E 29 88% 32 12%
P/BV and/or TBV 31 97% 3 1%
Total (a) 32 278
(a) Numerous opinions used more than one multiple.
39
SUTTER SECURITIES
VALUING FINANCIAL INSTITUTIONS
WITH THE MARKET APPROACH
In valuing financial institutions using either guideline
companies or guideline transactions, most analyses
considered two multiples:
•Price/Earnings and
•Price/Book Value or Price/Tangible Book Value
[see Tables 15 & 16]
Ratios commonly used for non-financial companies, such as
EV/Revenues and EV/EBITDA, are generally not applicable to
financial institutions
40
SUTTER SECURITIES
PRINCIPAL COMBINATIONS
OF COMMONLY-USED MULTIPLES
The opinion-givers used different multiples in guideline
company valuations than in guideline transaction valuations
in almost half of the fairness opinions in the study
[see Table 17]
44% of the analyses used both EV/EBITDA and P/E ratios in
their guideline company analyses but used EV/EBITDA and
inexplicably ignored P/E in their guideline transaction
analyses
41
SUTTER SECURITIES
17: PRINCIPAL COMBINATIONS OF MULTIPLES (a)
Same Multiples Used for Guideline Companies
and Guideline Transactions Opinions Percent
of Total
Both methods used EV/Revenues only 23 9%
Both methods used EV/EBITDA; neither used P/E 86 34%
Both methods used EV/EBITDA and P/E 18 7%
Both methods used P/E; neither used EV/EBITDA 6 2%
Subtotal 133
Different Multiples Used
Guideline companies used EV/EBITDA and/or P/E
but guideline transactions used EV/Revenues only 83%
Guideline companies used EV/EBITDA & P/E
but guideline transactions used EV/EBITDA only 112 44%
Guideline companies used P/E only
but guideline transactions used EV/EBITDA only 21%
Subtotal 122
(a) Excluding financial institutions. This Table includes only
EV/EBITDA, P/E and, if neither was used, EV/Revenues.
42
SUTTER SECURITIES
METHODS USED IN FAIRNESS OPINIONS
FOR STOCK-FOR STOCK MERGERS
Our study of fairness opinions in stock-for-stock mergers from 2009
through 2014 is in progress
oThe study addresses mergers where target shareholders will own at
least 10% of the surviving entity and where the sole consideration is
equity
The methods used in fairness opinions in stock-for-stock mergers
are – as would be expected – generally similar those in cash
transactions [see Table 18]
43
SUTTER SECURITIES
TABLE 18: PRINCIPAL VALUATION METHODS USED IN
FAIRNESS OPINIONS IN STOCK-FOR-STOCK MERGERS
Valuation method used Merger
opinions
Percent in
mergers
Percent in cash
transactions
Income approach (DCF or DDM) 122 88% 91%
Guideline companies 113 89% 84%
Guideline transactions 82 63% 87%
124 (a) 91% 96%
Premiums paid in other transactions 34 30% (b) 48%
Target prices of security analysts 37 30% 12%
Contribution analysis 92 72%
Not relevant
to cash
transactions
Accretion/dilution 63 61% (b)
Historical market prices 51 62%
Comparative data for merged companies 118 (a) 72%
Total number of opinions 136
(a) Many opinions used more than one of the
approaches.
(b) Excluding 13 opinions in transactions where one
party’s shares were not traded or thinly traded.
Data based on opinions for U.S. companies
in stock-for-stock mergers, 2009-2013
44
SUTTER SECURITIES
COMPARATIVE ANALYSES USED IN
STOCK-FOR-STOCK FAIRNESS OPINIONS
Most of the fairness opinions in stock-for-stock mergers
weighed relative fairness in addition to valuation measures
Comparative data was considered in three manners:
A comparison of the relative contributions of each company
to the combined business
The accretion or dilution in cash flow and/or net income
The exchange ratio compared to relative historical market
prices of the two companies
Relative fairness is an important factor to consider in stock-
for-stock mergers that are material to both parties
45
SUTTER SECURITIES
CLOSING COMMENTS
The use of customary and appropriate methodologies is
essential for rendering fairness opinions
Fairness is not simply a mathematical exercise
If all shareholders do not receive the same consideration, the
opinion-giver should also consider the impact of differential
treatment on the fairness of the transaction
Although a fairness opinion is not a recommendation to
shareholders, the opinion-giver, before rendering an
opinion, should consider whether shareholders are better
off after a transaction than before it
I would like to thank
Prof. Bini and the OIV
for inviting me again
to this professional gathering
and for the opportunity
to share ideas with you
Your questions and comments are welcome
47
SUTTER SECURITIES
APPENDIX
TABLES 6 – 14
48
SUTTER SECURITIES
TABLE 6: MIDPOINTS OF DISCOUNT RATES
USED IN DCF VALUATIONS
Equity Value of
Transaction
Average
Discount
Rate
Less
than
10%
10% to
13.9%
14% to
16.9%
17.0%
or More
Less than $100 million 17.4% 1 13 20 33
$100 to $250 million 15.6% 3 18 17 14
$250 to $500 million 13.4% 5 32 15 10
$500 million to $1 billion 12.0% 5 24 7 2
$1 to $3 billion 11.1% 7 41 2 0
$3 to $10 billion 9.8% 18 19 0 0
More than $10 billion 8.5% 6 2 0 0
49
SUTTER SECURITIES
TABLE 7: DIFFERENCE BETWEEN HIGH AND LOW
DISCOUNT RATES USED IN DCF CALCULATIONS
Difference WACC Used WACC Not Expressly Used
0% 18 4
0.5% 5 0
1% to 1.5% 45 13
2% to 2.5% 59 60
3% to 3.5% 12 16
4% to 4.5% 29 20
5% 10 6
6% to 10% 7 9
Subtotal 185 128
Discount rate not disclosed 2 5
Total 187 133
50
SUTTER SECURITIES
TABLE 8: APPROACHES USED TO CALCULATE
TERMINAL VALUE
Basis of Calculation Opinions Percent
Growth model only 107 34.5%
Multiples only 183 59.0%
Both multiples and growth model 20 6.5%
Subtotal 310 100.0%
Basis not disclosed 4
Product life (no terminal value) 6 (a)
DCF not used 32
Total 352
(a) 5 of these were developmental pharmaceutical/bioscience companies;
1 was a loan portfolio.
51
SUTTER SECURITIES
TABLE 9: BASIS OF TERMINAL VALUE
CALCULATIONS USING A GROWTH MODEL
Growth of:
All
Opinions
Financial
Companies
All Other
Companies
Using
DCF
Using
DDM
Using
DCF
Using
DDM
Free cash flow 119 0 1 118 0
Net income 1 0 1 0 0
Dividends 6 0 5 0 1
Growth model – total (a) 126 0 7 118 1
(a) 21 opinions (including 3 financial companies) calculated terminal value
using both multiples and a growth model.
52
SUTTER SECURITIES
TABLE 10: GROWTH RATES USED
TO CALCULATE TERMINAL VALUE
Growth Rate Opinions
0% 5
1% 5
Between 1% and 2% 5
2% 20
Between 2% and 3% 20
3% 28
Between 3% and 4% 9
4% 9
Between 4% and 5% 4
5% 8
More than 5% 4
Subtotal 117
Minus 30% 1
Not disclosed 8
Total 126
53
SUTTER SECURITIES
TABLE 11: BASIS OF TERMINAL VALUE
CALCULATIONS USING MULTIPLES
Multiples of:
All
Opinions
Financial
Companies
All Other
Companies
Using
DCF
Using
DDM
Using
DCF
Using
DDM
Revenues 11 Not
applicable
to financial
institutions
11 0
EBITDA 155 155 0
EBITDA & another factor (a) 3 3 0
Free cash flow 3 3 0
Net operating profit 2 2 0
Net income 11 5 2 4 0
Book value 5 4 1 0 0
Book value & net income 15 10 5 0 0
Total (b) 205 19 8 178 0
(a) One each: revenues, free cash flow and net income.
(b) 21 opinions (including 3 financial companies) calculated terminal
value using both multiples and a growth model.
54
SUTTER SECURITIES
TABLE 12: EBITDA MULTIPLES USED TO
CALCULATE TERMINAL VALUE
EBITDA Multiple Opinions
3.5x to 4.4x 2
4.5x to 5.4x 15
5.5x to 6.4x 17
6.5x to 7.4x 29
7.5x to 8.4x 42
8.5x to 9.4x 21
9.5x to 10.4x 12
10.5x to 11.4x 6
11.5x to 12.4x 6
12.5x and up 8
Total 158
55
SUTTER SECURITIES
TABLE 13: TERMINAL VALUE – WIDTH OF
SPREADS OF GROWTH RATES
Difference between
Low and High Opinions
0% 9
0.5% 7
1% 37
1.5% 1
2% 53
3% 5
4% or more 5
Total 117
56
SUTTER SECURITIES
TABLE 14: TERMINAL VALUE – WIDTH OF SPREADS OF
EBITDA MULTIPLES AS PERCENT OF MIDPOINT OF RANGE
Difference between
Low and High (Spread) Opinions
0% to 9.9% 8
10% to 19.9% 41
20% to 29.9% 65
30% to 39.9% 23
40% to 49.9% 14
50% or more 7
Total 158
Example: If the range of multiples is 9x to 11x, the midpoint is 10x
and the spread is 2x. Thus, the spread is 20% of the midpoint.
57
SUTTER SECURITIES
Selected Bibliography
Cain, Matthew D., “Information Production by Investment Banks: Evidence from
Fairness Opinions,” 56 Journal of Law & Economics 245 (2013)
Matthews, Gilbert E., “Valuation Methods in Fairness Opinions: An Empirical
Study of Cash Transactions,” 31 Business Valuation Review 55 (2012)
Rucker, Chad, “Dependable Fairness Opinions – Ensuring that Boards Rely on
Opinions that Are Strong and Defensible,” Valuation Strategies, Nov./Dec 2015
Shaked, Israel, and Stephen Kempainen, “A Review of Fairness Opinions and
Proxy Statements: 2005-2006,” 19 Journal of Applied Finance 103 (2009)