Makes You Better Mini-Case Dash Riprock, Mergers ... Question: Makes You Better Mini-Case Dash Riprock, mergers... Bookmark Makes You Better Mini-Case Dash Riprock, mergers and acquisitions consultant extraordinaire, was in the final stages of estimating the value of Makes You Better Corp. Makes You Better is a biopharmaceutical company located in Eastern Europe. I Wanna Get Bigger, Inc., a U.S.-based pharmaceuticals company, was considering the acquisition of Makes You Better and had retained Riprock to estimate a fair value. Riprock had obtained data on trading multiples for a sample of companies comparable to Makes You Better. These companies were also in the biopharmaceuticals industry. Multiples for the comparable companies are shown in Exhibit 1. Values for Makes You Better were calculated by applying the mean and median values of the trading multiples to the appropriate bases for Makes You Better. The results are shown in Exhibit 2. Regarding the estimation of an overall value for Makes You Better using the trading multiples, Riprock was concerned about the dispersion in the various ratios and the potential for outliers to unduly influence the results. Riprock had also estimated values for Makes You Better using a discounted cash flow methodology, utilizing data obtained from Makes You Better and independent sources. One key factor was whether or not Makes You Better would gain access to the Western European Market in 2011. Riprock estimated the discounted cash flow value assuming entry into Western Europe (Exhibit 3) and assuming no entry into Western Europe (Exhibit 4). Industry consultants were slightly more inclined to believe that Makes You Better would gain entry into Western Europe as opposed to not gaining entry. Riprock was now faced with the task of utilizing the analysis to estimate the value of Makes You Better. He believed that both methods had their strengths and weaknesses. He was slightly more confident in the discounted cash flow methodology.

1. Estimate the value of Makes-You-Better using trading multiples.

2. Estimate the value of Makes-You-Better using discounted cash flow analysis.

3. Estimate the value of Makes-You-Better. In other words, use any or all of the analysis to determine how much you would be willing to pay for Makes-You-Better.

EXHIBIT 1 MULTIPLES FOR COMPARABLE COMPANIES, 2007 Company Ratio of Stock Price to Annual Revenue Ratio of Stock Price to Net Income Ratio of Stock Price to Book Equity Ratio of Stock Price to EBT Ratio of Stock Price to EBIT Makes You Sleepy 121.90 NA 4.90 NA NA Makes You Anxious NA NA NA NA NA Make You Hungry 7.00 53.70 3.10 44.57 99.83 Makes You Crazy NA 66.70 NA NA NA Makes You Hairy 18.60 106.30 8.70 102.34 148.94 Makes You Vomit 2.50 NA 10.30 NA NA Mean 37.50 75.57 6.75 73.45 124.38 Median 12.80 66.70 6.80 73.45 124.38 EXHIBIT 2 VALUE OF MAKES YOU BETTER IN 2007 USING COMPARABLES GUIDELINE MEAN MAKES YOU BETTER VALUE ($ M) GUIDELINE MEDIAN MAKES YOU BETTER VALUE ($ M) Stock price/Net Income 75.57 $49,605 66.70 $46,030 Stock price/Book Equity 6.75 $24,031 6.80 $24,209 Stock price/Annual Revenue 37.50 $106,488 12.80 $48,961 Stock price / EBT 73.45 $48,751 73.45 $48,751 Stock price / EBIT 124.38 $87,810 124.38 $87,810 Note: Makes You Better 2007 amounts (in Millions $): Net Income = $403, Book Equity = $744, Revenue=$2,329, EBT = 403, and EBIT = $552. Makes You Better values reflect the estimated equity values plus $19,150,000 of debt (long-term plus current portion of long-term). EXHIBIT 3 DISCOUNTED CASH FLOW VALUATION ASSUMING COUNTRY-ADJUSTED COST OF CAPITAL AND ENTRY INTO WESTERN EUROPE Actual 2007 2008 2009 2010 2011 2012 Revenue $2,329 $5,682 $5,739 $12,915 $20,505 $27,775 Expenses (A) 1,926 4,887 4,934 10,918 17,247 23,309 EBT $403 $795 $805 $1,997 $3,258 $4,466 Tax (B) 0 0 0 0 0 0 Net Income $539 $795 $805 $1,997 $3,258 $4,466 Operating Cash Flow (C) $688 $2,313 $2,860 $3,450 $4,676 $5,911 Terminal Value (D) $48,524 Total Cash Flow $688 $2,313 $2,860 $3,450 $4,676 $54,435 2008 2009 2010 2011 2012 Total Cash Flow $2,313 $2,860 $3,450 $4,676 $54,435 Present Value $35,534 Marketable Securities 1,500 Total Value $37,034 Discount Rate 15.47% Terminal Growth Rate 5.0% Notes: A. COGS is expected to be a constant 15% of sales over the 2007-2012 period. SG&A is expected to be a constant 68% of sales over the 2007-2012 period. These are assumed to include depreciation of the new facility. Makes You Better does not pay taxes for the period 2007 -2012; its tax rate after 2012 is assumed to be 24%. Operating cash flow is computed as net income plus interest expense, plus depreciation expense, minus the increase in net working capital, minus capital expenditures. Depreciation is added back for the new facility. Capital expenditures are assumed to offset other depreciation. The terminal value is computed using cash flow for 2012 (minus taxes of 24% on income), capitalized at the cost of capital. EXHIBIT 4 DISCOUNTED CASH FLOW VALUATION ASSUMING COUNTRY-ADJUSTED COST OF CAPITAL AND NO ENTRY INTO WESTERN EUROPE Actual 2007 2008 2009 2010 2011 2012 Revenue $2,329 $5,682 $5,739 $7,515 $10,605 $12,475 Expenses (A) 1,926 4,887 4,934 6,415 8,992 10,551 EBT $403 $795 $805 $1,100 $1,613 $1,924 Tax (B) 0 0 0 0 0 0 Net Income $539 $795 $805 $1,100 $1,613 $1,924 Operating Cash Flow (C) $688 $2,313 $2,860 $2,553 $3,031 $3,369 Terminal Value (D) $29,150 Total Cash Flow $688 $2,313 $2,860 $2,553 $3,031 $32,519 2008 2009 2010 2011 2012 Total Cash Flow $2,313 $2,860 $2,553 $3,031 $32,519 Present Value $23,350 Marketable Securities 1,500 Total Value $24,850 Discount Rate 15.47% Terminal Growth Rate 5.0% Notes: A. COGS is expected to be a constant 15% of sales over the 2007-2012 period. SG&A is expected to be a constant 68% of sales over the 2007-2012 period. These are assumed to include depreciation of the new facility. Makes You Better does not pay taxes for the period 2007 -2012; its tax rate after 2012 is assumed to be 24%. Operating cash flow is computed as net income plus interest expense, plus depreciation expense, minus the increase in net working capital, minus capital expenditures. Depreciation is added back for the new facility. Capital expenditures are assumed to offset other depreciation. The terminal value is computed using cash flow for 2012 (minus taxes of 24% on income), capitalized at the cost of capital.

Exhibit 1

Multiples for Comparable Companies, 2007

Company

Ratio of Stock Price to Annual

Revenue

Ratio of Stock Price to Net Income

Ratio of Stock Price to Book Equity

Ratio of Stock Price to EBT

Ratio of Stock Price to EBIT

Makes You Sleepy

121.90

NA

4.90

NA

NA

Makes You Anxious

NA

NA

NA

NA

NA

Make You Hungry

7.00

53.70

3.10

44.57

99.83

Makes You Crazy

NA

66.70

NA

NA

NA

Makes You Hairy

18.60

106.30

8.70

102.34

148.94

Makes You Vomit

2.50

NA

10.30

NA

NA

Mean

37.50

75.57

6.75

73.45

124.38

Median

12.80

66.70

6.80

73.45

124.3

Exhibit 2

Value of Makes You Better in 2007 Using Comparables

				Guideline Mean		Makes You Better Value ($ M)	Guideline Median	Makes You Better Value ($ M)
Stock price/Net Income				75.57		$49,605	66.70	$46,030
Stock price/Book Equity				6.75		$24,031	6.80	$24,209
Stock price/Annual Revenue				37.50		$106,488	12.80	$48,961
Stock price / EBT				73.45		$48,751	73.45	$48,751
Stock price / EBIT				124.38		$87,810	124.38	$87,810

Note: Makes You Better 2007 amounts (in Millions $): Net Income = $403, Book Equity = $744, Revenue=$2,329, EBT = 403, and EBIT = $552. Makes You Better values reflect the estimated equity values plus $19,150,000 of debt (long-term plus current portion of long-term).

Exhibit 3

Discounted Cash Flow Valuation

Assuming Country-Adjusted Cost of Capital and Entry into Western Europe

	Actual
	2007	2008	2009	2010	2011	2012
Revenue	$2,329	$5,682	$5,739	$12,915	$20,505	$27,775
Expenses (A)	1,926	4,887	4,934	10,918	17,247	23,309
EBT	$403	$795	$805	$1,997	$3,258	$4,466
Tax (B)	0	0	0	0	0	0
Net Income	$539	$795	$805	$1,997	$3,258	$4,466
Operating Cash Flow (C)	$688	$2,313	$2,860	$3,450	$4,676	$5,911
Terminal Value (D)						$48,524
Total Cash Flow	$688	$2,313	$2,860	$3,450	$4,676	$54,435
		2008	2009	2010	2011	2012
Total Cash Flow		$2,313	$2,860	$3,450	$4,676	$54,435
Present Value		$35,534
Marketable Securities		1,500
Total Value		$37,034
Discount Rate	15.47%
Terminal Growth Rate	5.0%

Notes:

A. COGS is expected to be a constant 15% of sales over the 2007-2012 period. SG&A is expected to be a constant 68% of sales over the 2007-2012 period. These are assumed to include depreciation of the new facility. Makes You Better does not pay taxes for the period 2007 -2012; its tax rate after 2012 is assumed to be 24%. Operating cash flow is computed as net income plus interest expense, plus depreciation expense, minus the increase in net working capital, minus capital expenditures. Depreciation is added back for the new facility. Capital expenditures are assumed to offset other depreciation. The terminal value is computed using cash flow for 2012 (minus taxes of 24% on income), capitalized at the cost of capital.

Exhibit 4

Discounted Cash Flow Valuation

Assuming Country-Adjusted Cost of Capital and No Entry into Western Europe

	Actual
	2007	2008	2009	2010	2011	2012
Revenue	$2,329	$5,682	$5,739	$7,515	$10,605	$12,475
Expenses (A)	1,926	4,887	4,934	6,415	8,992	10,551
EBT	$403	$795	$805	$1,100	$1,613	$1,924
Tax (B)	0	0	0	0	0	0
Net Income	$539	$795	$805	$1,100	$1,613	$1,924
Operating Cash Flow (C)	$688	$2,313	$2,860	$2,553	$3,031	$3,369
Terminal Value (D)						$29,150
Total Cash Flow	$688	$2,313	$2,860	$2,553	$3,031	$32,519
		2008	2009	2010	2011	2012
Total Cash Flow		$2,313	$2,860	$2,553	$3,031	$32,519
Present Value		$23,350
Marketable Securities		1,500
Total Value		$24,850
Discount Rate	15.47%
Terminal Growth Rate	5.0%

Notes:

A. COGS is expected to be a constant 15% of sales over the 2007-2012 period. SG&A is expected to be a constant 68% of sales over the 2007-2012 period. These are assumed to include depreciation of the new facility. Makes You Better does not pay taxes for the period 2007 -2012; its tax rate after 2012 is assumed to be 24%. Operating cash flow is computed as net income plus interest expense, plus depreciation expense, minus the increase in net working capital, minus capital expenditures. Depreciation is added back for the new facility. Capital expenditures are assumed to offset other depreciation. The terminal value is computed using cash flow for 2012 (minus taxes of 24% on income), capitalized at the cost of capital.