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Transcript of Arcadian-Sierra
Arcadian: proposed to sell a 60% equity interest for $40 million.
Sierra: due diligence study showed a highly promising high-risk investment opportunity.
DCF analysis ready, terminal value to be done Background Agenda Terminal value accounts for most of the value of a company
Five year high Growth Rate is a reasonable assumption
Different methods in valuation often result in wide range of firm’s value estimate
For Arcadian case, we believe DCF is the best approach provided the given data Summary Comparison of Valuation Methods Multiples analysis to test DCF assumptions Help us decide if our assumptions and forecasts seem reasonable
Can help us set a floor or/and a ceiling price for our negociations
Put the investment opportunity into perspective by comparing it to the market Valuation Comparison of Valuation Methods PE Ratio Valuation DCF: The Best Comparison of Valuation Methods Real inside analysis
Based on available professionnal projections
2 factors to discuss and agree on :
Growth rate of FFCF
DCF gives us the big picture Valuation Comparison DCF is considered to be reasonable Valuation Discounted Cash Flow Forecast Horizon Five year high growth rate before stable (constant) growth rate is a reasonable assumption
(There is no such thing as “happily ever after”)
Finally, we adopt 10/11 years as forecast horizon and calculate the Terminal Value at the point of 2014/2015 AMT Team member: Wilson Kuo, Kartikasari Dwi, Pierre Alexand, Yiting Wu, Cici Tao Thank you Early Exit Options-like opportunity
High price but astronomical potential payoff (high risk, high gain)
Benchmarking: Affymetrix P/E is 50 (Arcadian’s high P/E is 20); Illumina with negative historical and expected earnings has P/sales equals to 8.82 times
40M barely covers the financial deficit; external financing needed after 2006
Thus, WACC might increase, so does cost of debt
IPO/ Early Exit
Arcadian potentially goes public after breakthrough is realized; DNA microarrays segment is expected to be available for sale within 1 year
Distribute the Arcadian’ shares tax-free to happy clients Comparison of Valuation Methods Difficult in this case to get a consensus based on DCF
The firm is not considered in financial distress Liquidation Value Only describes past value
Certainly not applicable to a high growth firm Book Value Assumptions:
Perpetuity Operation Valuation PB Ratio Arcadian Forecast Horizon Basic Conception Terminal Value Terminal value Terminal value is the lump-sum of cash flow at the end of a stream of cash flows.
Proceeds from exiting the investment
PV of all cash flows beyond the forecast horizon
Why consider terminal value?
1st present in valuation of almost every asset
2nd usually a very big value driver Forecast Horizon
After each Forecast Horizon point,
Growth rate = Inflation rate = 2% Terminal Value Task1: Present and explain the data in Exhibit 3 Percent of market price not attributable to dividends outweighed the present value of five year’s dividends a lot.
Most of the value lies in the terminal value instead of the dividends in this case. Terminal value Team member: Wilson Kuo, Kartikasari Dwi, Pierre Alexand, Yiting Wu, Cici Tao Arcadian Microarray Technologies, Inc AMT Comparison of Valuation Methods PE: We have to be careful with PE ratios because it is based on projected earnings and multiply the discrepencies between the different projections
PB : The book value is not representative of the market, and with a fast growing firm a multiple of the BV seems not accurate enough. PE and PB multiples Nominal growth rate in the economy: 5% per year
Real growth rate of cash flow in Management view: 5%
Historical nominal growth rate in pharmaceutical industry revenues: 5% per year. Population growth rate in the United States: 1% per year
Real growth rate in the economy: 3% per year
Historical real growth rate in pharmaceutical industry revenues: 5% per year.
Nominal growth rate of cash flow in Management view: 7%
Inflation rate: 2% per year. Valuation Perpetuity Growth rate of cash flow Task1: Present and explain the data in Exhibit 3 Dividend Value Terminal value Terminal Value