Title: Maximizing the Value of an Exit Strategy
1Maximizing the Value of an Exit Strategy
Fabian Barros Marcelo Bermudez Christopher Rowell Marimuthu Subburathinam Alexandre Wolynec
Fabian Barros Marcelo Bermudez Christopher Rowell Marimuthu Subburathinam Alexandre Wolynec
Fabian Barros Marcelo Bermudez Christopher Rowell Marimuthu Subburathinam Alexandre Wolynec
2Agenda
- Learning Objectives
- Overview and opportunities for Probil
- The Turkish market for an IPO
- Cost of Capital
- Managing Uncertainties and Real Options
- Recommendations
3Learning Objectives
Learning Objectives
- Evaluating country risks and mitigating factors
- Challenges of doing an IPO in Turkey
- Probils Cost of Capital
- Impact of Uncertainties
- Identifying and Modeling Real Options
4Probil Overview
Overview and opportunities for Probil
- Founded in 1989
- Provides IT solutions
- Networks, computer hardware, basic software
- Design and implementation services
- Support and maintenance services (unique)
- Multi-vendor, independent of holding groups
- Good reputation banking, telco, ISPs,
manufacturing - Positioned to help build the internet and perhaps
provide e-business software
5The new Investors
Overview and opportunities for Probil
- EMEA Technology Investment co-managed by
- Kagan Ceran
- EFG Hermes (over 2B)
- Summer 2000 Invested 21 million to
- Merge Probil Group companies and Bordata
- Infuse 10 M cash
- Take advantage of size and reputation to grow
more rapidly - Expand into e-business applications
- Exit required by 2005
6The Business Opportunities
Overview and opportunities for Probil
- Acquire a local distributor
- Improve delivery efficiency, lower price
multiples - Acquire US Internet professional services firm
- Access to US market with remote, less expensive
Turkey labor - Improve image in Turkey
- Source of US revenue
- Use an IPO to raise cash for acquisitions
- When?
- How much? 25 of the Company
- Consider equity investment?
7Turkey Overview
The Turkish market for an IPO
- Military governments an historic stabilization
factor - Contract with suppliers to share currency risks
Country Risks Level Mitigation
Expropriation Low
Currency fluctuation High Yes
War or violence Low
Political instability High Yes
Corruption Low
Repatriation Low
8Turkeys Stock Market
The Turkish market for an IPO
- One of the most active Emerging Markets Stock
Exchanges - High volatility
- Volumes (150m-1.5bn)
- Prices
9Doing an IPO in Turkey
The Turkish market for an IPO
- Small IPO market
- 35 new issues in 2000 up from 27 in 1997(157m)
- Turkeys IPOs are among the most undervalued
- Pre-IPO condition of the market most important
factor - Investment bankers do IPOs on a best effort
basis - Investors use Adjusted EV/EBITDA ratio
- P/E introduces debt and tax structures which may
differ - Simple EV/EBITDA assumes same growth rate
10The Cost of Capital
Cost of Capital
- Goldman-Integrated Model
- US Risk-free rate 5.5
- Market risk premium 5.0
- Beta of comparable 1.45
- Country premium1 4.5
- Cost of Capital 17.25
- Cost of debt in US in Turkey 20-25
- Somewhat inflated because of banking system
crisis - 1 Source Moodys
11The Cost of Capital
Cost of Capital
- Adjusted ICCRC model
- Average country cost of capital 23
- Beta Adjusted 30
- Mitigation factors -3
- Cost of Capital 27
12Impact of key uncertainties
Managing Uncertainties
- Revenue Growth rate
- Normal distribution (25, 15)
- Expected EV/EBITDA ratio
- Lognormal
- Actual EV/EBITDA ratio
- Lognormal, 0.75 correlation with expected
13Base Case NPV
Managing Uncertainties
E(NPV) 38.5MM St. Dev. 15.1MM Skewness 1.02
14Real Options
Real Options
- Timing of IPO Wait for best moment
- Alternative Funding Use VC Funds
- International Expansion
15Real Option I Timing of the IPO
Real Options
- If Expected EV/EBITDA lt Strike EV/EBITDA
- Dont do the IPO
- IPO could be done in any of the next 5 years
- Depends on pre-IPO market situation
- Drawback
- Delays growth boost
- Open door for competitors IPO
16Real Option II Alternative Funding
Real Options
- VC interested in equity investment
- EV/EBITDA of 10 for 10 of the company
- If Expected EV/EBITDA lt Strike Price lt 10
- Accept the new equity investment offer
- Alternative to IPO if we delay it
- Allows the company to boost some growth
- Reduce exposure to the IPO proceeds volatility
17Real Option III Expansion/Flexibility
Real Options
- Option to acquire internet consulting company in
the US - Improves image of the company
- Adds e-business implementation know-how skill set
- Reduces overall cash flow volatility (0.2
correlation) - Provides flexibility
- Reduces cost of capital
- ICCRC weighted average for US and Turkey (needs
to be calculated) - Requires a 5 million investment (company has
this money)
18Real Options Model
Real Options
International Expansion
Strike Price
IPO Forecast
IPO/VC
Finance Domestic Expansion
Revenue Growth
Yes
No - Wait next year
Excess Cash
Cash Flows
Company Value 2005
Value to Investor
19Real Options Results
Real Options
20Recommendations
Conclusions
- Probil should wait for a suitable moment to do
its IPO - If the market is unfavorable, Probil should
consider raising money through VC - They should pursue the international expansion
- Decrease growth volatility
- Improve image of the company
21Timing of IPO Results
Real Options
E(NPV) 39.9MM St. Dev. 15.7MM Skewness .99
22Alternative Funding Results
Real Options
E(NPV) 40.1MM St. Dev. 16.0MM Skewness 1.03
23International Expansion Results
Real Options
E(NPV) 43.5MM
St. Dev. 17.4MM
Skewness .99
2001
E(NPV) 44.0MM
St. Dev. 17.9MM
Skewness 1.01
2002
24END OF PRESENTATION
- The following slides were removed from the
presentation
25Comparables for EV/EBITDA ratios
Managing Uncertainties
26Base Case NPV IPO in 2001
Base Case Valuation