The Enterprise Value Creation Approach to Driving an M&A or Organic Growth Strategy

Transcription

1 The Enterprise Value Creation Approach to Driving an M&A or Organic Growth Strategy Presented by: Jack R. Salvetti, President S.R. Snodgrass, P.C.

2 Three Questions Concerning Your Strategy and Business Model Sustainable Scalable Relevant 2

3 Value Creation of the Four Constituencies Shareholder Value Customer Value Employee Value Community Value 3

4 Value Creation of the Four Constituencies Shareholder Value Customer Value Employee Value Community Value Value of the Entity 4

5 5

6 COSO: Enterprise Risk Management Integrated Framework 6

7 The Problem The Board of Directors and executive management of a successful billion-dollar community bank that had converted from a mutual savings bank to a stock-based commercial bank some years ago were preparing to update the bank s strategic plan. The question raised by the Board was, Given the daunting challenges community banks face today, and our financial performance challenges, is this the time to get top value by engaging advisors to assist us in selling the Company? 7

8 Value Creation Market Capitalization Transaction Value Intrinsic Value Franchise Value Market Value Financial Value 8

9 Financial Value Financial Value A fair presentation of the financial position of the entity Where is the Value in Financial Value? A rather dubious measurement of Value A measure of performance and/or financial return, independent of economic or market value factors U.S. GAAP Historical cost basis The Board, management, regulators and the financial community have great interest in financial reporting Financial Value is the starting point for determining Value 9

10 ROA ROE Book Value EPS Capital Ratios Other Financial Value Selected Measures 10

11 Market Value Fair Market Value An estimate of the market value of a single share of stock, exchanged between willing, knowledgeable and unpressured buyers and sellers. Perhaps the most significant strategic issue for a community bank is ownership. Ranging from mutual to closely held to local retail investors to institutional investors Converting financial value into market value may be one of the greatest challenges Control vs. Influence, we can only influence the outcomes The presence of buyers and sellers The nature of your equity shares; growth, value or high dividend yield stock 11

12 12

13 Market Value Selected Measures Stock Price P/E Ratio Price/Tangible Book Value Dividend Yield Total Return 13

14 Franchise Value Franchise Value The Intangible Value of the Enterprise expressed as the Transaction Value (control premium). It s a business and not just a balance sheet. Difficult to measure the components The sum total of the components is a primary influencer of market value for companies with institutional investors The Story Influences Transaction Value for all investors Determines how far an interested buyer will stretch the tolerances for accretion/dilution, payback, etc., merely on the basis of the attractiveness of the target s business model attributes, financial performance and strategic fit 14

15 Franchise Value Business Model B/S Structure Interest Rate Risk Position Noninterest Income Sources Office Footprint Facilities Management Capabilities Market Characteristics Competitive Climate A Lot of Others. 15

16 200,000,000 Pennsylvania Banks: Total Deposits Excluding Brokered 190,000, ,000, ,224, ,000,000 Thousands ($000) 160,000, ,452, ,000, ,000, ,000, ,000, ,000, ,000, Time Period Total Pennsylvania banks decreased from 215 as of June 30, 2010 to 182 as of June 30, The decrease was attributed to 29 acquisitions, and 5 failures. One bank commenced operations during this time period

17 200,000,000 Total Deposits Exluding Brokered and Public Funds 190,000, ,000, ,000, ,720,412 Thousands ($000) 160,000, ,000, ,873, ,000, ,000, ,000, ,000, ,000, Total Pennsylvania banks decreased from 215 as of June 30, 2010 to 182 as of June 30, The decrease was attributed to 29 acquisitions, and 5 failures. One bank commenced operations during this time period Time Period

18 Pennsylvania Deposit Analysis Total Deposits Excluding Brokered Deposits Total Deposits Excluding Brokered and Public Funds 200,000, ,000, ,000, ,224, ,000,000 Thousands ($000) 160,000, ,452, ,000, ,000, ,873, ,000, ,720, ,000, ,000, ,000, Time Period Total Pennsylvania banks decreased from 215 as of June 30, 2010 to 182 as of June 30, The decrease was attributed to 29 acquisitions, and 5 failures. One bank commenced operations during this time period

19 Franchise Value Selected Measures Number of Offices Number of Defined Markets Deposits Per Office Earning Asset Mix Deposit mix Deposits per Office Revenue per FTE Efficiency Ratio Risk Profile Others 19

20 Intrinsic Value Intrinsic Value The value of the company beyond the cost-basis carrying value portrayed in the financial statements. Or, the value placed on an asset by a buyer based on their own preferences and circumstances. (Wikipedia) Not a clear measure Includes a level of subjectivity The efficacy with which retained earnings will be deployed in the future. (Berkshire Hathaway 2012 Annual Report) Discounted cash flow analysis Reflected in P/E multiple Earnings multiple imbedded in an acquisition price as negotiated between willing buyers and sellers Includes elements of financial, market and franchise value 20

21 Discount Rate Terminal P/E Ratio (X) 12.00% 15.0x EPS Years Net Income Shareholder Avg. Shares Book Stock Dividend EPS Equity Outstanding Value Price per Share 2015 $9,401, ,238,397 10,535,697 $ 0.89 $ $ $ $10,341, ,751,901 9,970,412 $ 1.04 $ $ $ $11,375, ,977,272 9,433,392 $ 1.21 $ $ $ $12,512, ,610,178 9,433,392 $ 1.33 $ $ $ $13,764, ,006,374 9,433,392 $ 1.46 $ $ $ $15,140, ,242,189 9,433,392 $ 1.61 $ $ $ $16,654, ,401,587 9,433,392 $ 1.77 $ $ $ $18,320, ,576,924 9,433,392 $ 1.94 $ $ $ $20,152, ,869,794 9,433,392 $ 2.14 $ $ $ $22,167, ,391,952 9,433,392 $ 2.35 $ $ $ 0.92 NPV Dividends $3.15 Terminal Value $ $11.35 Calculated FMV $14.50 Current FMV $ Premium (Disc) $ (3.20) % -22.1% Terminal Value / BV

22 22

23 Selected Measures Intrinsic Value Total Shareholders Equity ROE Leverage Ratio Book Value Tangible Book Value Transaction Premium (B/V, EPS) 23

24 Value Creation Market Capitalization Transaction Value Intrinsic Value Franchise Value Market Value Financial Value Sustainable Scalable Relevant 24

25 The Decision So after carefully addressing these considerations, they decided to remain independent. They believe they can and will continue to create corporate and shareholder value by effectively delivering customer and employee value and continuing to make investments in the communities they serve by taking the following steps: Refined Financial Value targets Addressed gaps in the Financial Value Increased focus on influencing stock price Re-addressed the dividend policy Focused on enhancing total return Include calculation of Intrinsic Value in the Board oversight Built an Enterprise Value Creation dashboard report 25

26 The Results Through the process, they developed enhanced focus that led to a more collaborative environment, while enjoying the story they were writing about the company s future. They moved from considering the sale of the company to completing an acquisition. The industry challenges we all face became much less daunting. 26

27 Jack R. Salvetti, CPA President S.R. Snodgrass, A.C. Jack R. Salvetti, CPA President S.R. Snodgrass, P.C. Jack R. Salvetti is the President of S.R. Snodgrass, P.C., a regional accounting and consulting firm specializing in service to the banking industry. Jack assists banks throughout the United States by formulating successful strategies, improving financial performance, and implementing dynamic enterprise risk management frameworks. Jack is a frequent speaker, writer, and instructor at bank management schools and bank director programs. SRSNODGRASS.COM P: