Distressed Equity & Acquisition Analysis

Distressed Equity & Acquisition Analysis

In this session, we completed our discussion of real options by looking at how to apply the technique to valuing troubled companies. Watch for this week’s tools webcast, where I try to apply this to a real company. We then started on acquisitions, their sorry history and explanations that are embedded in the process. We then started on testing for standard mistakes in acquisitions.

Slides: http://www.stern.nyu.edu/

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Session 25: Distressed Equity & Acquisition Analysis

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Q1 hedge fund letters, conference, scoops etc


So let's pick up where we left off. Any questions before I start. So you guys should be well into the pricing section now right. Or done with eight or. So of your. I'll give you a couple of questions in the pricing section everybody knows what you need to do. Yeah. OK the question was if you're having a little bit of trouble finding significance for certain fact that the requires we are running a regression right and you're getting t statistics and.

Don't fight the data right. Don't tell yourself it has to be in there. There is no has to be in pricing. So if it if you can find that growth doesn't explain PE ratios. Guess what. Growth doesn't explain PE ratios. You can't make. You can't get blood out of a stone. Just let it go. Same would have none of my variables in the regression are significant. You can try a different multiple but every regression you run did the same thing. Then what's what do you learn from that that the regression.

Not that the market is great but you can't explain differences across multiple using any of the fundamentals. Which means that your best predictor then for PE ratio of your companies to the average PE for the sector because there's no rhyme or reason for the differences so don't force yourself into running a regression because I've run a regression right. I mean that if you run a regression it doesn't work. You can and don't feel the urge to show me the regression that did not work just to show me that you ran a regression. I'm not giving special credit for your being able to use many tabs. Look I ran the regression. If you ran the regression in work you can mention it ran a regression. Nothing worked. Therefore I studied the average. Your end game as you went to price the company and remember if you don't trust the pricing you know where it's going to shop what you have to do after you value new pricing. You've got to make a recommendation. You can say look when I price the company I use the average P for the sector. I don't particularly feel any confidence in that number. Therefore I'm basing my buy or sell recommendation entirely on Medici. So that's the way to think about pricing it's a pragmatic exercise. There is no should be done must be done.

It basically is whatever works to better price this company. And the questions of pricing.

So let's talk about let's look at where we left off. Remember we're talking about distressed equity as an option. So I looked up a couple of companies that you might think of as potentially fitting into this. And of course we could take movie pass.

Which is owned by Hank you know and is an more I don't hear H&M when I was looking up the stock price for the company what the stock is trading at point 0 0 3 6 it's trading at a fraction of a cent. This is one of a few chances to buy a million shares in a company don't mentioned which company and at what price you can go telling people Look I bought a million shares a million shares in movie pass you could probably but the whole stock is trading for less. Somebody described less than the value of a house in Silicon Valley. The whole company moving price is a deep out to the money option.

It's probably never going to get out of there but anybody doing Tenet Healthcare will get a chance to look it up. It's obviously a healthcare company is its name indicates its market cap is about 2 billion. So far it's looking OK but that's a good news market cap is 2 billion it always about 15 billion in debt. So think about the checkbox right. It owes a lot of money. It lost money last year. CheckBox it lost money last year. It's book equities negative. What does I tell you it's been losing money for a long time. So basically it owes a lot of money lost money last year. It's losing money its bond rating is single be which means there's a heavy chance it will not make it. The stars are all aligned. You got an equity option right here. If you're buying Tenet Healthcare you're not buying it for the cash flows I hope. Unless you like large negative cash flows. You're not buying it because it's priced right because it's not a price you're buying it for the same reasons you buy an option. So one of the things I want to talk about today is applying what we did with that hypothetical company move the one I created out of thin air. To a real company to see how you'd get the numbers for a company. If this is the kind of company you evaluate. So let's start with today with with a couple of tests related to that concept of. I'm thinking about equity as an option.

So first if you decide to view equity as an option. Which of the following conditions. So as I list the conditions. And one way to think about this is start thinking about your company and seeing if it fits any of these conditions. The company has to have a significant amount of debt outstanding.

Yeah. If you're gonna valued as a liquidation option you do need.

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Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver
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