Mergers & Acquisition & Corporate Restructuring

Topic: Valuation Method & Strategic Alliance of Yahoo & Ebays

Prof: C.S. Balasubramanium

Group Member:
Name
Aftab Dalvi
Sharukh Kinariwala
Mohammed Mujahid Sajan
Hussain Shaikh

Roll No
26
29
32
35

Valuation Method
Valuation methods typically fall into two main categories: absolute and relative
valuation models. Absolute valuation models attempt to find the intrinsic or "true"
value of an investment based only on fundamentals. Looking at fundamentals
simply mean you would only focus on such things as dividends, cash flow and
growth rate for a single company, and not worry about any other companies.
Valuation models that fall into this category include the dividend discount model,
discounted cash flow model, residual income models and asset-based models.
In contrast to absolute valuation models, relative valuation models operate by
comparing the company in question to other similar companies. These methods
generally involve calculating multiples or ratios, such as the price-to-earnings
multiple, and comparing them to the multiples of other comparable firms. For
instance, if the P/E of the firm you are trying to value is lower than the P/E
multiple of a comparable firm, that company may be said to be relatively
undervalued. Generally, this type of valuation is a lot easier and quicker to do than
the absolute valuation methods, which is why many investors and analysts start
their analysis with this method.
Let's take a look at some of the more popular valuation methods available to
investors, and see when it is appropriate to use each model.

Dividend Discount Model (DDM)

The dividend discount model (DDM) is one of the most basic of the absolute
valuation models. The dividend model calculates the "true" value of a firm based
on the dividends the company pays its shareholders. The justification for using
dividends to value a company is that dividends represent the actual cash flows
going to the shareholder, thus valuing the present value of these cash flows should
give you a value for how much the shares should be worth. So, the first thing you
should check if you want to use this method is if the company actually pays a
dividend.
Secondly, it is not enough for the company to just a pay dividend; the dividend
should also be stable and predictable. The companies that pay stable and
predictable dividends are typically mature blue-chip companies in mature and
well-developed industries. These type of companies are often best suited for this
2

type of valuation method. For instance, take a look at the dividends and earnings of
company XYZ below and see if you think the DDM model would be appropriate
for this company:
200 200 200 200 200 201
5
6
7
8
9
0
Dividend
s
Per $0.5 $0.5 $0.5 $0.5 $0.6 $0.6
Share
0
3
5
8
1
4
Earnings
Per
$4.0 $4.2 $4.4 $4.6 $4.8 $5.1
Share
0
0
1
3
6
1
In this example, the earnings per share are consistently growing at an average rate
of 5%, and the dividends are also growing at the same rate. This means the firm's
dividend is consistent with its earnings trend which would make it easy to predict
for future periods. In addition, you should check the payout ratio to make sure the
ratio is consistent. In this case the ratio is 0.125 for all six years which is good, and
makes this company an ideal candidate for the dividend model.

Discounted Cash Flow Model (DCF)

What if the company doesn't pay a dividend or its dividend pattern is irregular? In
this case, move on to check if the company fits the criteria to use the discounted
cash flow model. Instead of looking at dividends, the DCF model uses a firm's
discounted future cash flows to value the business. The big advantage of this
approach is that it can be used with a wide variety of firms that don't pay
dividends, and even for companies that do pay dividends, such as company XYZ in
the previous example.
The DCF model has several variations, but the most commonly used form is the
Two-Stage DCF model. In this variation, the free cash flows are generally
forecasted for five to ten years, and then a terminal values calculated to account for
3

all the cash flows beyond the forecast period. So, the first requirement for using
this model is for the company to have predictable free cash flows, and for the free
cash flows to be positive. Based on this requirement alone, you will quickly find
that many small high-growth firms and non-mature firms will be excluded due to
the large capital expenditures these companies generally face.

For example, take a look at the simplified cash flows of the following firm:
200 200 200 200 200 201
5
6
7
8
9
0
Operatin
g Cash
146
256
Flow
438 789 2
890 5
510
Capital
Expendit
113 125 223 154
ures
785 995 2
6
5
6
Free
Cash
Flow

103
347 206 330 366 330 6

In this snapshot, the firm has produced increasing positive operating cash flow,
which is good. But you can see by the high level of capital expenditures that the
company is still investing a lot of its cash back into the business in order to grow.
This results in negative free cash flows for four of the six years, and would make it
4

extremely difficult or impossible to predict the cash flows for the next five to ten
years. So, in order to use the DCF model most effectively, the target company
should generally have stable, positive and predictable free cash flows. Companies
that have the ideal cash flows suited for the DCF model are typically the mature
firms that are past the growth stages.

Comparable Method
The last method we'll look at is sort of a catch-all method that can be used if you
are unable to value the company using any of the other models, or if you simply
don't want to spend the time crunching the numbers. The method doesn't attempt to
find an intrinsic value for the stock like the previous two valuation methods do; it
simply compares the stock's price multiples to a benchmark to determine if the
stock is relatively undervalued or overvalued. The rationale for this is based off of
the Law of One Price, which states that two similar assets should sell for similar
prices. The intuitive nature of this method is one of the reasons it is so popular.
The reason why it can be used in almost all circumstances is due to the vast
number of multiples that can be used, such as the price-to-earnings (P/E), price-tobook (P/B), price-to-sales (P/S), price-to-cash flow (P/CF), and many others. Of
5

these ratios though, the P/E ratio is the most commonly used one because it focuses
on the earnings of the company, which is one of the primary drivers of an
investments value.
When can you use the P/E multiple for a comparison? You can generally use it if
the company is publicly traded because you need the price of the stock and you
need to know the earnings of the company. Secondly, the company should be
generating positive earnings because a comparison using a negative P/E multiple
would be meaningless. And lastly, the earnings quality should be strong. That is,
earnings should not be too volatile and the accounting practices used by
management should not distort the reported earnings drastically.
These are just some of the main criteria investors should look at when choosing
which ratio or multiples to use. If the P/E multiple cannot be used, simply look at
using a different ratio such as the price-to-sales multiple.

The Bottom Line

No one valuation method is perfect for every situation, but by knowing the
characteristics of the company, you can select a valuation method that best suits the
situation. In addition, investors are not limited to just using one method. Often,
investors will perform several valuations to create a range of possible values or
average all of the valuations into one.

Strategic Alliance of Yahoo & Ebay

(25th May2006)
EBay Inc. and Yahoo Inc. forged an alliance yesterday aimed at capturing more
online sales and advertising dollars, while giving both greater leverage against
their primary rivals, Google Inc. and Microsoft Corp.
The partnership spans some of the most critical areas of both companies'
businesses, adding eBay's Paypal online payment system throughout Yahoo's
operations and giving Yahoo an exclusive deal to sell display ads for eBay.com.
That two of the Internet's top brands decided to cooperate so closely highlights
how powerful Google is becoming as it roves across the online business world,
competing with eBay in online classifieds and payment systems and with Yahoo in
6

search and content. It also leaves Microsoft in increasing need of a partner of its
own, as its online service trails the others in search and advertising.
"This deal is partially offensive, partially defensive for eBay and Yahoo," because
it allows the companies to share technologies and combine resources, said Philip
Remek, an analyst for Guzman & Co.
Yahoo is the most visited site on the Internet, and eBay is the world's largest
auctioneer. Consumers will start to see experimental versions of joint offerings in
coming months. Yahoo users will more easily be able to make calls off the Internet
by "clicking-to-call" local merchants, for example, using eBay's Internet-phone
company Skype. EBay users will have greater access to Yahoo's news and
entertainment content through a toolbar championed by both brands.
"I think it plays to the complementary strengths of both companies," said eBay
president and chief executive Meg Whitman, speaking at a Goldman Sachs
investor conference yesterday.
Speaking at its annual shareholder meeting, Terry Semel, chairman and chief
executive of Yahoo, said the deal is a "terrific strategic partnership for our
company."
One area not covered by the arrangement: instant messaging. Yahoo's service will
not be compatible with eBay's Skype instant messaging; Yahoo already has such an
agreement with Microsoft's MSN.
Such overlapping deals show how Internet companies are jockeying for Web
surfers' time and interest, which translates into more opportunities to sell
advertising.
Microsoft appears to be planning to chart its own course in competing for an
advertising network, and for building its online audience. Earlier this year,
Microsoft lost out to Google in negotiations to forge a deal with Dulles-based AOL
LLC. Google invested $1 billion in AOL and deepened its search and contentsharing arrangement.
Separately, Google yesterday announced a partnership deal with Dell Computer
Corp. to install Google's software on its computers, an arrangement that threatens
to diminish Microsoft's presence on the consumer desktop.

"Microsoft has been jilted twice this year, by AOL and eBay," said David Card, an
analyst with Jupiter Research. Through MSN, Microsoft still has a large
community of users for its Web-based services, but it is trying to improve in areas
of both search and advertising sales, he said. "They are trying to go it alone."
Advertisers are also spending more to run ads alongside search results, or pictorial
ads that run on Web pages, as viewers spend more time online and less time with
traditional media sources. Google, the search engine with the most traffic,
dominates the search-based advertising market, while Yahoo has the largest
advertising network for pictorial ads, and is also trying to catch up to Google on
search-related ads.
"It's a bigger win for Yahoo, in many ways, to win against Google," said Charlene
Li, an analyst with Forrester Research. EBay, meanwhile, pays both Google and
Yahoo to sponsor links next to those companies' search results, but it has been
cautious about selling ads on its own site. By employing Yahoo to provide such
ads, it could boost its relatively meager share of the online ad market, she said.
EBay also might tap more locally based advertisers by integrating Skype
throughout Yahoo's network, Li said.
For now, the companies' collaboration will happen exclusively in the United States,
but if it succeeds, it might extend into other parts of the globe, Whitman said.
Shares of eBay closed up $3.68 yesterday, at $33.88 a share. Shares of Yahoo
closed up $1.13 a share at $32.92.

Yahoo eBay Alliance:

Yahoo and eBay have formed a commercial partnership which the two companies
feel will build their position in their respected online shopping, payment and
communications markets against recent moves by Microsofts Live Windows
Shopping and Google Base. This, ladies and gentlemen, is MASSIVE.
The partnership includes integration of PayPal into the Yahoo Web Services and
payment options (think Yahoo Stores), a co-branded toolbar, and partnering for
click-to-call marketing. Here is the official announcement from Yahoo & eBay:

Yahoo! Inc. and eBay Inc. today announced a multi-year strategic partnership
designed to mutually benefit both companies by better serving their user, merchant,
and advertising communities in the U.S. The agreement consists of four major
components in the areas of search and graphical advertising, online payments, a
co-branded toolbar, and the opportunity to explore click-to-call functionality.
Our consumers will benefit from the combination of Yahoo! and eBays leading
technology and services, providing them with one of the best online experiences,
said Terry Semel, chairman and chief executive officer, Yahoo! Inc. Yahoo! holds
a leadership position in all forms of online advertising. This partnership with eBay
provides us with a great opportunity to further extend our sponsored search and
graphical advertising reach to one of the largest and most active communities on
the Web.
We are thrilled to be working more closely with Yahoo! and we think this
agreement represents a great opportunity to benefit our communities and grow our
businesses, said Meg Whitman, president and chief executive officer, eBay Inc.
Yahoo! offers an engaged online audience, which drives massive traffic through
its rich consumer content and premium services. Working together, we can create
more exposure for our properties, which in turn makes them more valuable to our
users.
Yahoo! and eBay will begin to roll out the initiatives outlined in the agreement this
year. This will include a testing phase that will take place over the next several
months, with a plan to achieve full implementation in 2007.

Search and Advertising:

Yahoo! will become the exclusive third-party provider of all graphical
advertisements throughout the eBay.com site, and sponsored search for
complementary products on some eBay.com search results pages in the U.S.
Yahoo! already provides a broad and deep array of essential services to an
9

extremely engaged audience around the world. Through this partnership, Yahoo!
can expand upon these strengths with the addition of eBay.coms high quality
online inventory, offering advertising clients an optimal marketing experience.
Yahoo! and eBay have also agreed to collaborate on ways to increase the quality
and comprehensiveness of Yahoo! Web search results for eBay.com and to provide
Yahoo! search users with more up-to-date listings from the millions of products on
the eBay.com marketplace, with the goal to create a better search experience by
enabling shoppers to more easily find relevant eBay listings.

Integrated Commerce Payment System:

Yahoo! has selected PayPal to become the exclusive third-party provider of its
online wallet allowing customers to pay for Yahoo! services from bank
accounts, credit cards or balances associated with their PayPal accounts. PayPal,
which has 73 million accounts in the U.S., also will be deeply integrated on the
Yahoo! site and will receive prominent positioning when users purchase Yahoo!
services across its network. This offering will provide Yahoo! consumers with
additional online payment choices and the option to use PayPal across the entire
Yahoo! network.
PayPal will be integrated and promoted as Yahoo!s payment solution to Yahoo!s
merchants and publishers, which includes the Yahoo! Publisher Network, Yahoo!
Search Marketing, Yahoo! Merchant Solutions and other small business services.

Co-Branded eBay Toolbar:

Yahoo! Web search functionality and Yahoo! site links, including the Yahoo! Home
Page, Yahoo! Mail and My Yahoo!, will be integrated into a co-branded version of
the eBay toolbar. The eBay toolbar has been downloaded by more than four million
eBay users to date, and lets consumers quickly link to preferred eBay locations
while offering enhanced online protection. This new co-branded toolbar will make
it even easier for consumers to take advantage of both companies offerings to
quickly access information wherever they are on the Web.

Click-to-Call Advertising Functionality:

10

Yahoo! and eBay will explore developing and deploying click-to-call advertising
technologies on their respective Websites in the U.S., accessible by users of both
Yahoo! Messenger with Voice and Skype. Click-to-call is a product feature link
included inside an advertisement that consumers can use to directly call that
advertiser to pursue a transaction.
Yahoo! and eBay do not expect this relationship to have a material impact on their
financial results in 2006. Both companies will incorporate any financial impact for
2007 and beyond when they deliver their business outlook for those periods.

11