Precedent Transaction Analysis Tutorial – Microsoft / aQuantive
In this lesson, we’ll learn how to calendarize aQuantive’s financial statements, how to get projections from equity research, and how to calculate the transaction value and multiples for Microsoft’s acquisition of aQuantive.
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Sample Valuation Video – Microsoft / aQuantive Precedent Transaction Transcript
We’re going to get into our first M&A transaction, our first precedent transaction comparable here. And just looking at the template that you see right in front of you; right now that I’ve pulled up here on the screen; we see that in some ways it’s actually very similar to the calculation template we used for our public company comparables, over here.
The main difference is that it’s actually simpler. We don’t need to take into account as many different items here, because we’re not going to worry about calculating earnings per share for these companies and the reason why is because again, we don’t care too much about it.
Earnings per share tends to be more important, P/E tends to be more relevant for public company comparables than it does for precedent transactions, at least in the technology company and with internet companies like this. But, overall, the template is very similar.
We have the seller’s ticker on top if they’re a public company, then the seller’s name, then the buyer’s name. Then we go down and we have the typical income statement items, the balance sheet data, equity research projections, because we’re going to be looking at those, to figure out what the forward numbers are like here, and then of course, the diluted shares calculation.
I’ve already filled in the transaction announcement date here of May 18, 2007, as well as Microsoft’s offer price of $66.50 per share, and then finally at the bottom, the valuation metrics, multiples and these other variables we’re going to be looking up.
Right now, we see sort of an error message here, because I have not yet filled in this column. This is just going to be our TTM column in this case, and then this will be Year 1 and Year 2, forward years. If we look at what we’re actually trying to get to here, our display template for these M&A transactions, again it’s actually pretty similar to our public comps template, right here.
The main difference is that it is a bit simpler, and we’re also taking into account the acquisition date and the acquirer name, the target name, of course, since these are M&A transactions, but we still want to look at equity value, enterprise value.
These are both going to be based on the offer prices for the company, so unlike public company comparables where you just look at the market price, the share price of the company at a given point in time, with M&A transactions we’re looking at the offer price.
So, we’re assuming essentially, that the company’s stock price is however much the buyer offered to pay per share, as we’ll see with aQuantive. And then the rest of the metrics here, again very similar to what we saw before, TTM revenue, forward year revenue, EBITDA, forward EBITDA, as well. I’m not going to even bother to list EPS or P/E multiples here, because we’re not calculating them and because they’re not quite as relevant.
For an internet company like Yahoo and for this type of transaction, EBITDA multiples are actually the most relevant ones to look at, so we’re going to focus on those. So, going back to aQuantive, what we’re going to have to do here is actually calendarize our projections, which is something that we haven’t done in detail, yet.
The reason is because this transaction took place on May 18, 2007, so it was not at the beginning of the year. It was not January 30, 2008 as we saw with the public company comparables, one-quarter of the year had already passed. Their fiscal year ends in December. The March 2007 quarter had already passed.
So, what we’re going to have to do in this template is for our new partial we’ll enter the March ’07 numbers here, the quarterly numbers, and then for the old partial we’ll enter the March ’06 numbers. And we’ll be using fiscal year 2006, to base all our calculations off of.
Then in the TTM column we’ll just take the 2006 fiscal year, add the quarterly ’07 numbers, and subtract the quarterly ’06 numbers to get to our trailing 12-month numbers. So, where I’m going to start here is with aQuantive 10-K, which I have up in this window.
There’s also a link to it right below this video. We’re actually going to ignore the common stock outstanding here, because we want to be pulling this number from the 10-Q.
The 10-Q is a quarterly report for ‘07; it’s the more recent information, so we want to be getting our numbers from there, rather than the 10-K as we saw with the public company comparables. But, as with those we’re going to scroll down to financial statements and supplementary data first, then go to statements of operations, and here are all their revenue numbers.
So, for 2006 the revenue was $442.211 million. So, we have that, and let’s enter a cost of goods sold. This is just going to be the cost of revenue right here, so $67.578 million. For operating expenses, unfortunately they don’t list this in a great way here, so what we’re going to do here is take the total cost and expenses, and then subtract the cost of goods sold, the cost of revenue that we’ve already taken out, here.
So, we’ll take the $366.205 million actually, then we’ll subtract cost of goods sold of approximately $68 million. Now, we have a kind of weird item here, this ‘other operating income’. So, I don’t know exactly what that means.
It’s strange that they’re listing this as other operating income, because usually when you see other it’s just referring to interest income for example, but they’re counting this as operating income, so we’ll have to investigate that and see what exactly they mean. But for now, let’s enter the rest of these numbers, amortization, depreciation, stock-based comp, and non-recurring charges.
So, amortization is actually listed right here in the income statements, so it’s convenient. We’ll cross-check it with amortization listed on the cash flow statement, as well. So, we have the $9.330 million. Depreciation is not listed here. This client reimbursed expenses; this is something that we’ll also have to look into. My guess is that this is something that is probably being added to their revenue, so we could take a couple of approaches.
To be honest, we’re probably just going to ignore this and keep it as an operating expense. The reason is, because if it’s added to their revenue and also added in their expenses, and especially for a really small number like $5 million, out of $450 million revenue, it’s not going to make a difference.
And it won’t make a difference for EBITDA, if they’re adding it to both revenue and to their operating expenses. So, for depreciation let’s go to the cash flow statement. So, we have it listed right here, depreciation and amortization combined, so the $25.775 million number.
I’m going to subtract out amortization from this number, because depreciation and amortization are listed together (and we already know what amortization is from the Income Statement), and then stock-based comp is this $18.554 million number. Now, in terms of non-recurring charges we don’t see too much listed here, besides the standard depreciation and amortization and stock-based comp. Excess tax benefit, this is also really kind of a standard item, and then other non-cash items, but this is very small.
Looking through the rest of this, these are all standard balance sheet type items. It doesn’t look like there is anything major in terms of add-backs, here. The three things we do want to look into are other non-cash items, which was listed right here, though small. And then also look into client reimbursed expenses and other operating income.
So, we’ll start by looking for other non-cash items, and they’re not even saying what it is. So, if we don’t even have that information for what it is, then we’re not going to worry about adding it back, especially since it’s only around half a million dollars, which for a company the size of aQuantive is basically almost nothing. So, let’s now look for client reimbursed expenses, and see exactly what this is.
And as I predicted, these reimbursable project expenses are also recorded as a component of revenue, so $5.7 million, $4.3 million; and $1.3 million. So, they’re recording them under both revenue and operating expenses. We might make an argument here for subtracting them from revenue, because they’re not really revenue, similar to how with Google and Yahoo we subtract traffic acquisition costs (i.e. Revenues ex-TAC).
The difference here is that it’s actually standard for companies like this, with clients who have client-reimbursed expenses, listed under revenue. And it’s a very, very small proportion; it’s nothing like the traffic acquisition costs for Google and Yahoo. So, in this case we’re just going to leave it in.
Then the last thing we have to look for is ‘other operating income’, which conveniently is listed right here. Credits resulting from the extinguishment of liabilities relating to media served prior to 2004, before we had sequential liability terms for our media purchases.
So, it looks like this is some kind of either non-recurring item or something that is unusual, here. So, we may recognize additional operating income, from the extinguishment of these liabilities in future periods. In this case, what we’re actually going to do is, since this looks like a one-time item, and it looks like it was from that special case of extinguishing liabilities, we’re actually just going to keep this out, altogether.
So, in terms of the effect that it’s going to have, if we go in here we see that our EBIT is $95 million and EBITDA is $120 million. So, by not adding that back, let’s just compare our operating income to the filing’s operating income. So, we’ll just take gross profit and subtract operating expenses.
So, ours comes out to $76 million. They have $79 million, because they’re counting it as operating income. Not a huge difference, but we may just want to footnote this, and explain what we’re doing. Subtracting COGS from total expenses, ignoring other operating income.
And depreciation we’ll also just say, subtracting income statement amortization. In terms of other non-recurring charges, let’s go back to the statements and to the notes and see if we can see anything.
Probably nothing major here, because we already looked at the cash flow statement, and didn’t see anything show up on there, but we can skim through, here. What you want to do when looking for these items is to scan these expense sections, and look for anything that has dollar signs.
Sometimes they’ll say non-recurring or unusual, but in most cases, I just went through this quickly, and didn’t see anything here that looked unusual. They have acquisitions. Usually, there is nothing on non-recurring expenses here, tangible assets, goodwill, and taxes.
So, just going through this, and looking at the statements it looks like there is nothing too major, which we’ll confirm later on with equity research. So, with that in place we’re just going to enter zero for non-recurring charges, here.
And with the 2006 fiscal year set, now the next thing we want to do is move to aQuantive’s 10-Q. And what we want to do there is pull information first off on their options outstanding, so we can get to their diluted shares, and then get to their balance sheet, and then finally fill out this old partial and this new partial column, as well. That will let us calendarize these financials, and get to the real TTM numbers. Right now, this TTM number is really just the 12/31/06, the fiscal year ’06 number for aQuantive.
So, let’s go to their 10-Q, which I also have open in a separate window. We see here they give the number of shares. The number of shares of the registrant’s common stock outstanding was 78,924,220 shares, so we’ll enter that. In terms of the share price and the transaction date here, and getting all of that information, if you look there are a lot of press releases on this deal.
I have one up here in a window and they say here, Microsoft said we’ll buy aQuantive for $6 billion, paying at 85% premium, and they give the per share acquisition price here of $66.50 per share. Previous day’s ‘unaffected’ share price was $35.87.
And so, press releases like this are never entirely accurate. They’re almost always just estimates of what actually happened, but you can pull acquisition offer prices, from here. They’re useful for that. Dates, they’re useful to get from press releases, but you never want to rely on press releases for numbers for public companies, assuming that you have a better source.
You want to use them to confirm, and maybe to pull the acquisition price information and the transaction date, only. So, we just confirmed the per share price by looking at this one. Now, to get the diluted shares outstanding, I’m going to go back to the 10-Q right here, and I’m going to search for exercise price to find this, quickly.
We see here, that in aQuantive’s section on their stock option activity, stock-based compensation, like some of the other companies we looked at, they’re unfortunately not giving too much detail on this, so we’re just going to have to go with this summary information.
They say, 12.639 million stock options outstanding, so we’re going to enter that, 12.639 million, and a strike price of $11.27, so a dilution of about 10 million shares. Actually, pretty big for a company of this size, over 10% dilution which explains how the equity price is closer to $6 billion that we saw in the press release.
Now, the other thing we want to check for briefly is to make sure there are no other sources of dilution such as convertible bonds, here. It’s not listed under there. I’ll try dilutive now, and here we go. So, add dilutive effect of employee stock option compensation and awards, and then the dilutive effect of convertible debt.
So, there’s clearly convertible debt going on here that we need to factor in, as well. We’ll do a search for convertible, because we need to find how much and what the conversion price is. So, we have the interest rate, we have $80 million of convertible debt. That’s what they’re saying is on their balance sheet as of March 31, 2007.
So, let’s just go back here and enter the $80 million number. We’ll be changing this, of course, but this is just what we have, for now. They’re giving some information on interest expense, but it looks like they’re actually not doing the conversion price, here. I just searched and they don’t have it anywhere in this filing.
So, in this case what we’ll do is actually go back to the 10-K, and look for a conversion price. Here we go; we just found it under Note 13. The notes bear an interest rate of 2.25%, the same one we found in the 10-Q, payable semi-annually, and are convertible into our common stock at a fixed conversion price of $12.98 per share, so $12.98 per share.
Now with Yahoo, if you recall they’re actually different conversion prices, the amount that the convertibles actually converted into shares at, and then the amount that the share price had to exceed the strike price, for the convertibles debt to actually be convertible into common stock for our diluted share count.
In this case, they’re just giving us one price, which is the best information we have here, so we’re going to go with that, so $12.98 per share. Then you remember with convertibles, the way we do it is we divide the $80 million convertible note amount by 1,000, because each $1,000 dollars’ worth of convertible bonds is a single convertible unit. Then we’ll divide by the share price of $12.98, here.
This formula is not quite right, because this is assuming options instead of convertible bonds. So, I’m going to change this. I’m going to say if the offer price is over the strike price then we will assume conversion, otherwise a zero. So, now we see that we get a fair amount of conversion in this. So, I’m going to footnote this and say, changed formula for convertible.
Just going back to their 10-Q, we didn’t see dilution from anything else, here. One thing we could check is our math here, and we see their dilutive effect from employee stock options and stock awards is about 4.7 million shares, 4.8 million. Ours is higher than that which makes sense, because the premium on this deal was huge, so it makes sense that we have about twice as much dilution.
For the convertible, ours matches theirs almost exactly and again, this is fine, because remember that with convertibles when you get dilution it’s the whole amount of convertible shares that change into stock. So this is fine, and our dilution calculation matches theirs. They have 89 million shares, we have 95 million shares, and this is because of the difference in options, here.
Also, fill out under valuation multiples, I’ll just say TTM here, this is a named variable. Then I’ll have forward Year 1 and forward Year 2, here. So, with that in place, let’s go up and get aQuantive’s balance sheet information. I’m just going to do a search for balance sheets, and here it is.
So, we have to be careful to pull the March 31, 2007 numbers, here. For cash and cash equivalents, I’m going to enter the $130 million, and then the $165 million from short-term investments, and sum these both up. Looking at the rest of this, we could also enter long-term investments here, but we need to see what’s in this one, first.
I’m just going to do a search for long-term investments, here. It looks like they’ve acquired shares in Digital Palette, some other company. So, similar to Interactive Corp and Yahoo; they have shares in another company.
Here, since it’s not clear whether it is a public or private company. If I had to guess I would say private given that aQuantive has acquired shares in it and they’re not too large. We’re just going to go with the book value of those long-term investments here, so the $18.996 million number.
For debt, so there’s no conventional debt here, it’s just the normal accounts payable, deferred revenue items, and really the only debt item we see here is these notes payable.
And these are actually referring to the convertible bonds, so I’m going to list this as similar to the formula we did for Yahoo. I’m going to say if this is greater than zero then we have dilution, so this is no longer debt, otherwise we’ll have the $80 million number, here.
I’m going to change the formatting to reflect the fact this is the formula, so $80 million as debt, zero if converted. Preferred stock, they don’t have any here and minority interest, also nothing showing up in this section.
So, with that in place now we can start entering the rest of these items under old partial and new partial for our calendarization. So, let’s just scroll down to income statement.
For 2007 (i.e. new partial period) we have $142.621 million, and for 2006 (i.e. old partial period), we have $92.185 million of revenue. Be careful not to get these mixed up when you’re entering them, because the columns are actually reversed from what they have in the filings, here.
Cost of revenue, so $23.588 million for new partial period, and then $13.378 million for old partial period, operating expenses, so $123.773 million total expense for ’07 less the COGS as usual (to get to only OpEx), and then $81.032 million total expense for 2006, less the COGS (to get to only OpEx), there.
For amortization, you’ll recall from the 10-K that this is actually listed on the income statements, so it’s easy, $2.743 million for partial period ’07, and then $2.036 million for partial period ’06. It doesn’t look like there are any big non-recurring charges, here.
They still have this other operating income category, but we’re ignoring it. So, let’s go down to the cash flow statement and get the rest of this. So, depreciation and amortization combined is $8.151 million for partial period ’07, so we need to subtract out the amortization component (already given) to get to depreciation, and then $5.799 million for combined D&A for partial period ’06, and again we need to subtract out the amortization to get to stand-alone depreciation. Stock-based compensation is $4.704 million for partial period ’07, and $4.749 million for partial period ’06.
And for non-recurring charges, so let’s just look at the cash flow statement and see if we see anything here. So, we have the normal D&A, stock-based comp, tax benefits, other non-cash items, it doesn’t look like there is anything too unusual here.
So, my first instinct would be to say that there are no other major non-recurring items, but let’s just read down and scroll through the notes, and see if we find anything. So, here they’re just talking about their revenue recognition, unbilled receivables, but that’s not really an add-back, getting into the stock options, here.
This is discussing again, the other operating income category, but we’re just ignoring this altogether for our analysis. Stock-based comp, legal proceedings, sometimes add-backs related to legal charges show up here. It really looks like there is nothing in the notes.
Then just going through the MD&A, a lot of times you can also find expenses listed here, because they discuss the different expense and revenue categories they have, nothing too unusual, yet.
Okay and here we go. So, under G&A actually, we get to our non-recurring expense. And I went through this very quickly, because I’ve a lot of experience going through filings, and because I’ve already done this, so I know where to look. But generally, when you’re finding non-recurring charges, look on the income statement and cash flow statement, first.
If it doesn’t show up there go through the notes and then go through the MD&A, and look under these different expense and revenue categories. Pay attention to dollar signs, scan for those, and you can sometimes find things.
So, G&A expenses also increased as the result of increased depreciation expense. Increase was also due to higher business tax expense, due to the reversal of a business tax accrual, of $1.9 million that occurred in the first quarter of ’06.
So, this increased the G&A expense, and this is something we will be adding back, here. It looks like this is further discussed in Note 2, due to the consolidated financial statements.
We’re not even going to bother going down here, so we’re just going to add back that $1.9 million, here. So, we’ll say and this is for partial period ’06, so it’s the old partial period. I’ll just footnote this and say, business tax accrual reversal per 10-Q.
So, with that in place we’re now essentially done with the filings part of this, which required us to look at the balance sheets and go through and figure out the shares and their financials for the TTM periods, and the quarterly periods, here.
So, the final thing we’re going to do is figure out what aQuantive looks like going forward, by looking at equity research. Now generally, for M&A transactions like this, your best bet for equity research is to find something from around the time that the transaction was announced, because then you’ll get reports from analysts who estimate how much the company will actually contribute, and also potentially how much they would’ve had, had they not been acquired by Microsoft, in this case.
There’s always a question of which number do you use here, the stand-alone projections or combined with Microsoft projections. The standard practice in banking is to just use the stand-alone numbers.
You run into dangerous territory if you start assuming synergies and all sorts of other things, but usually just going with equity research stand-alone projections is safe, so that’s what we’re going to do here.
So, I have up here a report from Credit Suisse on aQuantive from May 8, 2007, so this is a perfect date, it was right before the transaction was announced, so fairly unbiased and really up-to-date information as of the transaction date.
Let’s just go through and look at their numbers here and compare them to ours first. So, they don’t have TTM, but they do have fiscal years numbers. Their EBITDA they’re giving $123.3 million versus ours of $120 million, this is most likely because of that charge that we were ignoring here, the other operating income one.
I think it’s really more of a nonstandard expense, because it’s non-recurring and it’s going to go away after a while. They’re actually including it in their EBITDA number, we’re taking it out. EPS, we’re not even worried about that. Revenue is $442.2 million, so we see that’s similar to us, they’re also not subtracting the client reimbursable expenses, they’re actually including them there, so our numbers seem to match decently with theirs. For the forward years here we have 12/31/07 and 12/31/08.
Enter CS for the bank, and then the date here again is 5/8/07. The revenue, so we have $610.2 million for ’07, and then $748.6 million for ’08. For EBITDA we have $154.4 million for ’07, and then $197.8 million for ’08. For EBIT, again they don’t list it on the front page, but if we scroll down a bit we can probably find it.
So, we’ll look under pro forma operating income, right here. So, they have $94.88 million for ’06 versus our number, ours matches almost exactly, we have $95 million. So, we’ll go with projected EBIT of $119.24 million for ’07, and then $153.57 million for ’08.
So, now we have our equity research projections for the aQuantive/Microsoft deal. And just looking at these multiples we see that they’re extremely high. The revenue multiple is 12x TMM, forward revenue multiple 10x, forward year 2 revenue multiple of 8x; even two years forward EBITDA multiples are also really high, between 30x and 40x.
You’ll also recall, and if you go back to the sheet that we were originally getting these transactions from, the EBITDA multiples are actually in this range, so we know that we’re basically correct, and this is fairly close to what the analysts, and what everyone else on Wall Street was predicting and projecting from the deal. So, that’s our M&A Transaction Comparable for the Microsoft/aQuantive deal.
And as you can see for precedent transaction companies it’s not too much different from what we saw with public comparable company analysis. The main difference here is we have to calendarize things. The equity research is similar for the price, here. Instead of assuming the current market price, we’re assuming the offer price that Microsoft gave, but otherwise it’s fairly standard, and it’s actually easier, because we’re just ignoring EPS and taxes altogether here.
Coming up next, we’re going to look at the Google/Double Click deal, which is actually harder in some ways, because it’s a private company, and so the information is much harder to come by. So, we’ll see what you do when you have a private company M&A transaction like that, and there isn’t much information on the purchase price, the revenue, or the EBITDA.