CONFIDENTIAL

Valuation - Overview

September 2006

DELIVERING PROCESS INNOVATION

Valuation Applications
Applications of Valuation Techniques:
Acquisitions: How much should we pay to buy the company / division? Divestitures: How much could we sell our company / division for? Defense: Is our company undervalued / vulnerable to a raider? Going Private Transactions: What is the fair value to be paid for the company Fairness Opinions: Is the price offered for our company / division fair from a financial point of

view?
Public Equity Offerings: For how much could we sell our company / division in the public

market?
New Business Presentations: Various applications Tax Opinions: What is the fair market value of the assets acquired or sold

Different methodologies receive different levels of focus based on the situation:

Discounted Cash Flow (DCF) Analysis: Primary valuation methodology used in M&A

transactions.
Comparable Companies Analysis: Primary methodology used in capital markets deals and as a

confirming methodology in M&A situations

Comparable Acquisitions Analysis: Generally a confirming methodology in M&A situations Asset Values/Other: Used as a supporting methodology or if other methodologies are

inapplicable
1

Valuation Methods
Absolute Value Method
Dividend Discount Model What Discount Rate? Risk Free or Market Spread?

Absolute, Relative And Historical Valuation Metrics

Price To Earnings/Earnings Yield PEG Ratio Equity Value To Cash Flow Equity Value To Free Cash Flow Equity Value To Book Value EV/EBITDA EV/ Sales

Alternative Metrics
Relative Growth Methods Intrinsic Value/M&A Comparables

Approach to Valuation
fValuation Range

Discounted Cash Flow Analysis Present value of projected free cash flows Intrinsic value Best captures business in transition Sensitivity analysis Synergies analysis Buy vs. build

Comparable Trading Analysis Value based on market trading multiples of comparable companies Implied value in public securities markets (IPO analysis); fullydistributed value

Comparable Acquisition Analysis Value based on multiples paid for comparable companies in sale transactions Implied value in private market

Merger Consequences Analysis Pro forma presentation shows impacts of acquisition at different prices and with different structures Value related to pro forma effects Buy vs. build

Break-up Analysis

Leveraged Buyout Analysis Value related to cost and availability of leveraged funds Analyzes business based upon leveraging of cash flows

Other Analysis

Used for conglomerates Sum-of-theparts analysis Value each business independently based on DCF, Comparable Companies, etc.

Asset values Liquidation values Recapitalization Analysis Future Value of Share Price Quantification of contingencies

Enterprise Value versus Equity Value

Enterprise Value (Adjusted Market Value, AMV) = Equity Value Equity Value
Net Assets

Value of all the business assets Value of the shareholders equity Enterprise Value Net Debt(1)
Liabilities and Shareholders Equity
Net Debt

= =

Enterprise Value

Enterprise Value Equity Value

Net Debt (Corporate Adjustments)

= Total debt + Minority interest + Preferred stock + Out-of-the-money convertible debt + Capitalized leases - Cash and cash equivalents 4

Enterprise Value versus Equity Value

General Overview
There are typically two stakeholders in any firm, the Debt Holders and the Equity Holders. The

concept of Enterprise value contemplates that the earnings of the company are allocated to both the Debt Holders (trough interest payments) and the Equity Holders (through dividends and appreciation in stock price)

When to use Enterprise Value

Typically, you will use enterprise value in circumstances when the financial statistic being

utilized is flowing to the debt and equity holders. In general, this means that any financial statistic that is pre-interest expense (i.e. sales, EBITDA, EBIT) will use an Enterprise Value concept to determine valuations
Private market valuations tend to use EBITDA and (to a lesser extent) EBIT multiples because

the financing decision (i.e. how much debt v/s how much equity us going to be made after the decision to buy the company)

When to use Equity Value

Typically you will use Equity Value in circumstances when the financial statistic being utilized is

flowing only to he equity holders. In general, this means that any financial statistic that is postinterest expense (i.e. earnings per share, after-tax cash flow or book value) will use an Equity Value concept to determine valuation
Public market valuations tend to use earnings multiples (typically forward earnings multiples)

because the investment decision is being made based upon a capital structure that is already in place and can not be influenced by the common stockholder

Valuation Focus
M&A Transactions
Primary Methodology DCF Conforming Methodology Compco and Compacqs

Capital Market Transactions

Primary Methodology Compco Conforming Methodology DCF, Break-up analysis, etc

fDiscounted Cash Flow

fComparable Company

fComparable Acquisitions

Analysis (DCF)

Analysis (Compco)

Analysis (Compacqs)

fFuture unlevered free cash

fReview similar assets or

fReview recent acquisitions

flows of the assets

fDiscounted to the effective

business operations of publicly traded companies

fDetermine multiples of Net

of similar assets or business operations

fDetermine multiples of Net

date of the valuation

fApply discount rate to free

cash flows
fApply a terminal value at

Income, EBITDA, Book Value, etc. for currently publicly traded companies
fApply multiples to the

Income, EBITDA, Book Value, etc. paid in completed acquisitions

fApply multiples to the

final year of cash flow projections and discount that value to the present

relevant statistics of the assets

relevant statistics of the assets

Break-up Analysis
Sum-of-parts analysis
Used in case of conglomerates In a break up analysis, a typical valuation analysis is performed on each segment of the

business to determine if it is worth more apart than it is together.

Care must be taken to assure that proper tax treatment is used if segments off the business are

going to be sold
ASSET BREAK-UP VALUATION
($ in millions, except per share amounts)

MW

Book Value $/KW $ million

Ratio

Multiple Asset Value

Fossil Generation Clinton Plant Transmission and Distribution Gas Operations Other Including CWIP and HQ Total Utility Plant IPP Business Total Asset Value Debt Cash Net Asset Value

3,618 950

$138.2 1,684.2

500.0 1,600.0 800.0 400.0 400.0 3,700.0 180.0 3,880.0

$/KW $/KW Asset Value / BV Asset Value / BV Asset Value / BV

488.0x 0.0x 1.8x 1.7x 1.0x

$1,765.6 0.0 1,440.0 680.0 400.0 4,285.6 450.0 4,735.6 2,278.9 14.9 $2,471.6

Asset Value / BV

2.5

Leveraged Buyout Analysis

Leveraged Buyout Analysis
Consists of the preparation of an LBO model to determine the price which could be paid by a

financial buyer of a company. The goal is to create a model which shows the maximum price that could be paid for the company that provides a financial equity return to a financial buyer (typically 25%- 35%) and can be financed in the current debt market

Other Analyses
Liquidation Analysis
Determines the value of the business if all of the assets were taken and sold at their fair market values with the

proceeds used to pay off the liabilities of the business

Typically this is only relevant in certain capital intensive businesses where the value of the assets are worth

more than the value of the cash flows provided by those assets
Care must be taken to assure that all contingent liabilities are accounted for i.e. pension plans, plant closing

laws, environmental etc.)

In addition, many assets are worth less in a fire sale type situation than under normal sale conditions

Recapitalization Analysis
This analysis assumes that the company incurs substantial indebtedness which is paid to shareholders in the

form of a dividend
The value of the recapitalization is the value of the cash dividend paid to the shareholders plus the present

value of the future value of the stub equity assuming a set of projected financial statements and discount factors

Future value of share price

Based on the Companys projections and target multiples, where will the stock trade in the future. Frequently

the present value is used to determine a value today