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Agenda
A. Overview of Valuation
B. Software Firms
C. Market-based Valuation
D. Q&A
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Valuation – Myth #1
FMVc≈1.10 x Incc(1+g)n x [1-(CapEx-Dep) + ΔNWC/Incc(1+g)n] x (1/yn-gn)
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Valuation Myth #2
X Times EBITDA
- or -
X Times Revenue
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Valuation Reality
Eye of the Beholder
Price vs. Value Fair Market Value
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Overview – Standard
Methods
• Income
• Comparable Firm
• Cost
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Income Approach
Forecast Free Cash Flow $10,000,000
Capitalize with Cost of Capital $10,000,000/0.15 = $66,700,000
Add Terminal Value $10,000,000/1.15 = $ 8,696,000
Value = $75,396,000
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Comparable Firm
Approach
1. Identify Comps
2. Analyze relationship of performance to value
3. Derive Multiples
4. Make Adjustments
5. Apply to Target Firm
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Comparable Firm
Approach
Mkt Cap Price per Share Sales NI S&P Hist
($1,000) Last 1 year ($1,000) P/S P/E P/E
Symantec SYMC $ 14,600,000 $ 20.57 $ 22.52 $ 1,870,000 $ 370,600 7.8 39.4
Siebel Systems SEBL $ 4,610,000 $ 8.96 $ 10.29 $ 1,340,000 $ 110,700 3.4 41.6
Tibco TIBX $ 1,530,000 $ 7.11 $ 7.50 $ 387,200 $ 44,900 4.0 34.1
FileNet FILE $ 950,430 $ 23.37 $ 27.19 $ 397,600 $ 29,400 2.4 32.3
MicroStrategy MSTR $ 898,700 $ 55.39 $ 48.05 $ 231,200 $ 168,330 3.9 5.3
Informatica INFA $ 691,730 $ 7.93 $ 7.26 $ 219,700 $ (104,400) 3.1 -6.6
Lawson LWSN $ 551,900 $ 5.57 $ 7.07 $ 363,600 $ 7,990 1.5 69.1
Ariba ARBA $ 482,960 $ 7.31 $ 13.44 $ 245,800 $ (25,200) 2.0 -19.2
PegaSystems PEGA $ 192,300 $ 5.33 $ 8.60 $ 96,460 $ 7,550 2.0 25.5
Captiva Systems CPTV $ 129,280 $ 10.44 $ 10.79 $ 68,010 $ 4,100 1.9 31.5
Total $ 24,637,300 $ 5,219,570 $ 613,970 4.7 40.1 15.1
Mean $ 2,463,730 $ 521,957 $ 61,397
Median $ 795,215 $ 304,700 $ 18,695 2.8 31.9
Target Co
Weighted Private Firm Imputed
Value = f (revenue): Weighting Value Discount Value
Revenue $400,000
Market Multiple 2.8
$ 1,120,000 75% $ 840,000
Value - f (net income)
Net Income $65,000
Market Multiple 31.9
$ 2,073,500 25% $ 518,375
$ 1,358,375 67% $ 910,111
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Valuation Methods
Cost Method
1. Identify component assets and liabilities of the business
2. Estimate cost of replicating at current prices
3. Adjust for market and competitor considerations
4. Sum the parts
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Uses of Valuations
• 80% - Legal & Regulatory
• 20% - Strategic Decisions
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Strategic Decisions
1. Acquisitions, Joint Ventures
2. Divestitures (all or part)
3. Internal Ownership Transfer
4. Capital (IPO, private equity)
5. Performance Measurement
6. Strategic Plan
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Acquisitions & Joint
Ventures
>80% fail, most by overpaying
Overpay?
1. Overestimating “synergies”
2. Trying to outgrow problems
3. Fair price, bad terms
4. Inexperience
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Divestitures
A fair price is good thing
Why fair?
1. Top Dollar Fallacy
2. The board, investors, and Sarbox
3. Reputation Matters
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Internal Ownership
Buy-Sell Agreements
Why bother?
1. Minimize disruption in operations
2. Ensure funding (life insurance)
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Raising Capital
Be Prepared
• Investment Bankers, VCs are not your friends
• Conflicts of interest are legion
• Know a good deal when you see one
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Performance
Measurement
It’s about shareholder value, buddy
1. Revenue, earnings, cash flow aren’t enough today
2. Tie incentives & bonuses to increases in firm value*
3. Prepare to be, or part of, a public company
*Only 20% from within the firm!
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Strategic Plans
Measure twice, cut once
1. Nice strategy, but will it create enterprise value?
2. Benchmark, then repeat to gauge progress
3. Don’t be surprised at the altar
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Software Valuation
• Past as Prologue?
• Current Climate
• Software Hurdles
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Index Price
0
500
1000
1500
2000
2500
4/3/1995 3000
8/3/1995
12/3/1995
4/3/1996
8/3/1996
12/3/1996
4/3/1997
8/3/1997
12/3/1997
4/3/1998
8/3/1998
12/3/1998
4/3/1999
8/3/1999
12/3/1999
4/3/2000
8/3/2000
12/3/2000
4/3/2001
10 Years Ending April 2005
8/3/2001
NASDAQ - Computer Stocks
12/3/2001
4/3/2002
8/3/2002
12/3/2002
4/3/2003
8/3/2003
12/3/2003
4/3/2004
8/3/2004
12/3/2004
Series1
Past As Prologue?
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Past as Prologue?
Market Value Index 10 Year IRR $10,000 Invested
As of April 8, 2005 On April 8, 1995
NASDAQ Computer 7.62% $20,842
Index (n=600+)
S&P 500 8.58% $22,777
Dow Industrials 9.18% $24,067
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Current Climate
Firm Market Cap Δ12 months Price/Sales Price/Earnings
Symantec $14,600,000 - 8.7% 7.8 39.4
Siebel $ 4,610,000 -12.9% 3.4 41.6
Tibco $ 1,530,000 - 5.2% 4.0 34.1
FileNet $ 950,430 -14.0% 2.4 32.3
MicroStrategy $ 898,700 15.3% 3.9 5.3
Informatica $ 691,730 9.2% 3.1 Nm
Lawson $ 551,900 -21.2% 1.5 69.1
Ariba $ 481,960 -45.6% 2.0 Nm
PegaSystems $ 192,300 -38.0% 2.0 25.5
Captiva $ 129,280 - 3.2% 1.9 31.5
Mean $ 2,463,730 4.7 40.1
Median $ 795,215 2.8 31.9
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Software’S valuation
Hurdles
*Residual Value
Pricing Power
International IP Laws
Piracy Concerns
*Maturity
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Residual Value
• Vapor Assets – Little to liquidate and restart
• IP Part I – Evidence of past innovation, but the future?
• IP Part II – Require creators to realize value?
• Abandoned Children – VCs tend to starve all but winners
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Maturity
• Act like grown up company
• Business discipline
• Repeatable success
• Easy to be partner, acquired
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Market-based
Valuation
• Traditional Approach
• Market-based Approach
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Traditional
Approach
1. Professional Hired
– Investment banker, appraiser, financial advisor, consultant
Or
– Internal M&A team, CFO
2. Analysis Conducted
3. Report Delivered
4. Decision Made
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Drawbacks
Static analysis, many assumptions, yielding one opinion
~
What if it’s wrong?
~
Other Concerns:
» Objectivity
» Independence
» Competence
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Market-based
Valuation
Multiple valuation experts
Independently valuing private companies
Analysts and process are objective
Outcome the clearest view of a private firm’s value
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NUMERIA Case Study
Initial Final
Analyst Valuation Valuation
1 $26.3 $26.9
2 $38.8 $30.0
3 $65.0 $40.0
4 $27.0 $30.0
5 $17.0 $29.0
~ ~ ~
Average $34.8 $31.2
S.D. $18.6 $ 5.1
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Summary
• Valuation is art and science; don’t be bullied or fooled
• Software values are 99% expectations; be prudent
• Market-based valuation is a powerful executive management
tool for M&A, capital raising, and other strategic decisions
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Contact
Peter Leitner
Managing Partner
Waterford Advisors LLC
Princeton, New Jersey
pleitner@waterfordadvisors.com
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