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LBO 201 - Deal Evaluation Case Study Wharton Buyout Case Competition 2011 James O’Gara Matteo

LBO 201 - Deal Evaluation Case Study

Wharton Buyout Case Competition 2011

James O’Gara Matteo Luoni Matteo Masi Brandon Parry Ryan Brewer

Deal Evaluation Approach – Tell the Story

Deal Evaluation Approach – Tell the Story

Key StepsSources

Evaluate the Market Evaluate the Company
Evaluate the
Market
Evaluate the
Company

Evaluate from an investment perspective – take a stand High-level overview: size, growth, trends? Where/how is value being created or destroyed? 10-year view: need to consider your exit, value for next buyer What are the key risks? Where can PE create value?

Which companies are positioned to benefit from market trends you identified? Financial profile – cash flow is king Is the value proposition defendable? Key risks and mitigants Assets – think creatively and strategically (roll-ups, add-ons) Management strength and track record – can you partner with them? Key diligence items

record – can you partner with them? Key diligence items Deal Considerations Entry – Valuation and
record – can you partner with them? Key diligence items Deal Considerations Entry – Valuation and

Deal

Considerations

with them? Key diligence items Deal Considerations Entry – Valuation and deal approach – Leverage and

Entry

Valuation and deal approach

Leverage and structuring: what are current market conditions?

Management incentives Portfolio

Value creation opportunities:

what’s the plan? Exit: sale vs. IPO, strategic buyer vs. financial, exit multiple

S&P’s LCD for leverage market (on facebook) Company info – board, etc.

market (on facebook) Company info – board, etc. Analyst reports (Investext) Industry (Datamonitor, etc)
market (on facebook) Company info – board, etc. Analyst reports (Investext) Industry (Datamonitor, etc)

Analyst reports (Investext) Industry (Datamonitor, etc) Competitor reports

Public data: 10-K, etc. Capital IQ for financials Analyst reports

10-K, etc. Capital IQ for financials Analyst reports Investment Thesis Your fundamental bet about the industry
10-K, etc. Capital IQ for financials Analyst reports Investment Thesis Your fundamental bet about the industry

Investment Thesis

IQ for financials Analyst reports Investment Thesis Your fundamental bet about the industry and the company’s

Your fundamental bet about the industry and the company’s ability to capture value in it. It underpins your entire investment recommendation. Make it clear!

Financial Modeling

Financial Modeling
Boiling your investment thesis down to the numbers
Boiling your investment thesis down to the numbers
Basic Approach
Basic
Approach
Cases
Cases
Sensitivity Analysis
Sensitivity
Analysis
Revenue Build – Choose an approach: top-down or bottom-up – Should match your industry view,
Revenue Build
– Choose an approach: top-down or bottom-up
– Should match your industry view, incorporating key variables to examine how they impact it
– Flexible and easy to understand/walk someone through
– Be as granular as possible on division/product specific revenues
Cost Assumptions
– Understand fixed vs. variable costs and how flexible the cost structure is
– Think about what impacts margins: don’t just hold them flat!
– Be careful about assuming significant margin improvements
Cash Flow items
– Make sure your capex assumptions match both your revenue growth and D&A – sanity check
– Examine working capital accounts for seasonality – use minimum cash balance to reflect it
– Accurately reflect below the line, cash expenses: management fee, restructuring charges, etc.
At minimum, base and downside cases in the model – Base is your best guess,
At minimum, base and downside cases in the model
– Base is your best guess, downside is not “doomsday” but reflects a realistic, bearish scenario
Upside case may also be useful, but careful about too much optimism
– “Management Case” – projections from the company are often used as this
Sensitize returns around the key variables (risks) that impact your investment outcome – Not just
Sensitize returns around the key variables (risks) that impact your investment outcome
– Not just entry/exit multiples, or year of exit (lazy modeling!)
– Exit multiple is typically a huge driver of returns, but so are operational/industry outcomes
– Include at least one non-deal specific driver: company growth, margins, industry outcomes