Investing in distressed assets is nothing new. We have seen it for decades and we have seen many examples in the 2008-2010 period due to the economic crisis.

This NYT article on the sale of the John Hancock Towers in Boston was of particular interest to me as I spend many of my consulting days working out of it when visiting our corporate office. Reading the recent history of the building I was reminded about the opportunity and risks involved in investing in distressed assets.

Investing in distressed assets can be very profitable. Often the reason for distress is very clear, personal/specific and temporary. When the distressed situation blows away, the distressed assets gains tremendous value!  This article on investing in distressed assets highlights the profitability of the method when successful.

However, investing in distressed assets also has a high degree of risk. This risk is usually due to misreading the reason for distress or for misplaced or incorrect future expectations. The article also highlights an example of William Ackman’s (Perishing Square Capital Management) experience in investing in Stuyvesant Town and Peter Cooper Village.

If you are interested in learning more about investing in distressed assets, please do call or email us. Our finance tutors will be happy to assist you in learning how to evaluate and model opportunities.

Our last post on business valuation spoke about how you can approach business valuation using the discounted cash flow method or the valuation multiples method.  Here we show you how you can estimate the value of Groupon’s business using the multiples valuation method.

Your first task when trying to arrive at a multiples based valuation is to find comparable companies. Comparable companies are similar companies or companies that are in the same business, companies with similar characteristics, growth rates, profit margins, etc. Often it is not possible to get an exact match so picking a company with similar characteristics, growth rates and profit margins is sufficient.

For Groupon, Google itself may be a comparable company to arrive at valuation multiples. Google is significantly larger and but its slower growth rates compensate for the size difference. Apple has shown great growth but is much larger and is not a purely service business. Ebay can be a comparable firm to arrive at valuation multiples too. Lets start with Google.

Sales Multiples (valuation multiple)

According to the NYT, Groupon’s revenue may top $1 billion a year. This is a good place to start.  Google has revenues of 27.55 billion and a business valuation of 149.21 billion (enterprise value) today according to yahoo finance. This works out to a sales valuation multiple of 5.4x (149.21/27.55).

Using this 5.4x sales valuation multiple, Groupon’s business value will be $1 Billion*5.4 = $5.4 billion! This business valuation is in the ball park of the rumored deal price!

Earnings Multiples (valuation multiple)

Google has a PE multiple of 23.23. PE stands for Price/Earnings per share. This indicates that its business valuation is approximately 23.23 times its earnings as Google has very little debt.  If we assume that Groupon has the same profit margins as Google (28.8%), we can estimate its potential earnings at 288 million (28.8%*$1 Billion).

Using the above estimates, we can arrive at Groupon’s business valuation of $6.69 billion (288*23.23). This business valuation is again in the ball park of the rumored deal price! At first sight, it looks like Google is overpaying for Groupon. But it may not be overpaying. It may be a steal!

So are the business valuation concepts you learn in class used in business valuations in the real world? Looks like a resounding YES! So make sure you get your MBA finance concepts clear. You may be called to use it in the near future!

Go ahead and try the same with EBAY or AAPL’s valuation multiples. Let us know what you would pay for Groupon business using valuation multiples.

You learn the about business valuation in business school. But are the business valuation concepts you learn in business school used in business valuations in the real world?  Lets check a current business valuation:

You must have heard about Google’s interest in buying Groupon’s business at a reported valuation of $5-6 Billion! How could Google arrive at this business valuation of Groupon’s business? Valuation principles direct us to use either the discounted cash flow method or valuation multiples method to arrive at business valuations.

Business Valuations using the Discounted Cash-flow Method

To arrive at business valuation using the Discounted Cash-flow (DCF) process, we need to project out the cash flow of the business into the foreseeable future.  We discount this cash flow at the appropriate discount rate to arrive at the present value of cash flows for this valuation period. We then estimate a terminal value (present value of the cash flow beyond the foreseeable future assuming cash flow grows at a constant rate usually inflation rate or slightly higher).  The sum of the present value of cash flows for the foreseeable valuation period and the terminal value form the basis of the business valuation using the DCF method.

Can we estimate Groupon’s business value using the DCF method? We will need detailed projections of Groupon’s future cash flow which we do not have! We can try arrive at the business valuation with some estimates. But why do this when we have an easier approach?

Business Valuations using the Multiples

Business valuations using the valuation multiples is essentially looking at the business valuation similar companies have obtained recently and relating that to known business metrics like sales, earnings per share, customers,  etc. Groupon does not have any comparable companies with publicly available data. We therefore need to look at companies with similar business characteristics, growth rates, profit margins, etc to arrive at the appropriate valuation multiples.

Part 2 of this post shows you how valuation multiples can be used to arrive at the business valuation of Groupon.

Hedge funds are supposed to be seeking abnormal returns. Where a herds flock, abnormal returns are scarce! What will determine success for these funds? These funds include the big names of Soros Fund Management LLC, Viking Global Investors and GLG Partners LP. D.E. Shaw.

You can read the full WSJ article here.

Many factors come into play when a company decides on its IPO price.

You can be sure that the bankers and company’s finance teams spend hours trying to figure it out. Guess what? There ain’t a simple formula!  The general guide line is that you dont want to leave money on the table (price too low) nor do you want to price too high that your investors lose money and you lose good will!
Read how the recent GM IPO was priced in this NYT article.

Summary of Financial Statements Analysis Course

Warren Buffet is the richest investor on the planet, and according to many accounts, the bedrock of his success is the ability to understand financial statements. This is the best evidence that, despite tremendous development of sophisticated financial technologies over the last two decades, an old-school financial statements analysis still yields the best results.

The purpose of this course is to provide a student with a set of concepts and tools to analyze and evaluate companies using their financial statements. While the emphasis is on valuation, we will also pay close attention to measuring performance and estimating the quality of earnings. This course is essential for students interested in investment banking and investment research. In many business schools, it is dubbed “Investment Banking 101″, and that’s for a reason.

Recommended Textbook for Financial Statements Analysis Course

The recommended textbooks for this course are: “Analysis for Financial Management” by R. Higgins and “Principles of Corporate Finance” by Brealey, Myers, Allen. They complement each other and are best when used together.

Duration of the course can vary, depending primarily on the amount of time a student is able to commit and previous experience with accounting and finance. In most cases, the course can be completed within 5 weeks, given 2 sessions per week.

Success during the course is impossible without working knowledge of basic financial and accounting concepts; therefore Introduction to Finance and Introduction to Financial Accounting are pre-requisites to this course. In addition, almost all the case studies and exercises in this course require some degree of financial modeling, and because of this, fluency in Excel is critical as well.

Recommended Follow-up Courses for Financial Statements Analysis Course

Recommended follow-up courses for students who would like to get a deeper knowledge of specific areas:

• Introduction to Corporate Finance – focuses on how companies manage cashflow, how they find money to keep running/expand and how they decide which projects to pursue. An essential course for those who are interested in corporate finance and investment banking. Provides additional valuation techniques and insights, on top of those discussed in Financial Statements Analysis course.
• Entrepreneurial Finance – focuses on valuing early-stage companies and structuring venture capital investments. This course will be useful to students who are interested in start-ups and venture capital. Provides additional valuation techniques and insights.

Financial Statements Analysis Course Outline

1.      Valuation Introduction and Measuring Firm Performance

2.      The Basics of Equity Valuation

3.      Cash Flow and Earnings Projections

4.      Comparative Analysis for Valuation

5.      Using Accounting Earnings for Valuation (Residual Income)

6.      Economics of the Firm, Pro Forma Projections

7.      Valuation and Risk: Cost of Capital

8.      Fundamental Trading Strategies

9.      International Financial Analysis

10.  IFRS and International Valuation

Summary of Entrepreneurial Finance Course

Perhaps one of the most amazing things nowadays is how multi-billion fortunes are being created within just several years out of thin air by people in their 20s and 30s. This course helps better understand what exactly drives valuation of startup companies are during their lifetime, from seed investing all the way to IPO, and what role terms of investment play. The purpose of this course is to provide students with theory and practice of valuing startup-up companies, structuring venture capital deals and addressing other issues related to early-stage investing.

During the course, we discuss four main areas. We study how to evaluate new business opportunities, to raise money from investors and to exit eventually – all from the perspective of entrepreneurs. We also study, from the perspective of venture capitalists, how venture capital firms operate and how they are viewed by their investors, i.e. limited partners.

Recommended Textbook for Entrepreneurial Finance Course

The recommended optional textbooks for this course are: “Structuring Venture Capital, Private Equity, and Entrepreneurial Transactions” by Jack S. Levin and “Venture Capital and the Finance of Innovation” by Andrew Metrick.

Duration of the course can vary, depending primarily on the amount of time a student is able to commit and student’s previous experience with accounting and finance. In most cases, the course can be completed within 4 weeks, given 2 sessions per week.

This course is an advanced one and as such it requires working knowledge of financial and accounting concepts and tools, as well as the valuation segment of corporate finance. Having basic understanding of strategic management and business law would also be very helpful. In addition, almost all the case studies in this course require some degree of financial modeling, therefore fluency in Excel is critical as well.

Entrepreneurial Finance Course Outline

1. Introduction and Overview of Entrepreneurial Finance.
2. Valuation.
   1. DCF method.
   2. Venture Capital method.
   3. Real option valuation.
3. Deal Structure.
   1. Common contract terms.
   2. How deal structure affects valuation.
4. VC Partnerships.
   1. Structure.
   2. Performance.
5. IPO.

Summary of Mergers and Acquisitions Course

For a vast majority of companies, merger or acquisition is a life-changing event. On the other hand, some companies routinely acquire other, smaller ones. And finally, some firms even made it their core business to buy and re-sell companies. In any case, a merger or an acquisition is a very complex transaction that can create or destroy a lot of value and impact many people, like no other working of business.

The purpose of this course is to provide a student with concepts and tools to understand how companies and bankers evaluate, structure and execute mergers and acquisitions. We explore several areas: why M&A are transacted at all, how they are valued, what legal issues need to be addressed, and particular details of friendly, hostile and international M&A. For every area, we begin with reviewing theory and then look at how it is applied in the real world.

We need to emphasize that this course is not about financial valuation, although the deal value is a key issue during every transaction. This course is more about how external factors (legal, strategic, organizational, tactical) interplay to drive financial valuation in a competitive game. This course will be very useful for those students who are interested in investment banking, leveraged buyouts and general management.

Recommended Textbook for Mergers and Acquisitions Course

The recommended textbooks for this course are: “Mergers, Acquisitions and Corporate Restructurings” by Patrick Gaughan and “Principles of Corporate Finance” by Brealey, Myers, Allen.

Duration of the course can vary, depending primarily on the amount of time a student is able to commit and previous experience with accounting and finance. In most cases, the course can be completed within 4 weeks, given 2 sessions per week.

Success during the course is impossible without working knowledge of corporate finance and especially valuation, therefore Introduction to Finance and Introduction to Corporate Finance are pre-requisite to this course. Good understanding of strategic management, while not required, will be very useful for evaluating rationales for M&A and ultimately for better estimating the deal value. Finally, almost all the case studies in this course require detailed financial modeling, therefore fluency in Excel is critical as well.

Mergers and Acquisitions Course Outline

1. Introduction to M&A.
2. Valuation overview.
3. Legal aspects.
4. Friendly acquisitions.
   1. Tax issues.
   2. Payment methods for acquisitions.
   3. Valuing synergies.
5. International M&A.
6. Hostile M&A.
   1. Defensive tactics.
   2. Hostile takeovers.

Summary of the Introduction To Financial Accounting Course

The purpose of the course is two-fold. First, on a higher level, to convey how important accounting is for those of us who are looking to understand what’s going on with a company and what is likely to happen in the future.

Second, on a technical level, this course is intended to teach in detail what stands behind the key elements of financial statements. We will see how most common transactions are recorded, how they affect the three statements and what degree of discretion the management has in recording them. When we analyze financial statements, we need to understand exactly where the numbers come from and how reliable they are, and that’s precisely what this course teaches.

Since financial statements are the language of the business, successful completion of this course is critical for almost all finance courses: Corporate Finance, Financial Statements Analysis, Advanced Corporate Finance, Mergers and Acquisitions etc.

Recommended Textbook for Introduction To Financial Accounting

The recommended textbook for this course is “Financial Accounting: An Introduction to Concepts, Methods, and Uses” by Stickney and Weil.

Financial Accounting Duration

Duration of the course can vary, depending primarily on the amount of time a student is able to commit. In most cases, the course can be completed within 6-8 weeks, given 2 sessions per week.

Introduction To Financial Accounting Course Outline

1. Accrual Accounting.
2. Elements of Annual Report and Financial Ratios.
3. Revenue Recognition & A/R.
4. Inventory / Cost of Goods Sold.
5. Statement of Cash Flows.
6. PP&E.
7. Accounting for Taxes.
8. Marketable Securities.
9. Intangible Assets.
10. Long-Term Debt.
11. Leases.
12. Stockholder’s Equity.
13. Acquisitions and Intercorporate Ownership.
14. Financial Reporting Process & Ethics.

Summary of the Corporate Finance Course

The purpose of this course is to learn, using real-life examples, how companies manage their finances. The course focuses on three main areas. First, cashflow management. Have you ever wondered how a successful company with ф great product starts growing and then goes bankrupt? Most likely, the company has mismanaged its working capital.

Second, financing. Most of the companies always need more money (just like most of people). But how much exactly is needed? And what is the best way to raise it – via borrowing or via selling a stake in the company? Every option has different costs and different risks, and the choice can have very serious consequences.

Finally, valuation. When a company considers building a new plant, or relocating to another country, or replacing equipment, or even buying another company – it needs to understand what is the monetary benefit of doing it. Over the long term, the companies that do the best, are those which have consistently identified and undertaken the most valuable projects available. So how exactly do we estimate value?

Recommended Textbook the Corporate Finance Online Course

The recommended textbooks for this course are: “Principles of Corporate Finance” by Brealey, Myers, Allen and “Analysis for Financial Management” by R. Higgins. They complement each other and are best when used together.

Duration of the course can vary, depending primarily on the amount of time a student is able to commit and previous experience with accounting and finance. In most cases, the course can be completed within 6-8 weeks, given 2 sessions per week.

Pre-requisites to the Corporate Finance Online Course

Success during the course is impossible without working knowledge of basic financial and accounting concepts, therefore Introduction to Finance and Introduction to Financial Accounting are pre-requisite courses for this course. In addition, almost all the case studies and exercises in this course require some degree of financial modeling, and because of this, fluency in Excel is critical as well.

Recommended follow up courses for Introduction to Corporate Finance Course

Recommended follow-up courses for students who would like to get a deeper knowledge of specific areas:

• Advanced Corporate Finance – building on the previous course, discusses advanced topics and techniques such as valuing joint ventures and real options. This course would be particularly useful for students interested in corporate finance.
• Mergers and Acquisitions – studies why companies sometimes decide to buy other companies, how they come up with the price and what else surrounds the process (for example why a friendly merger is usually better than a hostile one). This course is essential for investment banking and corporate finance professionals.
• Entrepreneurial Finance – focuses on valuing early-stage companies and structuring venture capital investments. This course will be useful to students who are interested in start-ups and venture capital.

Introduction to Corporate Finance Course Outline

1.     Introduction – key tasks of the CFO:

a. Valuation.

b. Financing.

c. Cash management.

2. Identifying funding needs.

a. Using Sources and Uses of Funds.

b. Cash cycle.

c. Implications of trade credit.

d. Ratio analysis.

e. Using pro forma statements to forecast funding need.

f. Sustainable growth rate.

g. Implications of business cyclicality.

3. Optimal capital structure – basics.

a. Possible source of funds.

b. Characteristics of financial claims.

c. Key questions for capital structure decisions.

d. Modigliani-Miller Theorem.

e. Adding real-world pieces to the MM picture:

i. taxes;

ii. cost of financial distress;

iii. asymmetric information;

iv. agency costs.

f. Pecking order theory.

g. Summary – checklist for capital structure decision.

4. Valuation using Free cash flows.

a. Introduction to valuation.

b. Using NPV versus other criteria.

c. Using comparables.

d. Estimating free cashflow.

e. Estimating discount rate.

5. Weighted Average Cost of Capital (WACC) and Adjusted Present Value (APV).

a. Introduction – how to include effects of interest payments.

b. Using WACC method

i. using CAPM to estimate cost of equity.

c. Using APV method.

d. WACC vs. APV.

6. Real options.

a. Review of options as financial instruments.

b. Spotting real options.

c. Examples of real options.

d. Valuing real options:

i. “dynamic” DCF method;

ii. Black-Sholes model.

7. Valuing a company.

a. Enterprise value vs. Equity value.

b. Estimating terminal value.

c. Assessing growth using Economic Value Added (EVA).

d. Using valuation by multiples (comparables).