connectcode .net barcode sdk An Appraiser s Perspective on Valuation for Sale in Software

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CHAPTER 10 An Appraiser s Perspective on Valuation for Sale
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sively This is increasing the sales of the combined entity with little or no extra cost The combined entity can eliminate duplicated staff For example, the buyer has an accounting staff of 10 people, the seller has two, and the buyer will not need the staff of the seller This is an example of lowering the costs of accomplishing the same tasks
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Purex Corporation: A War Story
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Here s a war story of a real synergy10 In 1985, I valued the acquisition of Purex Corporation by Armour-Dial, Inc, then a subsidiary of Greyhound since 1970, which was a large conglomerate11 The Armour-Dial people told me they were excited about the acquisition, because of specific synergies that they felt Purex would bring to them Purex made a limited line of inexpensive detergents, bleaches, and cleaners and shipped its products in carload quantities (ie, by rail), while Armour-Dial made a wide range of high-end, specialty cleaning products and shipped by truck Since Purex had a similar customer list, Armour-Dial expected to be able to piggyback its own shipments by rail onto the Purex shipments, thus lowering its own transportation costs considerably At the time, Armour-Dial expected to add 1 percent to its own net income after taxes by that acquisition Assuming a Price Earnings multiple of, say 20,12 the synergies from buying Purex
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I give my profound thanks to Conrad A Conrad, Executive Vice President and Chief Financial Officer, and David Riddiford, the Senior Vice President and Treasurer, of The Dial Corporation, for their permission to publish this and their help with some of the financial details in this real story 11 Since then, Greyhound itself was spun off and split into three pieces The first piece is Greyhound Lines, Inc, the bus company that we all know In 1996, Greyhound spun off the Consumer Products Division, which included Armour-Dial, and it took on the name by which it is now known, The Dial Corporation The third piece, which was mostly leasing and financing, was Viad 12 Armour-Dial, a subsidiary of Greyhound at the time, was not publicly traded We would therefore look to Greyhound s PE multiple back then, which was unavailable
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PART TWO The Sale and Financing of a Business
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should have been worth 20 percent of Armour-Dial s own sales a very hefty number Armour-Dial s sales were close to $1 billion before the acquisition, which means the synergies were $200 million from the acquisition itself13 Suppose Purex was worth $120 million as a stand-alone entity, ie, its Fair Market Value14 Then Purex s Investment Value to Armour-Dial specifically would be $120 million plus $200 million $320 million The synergies were 167 percent of Purex s stand-alone value! Even if any other bidder might have been interested in Purex at the time and to my knowledge there were none you can see why Armour-Dial should have been willing to outbid them all At which price should the acquisition have taken place With these assumptions, all we can say is that FMV is the floor value, ie, the minimum value below which the shareholders of Purex should not have sold the company, and $320 million is the ceiling value, ie, the maximum amount that Armour-Dial should consider paying The actual transaction price would represent the negotiating position and skill of the two parties15 They could share the $200 million in any way, including none at all Conrad A Conrad and David Riddiford shared with me The Dial Corporation s subsequent experience with Purex They said it is Dial s largest business As of the end of 2002, they experienced two years of record sales growth They said that Purex is the number two selling laundry detergent (behind Tide) in the United States, with sales of close to $500 million That represents 62 percent compound average growth in sales since 1986 So, Purex is a tremendous success story one that has created great value for many people
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There probably were other sources of synergies in the operating efficiencies of combining the two firms, but rather than speculating, we will leave it at this 14 In 1985, Purex s sales were $180 million Assuming a 5 percent after-tax return would mean net income of $9 million Since Purex was a smaller business than Armour-Dial, which itself was smaller than Greyhound, it is reasonable to estimate a PE multiple of 12 to 15, which would lead to a valuation of $108 to $135 million The figure $120 million is a reasonable average 15 The actual price was unavailable
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