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LEADENHALL CORPORATE ADVISORY
VALUING DISRUPTION
AGENDA
1 What is ‘disruption’
2 Impact of disruption
3 Valuation approaches
4 Valuation issues
5 Questions
2
3
What is disruption?
WHAT IS DISRUPTION
Financial services / banking Disrupted = Kodak / Blockbuster / Nokia
Disruption /dɪsˈrʌpʃn
Noun
A product or service takes root initially in simple applications at
the bottom of a market and then relentlessly moves up market,
eventually displacing established competitors
Clayton Christensen, Harvard Business School
Synonyms: distraction, interference, trouble, inconvenience,
irritation
WHAT IS DISRUPTION (2)
Financial services / banking Disrupted = Kodak / Blockbuster / Nokia
Disrupted Disrupter
Start-up date
Current valuation
2009 US $50bn
Cost of buying a taxi licence in Sydney drops to lowest in six years Sydney morning Herald, December 14, 2014
WHAT IS DISRUPTION (3)
Disrupted Disrupter
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WHY SHOULD YOU CARE
Disruption is here to stay
Technology trends
Consumer behaviour
Globalisation
Can impact all businesses
Capital allocation
Opportunities to diversify
Defensive / reactive
Valuing disruption
WHY VALUE
10
M&A Compliance Equity & Fundraising
Price of over time
VALUE PRICE
IPO range (v1)
$60-$66 per
share
+127% return
(p.a)
$150b
Closing price on
IPO
$94 per share
+2000% return
(p.a)
$233b
Pre-IPO fund
raising
$32b
2012
1-Sep-14
IPO range (v2)
$66-$68 per
share
+440% return
(p.a)
$170b
12-Sep-14
19-Sep-14
Post-IPO trading
$119 per share
+190% return
(p.a)
$300b
10-Nov-14
11
COMMON VALUATION APPROACHES
= Costs incurred
or
Replacement cost
Asset based
approaches
Relative valuation = Earnings/revenue
x
Multiple
Discounted cash flow = Net present value
of future cash flows
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DETERMINING CASH FLOWS
Disrupter
-20
-10
0
10
20
30
40
1 2 3 4 5 6 7 8 9 10 11 12 13 14
$
Time (years)
1) R&D 2) proof of concept3) commercialisation
Disrupted
-
5
10
15
20
25
30
35
40
45
1 2 3 4 5 6 7 8 9 10 11 12 13 14$
Time (years)
Significant investment required to retain lower market share
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DETERMINING CASH FLOWS (2)
Target market – taxis,
broader car services
Geography
Revenue share
Barriers to entry
Take-up and network
effect
Competitive response
(incumbents and new)
Driver share of revenue
Regulatory costs
Tax
Capital costs
Potential users/customers Geography
Pricing
Competitive response Political/regulatory
Barriers to entry
Cost structure Staff incentives
Regulatory Capex W/C
= FREE CASH FLOW
Addressable market
Market share
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DETERMINING CASH FLOWS (3)
Different perspectives / views on cash flows can have
profound impacts on value
Investor 1: US$6 billion
Investor 2: US$54 billion
RISK AND RETURN
16
Risks
Business model
Execution
Key person(s)
Funding
Failure
Low High
Start-up 50% 70%
Round 1 financing 40% 60%
Round 2 financing 35% 50%
Bridge-IPO 15% 30%
Returns
Need to ensure risks aren’t included in cash
flows and discount rate!
Venture capital required returns
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SUMMARY
• Disruption is here to stay
• Understanding the potential impact on your business is critical
• Valuing early-stage and/or disruptive companies is subjective and complex
QUESTIONS
SYDNEY Level 11, 65 York St Sydney NSW 2000 T +61 2 8823 6224
ADELAIDE Level 1, 31 Franklin St Adelaide SA 5000 T +61 8 8385 2207
MELBOURNE Level 9, 440 Collins Street Melbourne, 3000 T +61 3 9607 1330
DAVE PEARSON
Qualifications and professional
memberships
Bachelor of Commerce, Wilfrid Laurier
University
Institute of Chartered Accountants (Ontario)
Masters of Applied Finance, FINSIA
Chartered Business Valuer
Chartered Financial Analyst
Experience
Dave joined Leadenhall in September 2014 after
10 years as an adviser at Deloitte and KPMG in
Australia, Canada and Hong Kong.
Dave specialises in providing valuation and other
commercial advice for M&A, strategic decision
making and compliance purposes across a range
of industry sectors including financial services,
property and infrastructure.
Dave’s experience includes preparation of a
number of independent expert reports and
pricing/valuation papers and other commercial
advice to assist senior management, boards and
shareholders evaluate M&A transactions and
capital raising alternatives.
DAVE PEARSON E: [email protected] T: (02) 9199 1103