HYPOTHETICAL SECURITY SIMULATION
The Valuation Metrics hypothetical security simulation tool assesses the impact of a potential corporate action on your company’s shareholder base.
We offer hypothetical security analysis for the following corporate actions:
- Initial Public Offerings (IPOs)
- Acquisitions and Divestitures
- Dividend Policy Studies
Using financial estimates based on the selected corporate action, we create a synthetic security that has all the characteristics of a real security. Our matching algorithms then generate targeting results just as if it were an actual security. These targeting results help to identify prospective new buyers and at-risk current holders.
The financial information needed to generate each hypothetical security varies depending on the type of corporate action. The more robust and accurate the data available or provided to us, the more meaningful the targeting results will be. In the case of IPO’s, much of the data can be obtained from the company’s S-1 filing. If available, analysts’ pro forma estimates are especially useful and lead to better targeting results. In the case of M&A and divestitures, a full set of historical and pro forma financials for the combined entity (in the case of mergers and acquisitions) or each separate entity (in the case of divestitures) provided to us by the client will ensure the most accurate targeting results. In all cases, if the value for a particular variable is unavailable, peer group or industry averages are used in its place.
For hypotheticals in which the original company is publicly traded, the user can compare the targeting results generated to those of the original company, as well as examine the difference in the underlying fundamentals and valuation models used in the analysis. This analysis helps the user gauge the effect of the corporate action on the company’s overall institutional appeal. Multiple scenarios can be run to determine the optimal scenario that produces the highest level of institutional appeal. This is especially useful for dividend policy studies.
As part of the Hypothetical Security Simulation, Valuation Metrics offers a separate but integrated hypothetical valuation tool. This tool is particularly useful for private companies and pending IPO’s interested in learning what their companies might be worth on the open market.
We estimate the likely market capitalization of the hypothetical security by doing a Comparable Company Analysis (CCA). The relative valuation multiples (EV/EBITDA, P/S, P/E, P/B, etc.) of the company’s closest peers are used to estimate the equivalent multiples for the hypothetical security. After taking into consideration other factors like the company’s estimated growth rates and the current industry and market sentiment, an educated estimate of the hypothetical security’s enterprise value and market capitalization is established.
Along with being an indicator of the likely public market demand for a private company or pending IPO, the market capitalization estimate is used to determine the company metrics which go into the matching algorithms that generate the targeting results for the hypothetical security scenarios described above.