CORPORATE VALUATION 2004 CONFERENCE

1
Role of Business Appraisals in MA

• CORPORATE VALUATION 2004 CONFERENCE
• 28 May 2004

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Agenda
IFRS 3 - Business Combinations
3
Valuation Methods considered in MAs

• Net Asset Valuation (NAV) Asset Based
• Comparable Market Valuations (CMV) Market
  Oriented
• Comparable Companies
• Comparable Transactions
• Discounted Cash Flows (DCF) Future Oriented

4
Major Issues surrounding valuation work

• Asset vs. Share deal
• Price vs. Value
• Does the deal make sense at the quoted price ?
• Choosing the appropriate valuation method
• Asset base of the business ?
• Be careful when using multiples
• EBIT/EBITDA vs. sales multiples
• Dont forget using sector specific multiples
• DCF has its own difficulties
• Real option valuation

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Major Issues surrounding valuation work

• Control Premium vs. Minority Discount
• Shares greater or less than 50
• Voting vs. non-voting shares
• Liquidity / Marketability Discount
• Private companies
• Difficulties in modeling the business
• Predictability ?
• Is the forecasted performance realistic ?
• Inflation vs. devaluation
• Nominal vs. real cash flow projections
• Cost of capital

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Other issues

• As is vs. synergy scenarios
• Value of the intangibles
• Necessity of market research
• Review of the working capital
• Effective tax rate
• Terminal value
• Perpetual growth / business life cycle
• Enterprise value vs. Equity value

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Market Price vs. Fair Value

• Market price can often be different than the fair
  value
• Volatility
• Liquidity
• Speculation
• Manipulation

Value
Market Price
Fair Value
Time
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Role of Valuations in MAs

• Determination of the transaction price
• Acquirer often does not want to pay for synergies
• Seller negotiates to be paid for part of the
  synergies
• Purchase Price Allocation (PPA)
• Intangible assets (brand, patents, customer
  lists, etc.)
• Goodwill
• Basis for future incidences
• Earn outs
• Bonus schemes (EVA, SVA, etc.)
• Dispute resolution

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Agenda
IASB Business Combinations
Which changes are expected ?
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Changing Accounting Environment

• Exposure Draft 3 (ED 3) ? convergence of IFRS
  towards US-GAAP
• ED 3 leads to fundamental changes of accounting
  for business combinations
• Increasing transparency (relevance)
• Increasing relevance of intangible assets
• Increasing volatility of earnings
• Increasing importance of value management

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Current Situation

• Harmonization of accounting standards IAS and
  US-GAAP
• Two phases of the project Business Combinations
  
• Exposure draft 3 Business Combinations, Phase
  I, (ED 3) published on
• December 5, 2002 became effective to be applied
  for all transactions beginning after March 31,
  2004

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First-Time Application of ED 3 / IFRS Business
Combinations
December 31, 2004
December 31, 2005
March 31, 2004
Application of ED 3
Gathering of comparable financial data
First FY complying with IFRS
Expected effective first-time application of ED 3
Opening balance sheet
First F/S according to IFRS
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Accounting for Intangible Assets Categories of
Intangible Assets
Intangible Assets with definite lifetime
Intangible Assets with indefinite lifetime
Subsequent treatment unchanged
No regular amortization
Rebuttable assumption of 20 years reversed
Impairment test annually or in case of triggering
event
Experience from US-GAAP
Time- and resource-consuming process
Companies face higher accounting requirements
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Accounting for Intangible Assets examples of
Intangible Assets

• Marketing-related intangible assets
• Trademarks, trade names, brands, service marks,
  internet domain names, newspaper masthead,
  non-competition agreements
• ...
• Customer-related intangible assets
• Customer lists, order or production backlog,
  customer contracts and related customer
  relationship, non-contractual customer
  relationship
• ...
• Artistic-related intangible assets
• Plays, operas, books, magazines, newspapers,
  pictures, photographs, compositions
• ...
• Contract-based intangible assets
• Licensing agreements, royalty agreements,
  standstill agreements, service or supply
  contracts, lease agreements, franchise
  agreements, employment contracts, use rights such
  as drilling, water, mineral
• ...
• Technology-based intangible assets
• Patented technology, unpatented technology,
  computer software, trade secrets
• ...

Source ED 3 Draft Illustrative Examples
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Accounting for Goodwill
Goodwill acquired in a Business Combination
should be recognised as an asset and should not
be amortised
Annual two step impairment test on the level of
the smallest cash-generating unit (CGU)
Identification of CGU required
Negative goodwill immediately expensed after
reassessment of identification and measurement of
acquired net assets
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Summary
Current standards
Proposed standards
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Process ofPurchase Price Allocation
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Agenda
Goodwill
Intangible Assets
Useful Life
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Purchase Price Allocation- Overview -

• Consider facts and circumstances (beyond
  ownership of shares)
• Measurement of purchase price (US-GAAP
  announcement date
• vs. IAS change-of-control date)

• Identification of Assets and Liabilities (esp.
  unrecorded/
• self-generated intangible assets)
• Estimating Remaining Useful Lifetimes
• Fair Value calculation of acquired tangible and
  intangible assets

• Calculation of deferred taxes on fair value
  adjustments (FV less NBV)
• Derive remaining goodwill
• Analyse future P/L impacts (scenarios)

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Purchase Price Allocation- Impact on
Consolidation -
Fair Value balance sheet of acquiree
Acquirees balance sheet before acquisition
Current Assets 300 ?
Liabilities 500 ?
Current Assets 300
Liabilities 500
PPA-Process - Identification Valuation
Fixed Assets 400 ?
Fixed Assets 400
Deferred Taxes ?
Equity 200
Equity 200 ?
Intangible Assets 0 ?
700
700
Goodwill 0 ?
700 ?
700 ?

• Additional Information
• Share deal
• Purchase price 600 Mio.
• Corporate tax rate 40

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Purchase Price Allocation- Numerical example (I)
-
Cost of the Acquisition Book value Equity before
Acquisition Excess Purchase Price
600
- 200
400
FV-Adjustments Current Assets Fixed
Assets Intangible Assets Total FV-Adjustments
- 50
- 50
- 200
- 300
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Purchase Price Allocation- Numerical example
(II) -
Total FV-Adjustments Deferred Taxes Total
FV-Adjustments after Taxes
- 300
120
- 180
Remaining Goodwill
220
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Purchase Price Allocation- Impact on
consolidation -
Fair value balance sheet of the acquired business
Acquirees balance sheet before acquisition
Current Assets 300 50
Liabilities 500
Current Assets 300
Liabilities 500
PPA-Process - Identification Valuation
Fixed Assets 400 50
Fixed Assets 400
Deferred Taxes 120
Equity 200
Equity 600
Intangible Assets 0 200
700
700
Goodwill 0 220
1220
1220

• Additional Information
• Share Deal
• Purchase Price 600 Mio.
• Corporate tax rate 40

Cost of the Acquisition 600 ./. Book value of
equity before PPA 200 Excess purchase
price 400 FV-Adjustments Current Assets -
50 Fixed Assets - 50 Intangible Assets -
200 FV-Total Adjustments - 300 Included
Deferred Taxes 120 FV-Adjustment after
Taxes -180 Remaining Goodwill 220
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Goodwill- Components of Goodwill -
Purchase Price plus Fair Value of Liabilities
assumed
Going Concern of acquiree stand alone
Inaccurate measure-ment of acquired assets
Over-payment
Fair Value (FV) of Net Assets
Value of expected synergies of combined entity
FV of pre-viously not recognized assets
Core Goodwill

Recognition
Value for acquirer
Impairment?
Additional value for acquirer
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Despite abolishment of systematic goodwill
amortisation net income will not necessarily
increase but certainly become more volatile.
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Comparison of Earnings Impacts
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