maximizing the value of an exit strategy
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Maximizing the Value of an Exit Strategy. March 1, 2001. Agenda. Learning Objectives Overview and opportunities for Probil The Turkish market for an IPO Cost of Capital Managing Uncertainties and Real Options Recommendations. Learning Objectives. Learning Objectives. - PowerPoint PPT PresentationTRANSCRIPT
Maximizing the Value of an Exit Strategy
March 1, 2001
Fabian BarrosMarcelo Bermudez Christopher Rowell
Marimuthu SubburathinamAlexandre Wolynec
Agenda
Learning Objectives
Overview and opportunities for Probil
The Turkish market for an IPO
Cost of Capital
Managing Uncertainties and Real Options
Recommendations
Learning Objectives
Evaluating country risks and mitigating factors
Challenges of doing an IPO in Turkey
Probil’s Cost of Capital
Impact of Uncertainties
Identifying and Modeling Real Options
Learning Objectives
Probil OverviewFounded 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
Overview and opportunities for Probil
The new Investors
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 $10 M cash
Take advantage of size and reputation to grow more
rapidly
Expand into e-business applications
Exit required by 2005
Overview and opportunities for Probil
The Business OpportunitiesAcquire a local distributor
Improve delivery efficiency, lower price multiples
Acquire US Internet professional services firm
Access to US market with remote, less expensive Turkey labor
Improve image in Turkey
Source of US$ revenue
Use an IPO to raise cash for acquisitions
When?
How much? 25% of the Company
Consider equity investment?
Overview and opportunities for Probil
Turkey Overview
Country Risks Level Mitigation
Expropriation Low
Currency fluctuation
High Yes
War or violence Low
Political instability High Yes
Corruption Low
Repatriation Low
Military governments an historic stabilization factor
Contract with suppliers to share currency risks
The Turkish market for an IPO
Turkey’s Stock Market
One of the most active Emerging Markets’ Stock Exchanges
High volatilityVolumes ($150m-$1.5bn)Prices
The Turkish market for an IPO
-50%
0%
50%
100%
150%
200%
250%
300%
350%
400%
450%
Mar-99
Jun-99
Sep-99
Dec-99
Mar-00
Jun-00
Sep-00
ISE 100
Nasdaq
S&P500
Doing an IPO in TurkeySmall IPO market
35 new issues in 2000 up from 27 in 1997($157m)
Turkey’s IPOs are among the most undervalued
Pre-IPO condition of the market most important factor
Investment bankers do IPOs on a “best effort” basis
Investors use Adjusted EV/EBITDA ratio
P/E introduces debt and tax structures which may differ
Simple EV/EBITDA assumes same growth rate
The Turkish market for an IPO
The Cost of Capital
Goldman-Integrated ModelUS Risk-free rate: 5.5%Market risk premium: 5.0%Beta of comparable: 1.45Country premium1: 4.5%Cost of Capital 17.25%
Cost of debt in US$ in Turkey: 20%-25%Somewhat inflated because of banking system crisis
1 Source: Moody’s
Cost of Capital
The Cost of Capital
Adjusted ICCRC model
Average country cost of capital 23%
Beta Adjusted 30%
Mitigation factors -3%
Cost of Capital 27%
Cost of Capital
Impact of key uncertainties
Revenue Growth rate
Normal distribution (25%, 15%)
Expected EV/EBITDA ratio
Lognormal
Actual EV/EBITDA ratio
Lognormal, 0.75 correlation with expected
Managing Uncertainties
Base Case NPV
Managing Uncertainties
E(NPV):$38.5MM
St. Dev.:
$15.1MM
Skewness: 1.02
Frequency Chart
Certainty is 95.00% from 15.62 to 74.39
Mean = 38.46.000
.006
.013
.019
.026
0
64
128
192
256
5.69 23.39 41.10 58.81 76.51
10,000 Trials 201 Outliers
Forecast: IPO in 2001
Real Options
Timing of IPO – “Wait for best moment”
Alternative Funding – Use VC Funds
International Expansion
Real Options
Real Option I: Timing of the IPO
If Expected EV/EBITDA < Strike EV/EBITDA
Don’t 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 competitor’s IPO
Real Options
Real Option II: Alternative Funding
VC interested in equity investment
EV/EBITDA of 10 for 10% of the company
If Expected EV/EBITDA < Strike Price < 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
Real Options
Real Option III: Expansion/Flexibility
Option to acquire internet consulting company in the US
Improves image of the companyAdds e-business implementation know-how skill setReduces overall cash flow volatility (“0.2” correlation)Provides flexibilityReduces cost of capital
– ICCRC weighted average for US and Turkey (needs to be calculated)
Requires a $5 million investment (company has this money)
Real Options
Real Options Model
IPO Forecast
IPO/VC
No - Wait next year
Strike Price
Finance Domestic Expansion
Yes
Value to Investor
Excess Cash Cash FlowsCompany
Value 2005
Revenue Growth
International Expansion
Real Options
Real Options ResultsReal Options Value Breakdown
38.5
44.0
1.40.2
3.9
30.0
32.0
34.0
36.0
38.0
40.0
42.0
44.0
46.0B
as
e V
alu
e
IPO
Tim
ing
Alt
ern
ati
ve
Fu
nd
ing
Inte
rna
tio
na
lE
xp
an
sio
n -
20
02
To
tal V
alu
e
NP
V (
$M
M)
Real Options
Recommendations
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 volatilityImprove image of the company
Conclusions
Timing of IPO Results
E(NPV):$39.9MM
St. Dev.:
$15.7MM
Skewness: .99
Frequency Chart
Certainty is 95.00% from 16.07 to 76.22
Mean = 39.88.000
.006
.012
.018
.025
0
61.25
122.5
183.7
245
5.69 24.25 42.81 61.37 79.94
10,000 Trials 198 Outliers
Forecast: No VC
Real Options
Alternative Funding Results
E(NPV):$40.1MM
St. Dev.:
$16.0MM
Skewness: 1.03
Frequency Chart
Certainty is 95.00% from 16.18 to 78.13
Mean = 40.11.000
.006
.012
.017
.023
0
57.5
115
172.5
230
5.69 24.49 43.28 62.08 80.88
10,000 Trials 199 Outliers
Forecast: VC
Real Options
International Expansion Results
Frequency Chart
Certainty is 95.00% from 17.40 to 86.90
Mean = 44.02.000
.006
.012
.018
.024
0
60
120
180
240
5.58 27.06 48.53 70.01 91.48
10,000 Trials 170 Outliers
Forecast: Expansion in 2002
Frequency Chart
Certainty is 95.00% from 16.95 to 83.88
Mean = 43.47.000
.006
.012
.018
.025
0
61.25
122.5
183.7
245
5.43 26.00 46.57 67.15 87.72
10,000 Trials 195 Outliers
Forecast: Expansion in 2001
E(NPV):$43.5MM
St. Dev.:$17.4MM
Skewness:
.99
E(NPV):$44.0MM
St. Dev.:$17.9MM
Skewness:
1.01
2001
2002
Real Options
END OF PRESENTATION
The following slides were removed from the presentation
Comparables for EV/EBITDA ratios
Managing Uncertainties
Comparison Data - EV/EBITDA
Country EV/EBITDA1999 2000 2001 (E)
DomesticEscort Turkey 18.5 9.4 8Arena Turkey 3.5 4.7 4.3
InternationalTech Data USA 13.9 11.8 8.9Altec Greece N/A 8.1 6.2Computer Land Poland 19.3 14.9 12.2Average 13.8 9.78 7.92
Base Case NPV: IPO in 2001
Base Case Valuation
VALUE FOR EMEA (time horizon = 5 years)
Million US$ 2,000 2,001 2,002 2,003 2,004 2,005
Cash from Operations 1.65 3.08 4.74 6.33 8.31
Cash excess IPO / VC 1.46 - - - -
Cash from sell of remaining shares 86.95
Total Cash Flows 3.10 3.08 4.74 6.33 95.27
NPV $37.93
Cost of Capital 27%