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Summary and Conclusion

  • Tilman E. Pohlhausen

Abstract

Our key findings can be summarized as follows:
  • Based on past transactions, raised funds, and general economic and industrial developments, we concluded that the concept of technology buyouts has a certain degree of substance, being more than a short-term or over-hyped investment idea. We found that technology buyouts inhibit greater risks, but also provide more upside in the form of growth than traditional buyouts.

  • We identified the Equity Cash Flow method to be a well-working valuation approach for buyout situations, and therefore incorporated it into a spreadsheet model that provides as outcome the internal rate of return to investors. The idea was to estimate returns with only publicly available data as input. For that, we drew on a set of assumptions, of which constant sales growth, constant EBIT margin, and the same exit multiple as entrance multiple were the most important.

  • We discussed a number of ways to account for technology-specific risk and return characteristics. Identified were an adjustment of the required rate of return, capital expenditure ratios and, most practically, cash flow projections. We noted the theoretical inconsistencies of arbitrary return rate adjustments with asset pricing models, as well as the problems of value additions based on real options.

  • Finally, we extended the model to incorporate other parameters that might have been neglected or that provide added meaning to the results. The outcome is a spreadsheet model that allows the user to specify his or her desired target characteristics and screen stock markets in a convenient and flexible way. When we used market and historical financial statement data from over 1,600 companies in European growth and technology indices, we identified a small but significant number of companies that would be suitable as potential buyout targets. This result led us to conclude that the stock market downturn since mid-2000 may have created technology buyout opportunities in Europe.

Keywords

Cash Flow Real Option Require Rate Asset Price Model Entrance Multiple 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Copyright information

© Deutscher Universitäts-Verlag GmbH, Wiesbaden 2003

Authors and Affiliations

  • Tilman E. Pohlhausen

There are no affiliations available

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