The total Market capitalization as at September 1996 for the 7 firms are calculated at $ 6.66 Billion, with an average share price of $ 29.88, and an average price earnings ratio of 56.73. This suggests that the share price is lot more than the average earnings of the organization, further industry expansion can also be considered under these figures.
Now we will be considering the value of the organization, that is WEST TELE SERVICES according to its 7 competitors or market holders, and try to determine a price according to that analysis.
The Calculations are as provided below:
| (2006) | Revenues | Operating Income | Net Income | |
| SITEL | $ 312,750,000 | $ 28,338,000 | $ 10,857,000 | |
| APAC | $ 276,443,000 | $ 49,079,000 | $ 30,550,000 | |
| ICT | $ 71,599,000 | $ 2,354,000 | $ (2,202,164) | |
| Precision | $ 97,637,000 | $ 11,565,000 | $ 7,850,000 | |
| Tele Tech | $ 165,504,000 | $ 23,212,000 | $ 13,756,000 | |
| Tele Spectrum | $ 119,176,000 | $ 6,111,000 | $ 3,439,000 | |
| RMH | $ 32,316,000 | $ 3,435,000 | $ (2,322,380) | |
| WEST TELE SERVICES | $ 235,188,000.00 | $ 36,806,000.00 | $ 21,977,000.00 | |
| TOTAL DATA | $ 1,310,613,000 | $ 160,900,000 | $ 83,904,456 | |
| MULTIPLES (2006) | Operating Margin | Net Margin | Issued Shares | Market Cap | Revenue Per Market Cap | |
| SITEL | 9% | 3% | 20,111,000 | $ 915,050,500 | 2.9 | |
| APAC | 18% | 11% | 46,277,000 | $ 2,522,096,500 | 9.1 | |
| ICT | 3% | -3% | 11,500,000 | $ 126,500,000 | 1.8 | |
| Precision | 12% | 8% | 20,000,000 | $ 602,500,000 | 6.2 | |
| Tele Tech | 14% | 8% | 54,947,000 | $ 1,923,145,000 | 11.6 | |
| Tele Spectrum | 5% | 3% | 23,200,000 | $ 475,600,000 | 4.0 | |
| RMH | 11% | -7% | 7,700,000 | $ 96,250,000 | 3.0 | |
| WEST TELE SERVICES | 16% | 9% | 5,700,000.00 | - | ||
| TOTAL DATA | 189,435,000 | $ 6,661,142,000 | 5.5 | |||
| Average Revenue Per Market Capitalization | 5.51 | ||
| WEST TELE SERVICES REVENUE | $ 235,188,000 | ||
| Expected West Tele Market Cap. | $ 1,296,083,327 | ||
| Number of shares | 5,400,000 | ||
| Expected Share Price | 240.015431 | ||
The method we have used, in our calculation is the usage of the revenue for the year 2006, as for our determination of the market price for the new shares as suggested by the Market Multiples for the organizations operating.
The Expected Share Price for WEST TELE SERVICES is calculated at $ 240/ share providing a market capitalization of $ 1.29 Billion.
This share price calculated is very much high than the average market share price of $ 29.88. Reason for this can be determined by the volatility observed in the industry, high amount of growth and more than 100 % sales increases from previous year’s data. Thus, the multiples approach data suggests an improper market price for the new shares.
DISCOUNTED CASH FLOW ANALYSIS
In this part, we are going to consider the Proforma Discounted Cash flow for WEST TELE SERVICES from the year 2006 and onwards, the calculations for the Discounted Cash flow are provided below:
| Discounted Cash flow Analysis | |||||||||
| WEST TELE SERVICES (000) | 9 months | Proforma | |||||||
| 1996 | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | |||
| Revenue | 235,188.0 | 325,000.0 | 410,000.0 | 451,000.0 | 496,100.0 | 545,710.0 | 600,281.0 | ||
| Operating Income | 36,806.0 | 49,331.0 | 63,550.0 | 69,905.0 | 76,895.5 | 84,585.1 | 93,043.6 | ||
| Net Income | 21,977.0 | 28,748.0 | 37,720.0 | 41,492.0 | 45,641.2 | 50,205.3 | 55,225.9 | ||
| add: Goodwill Amortized | 1,263.0 | 1,684.0 | 1,684.0 | 1,684.0 | 1,684.0 | 1,684.0 | 1,684.0 | ||
| Less: Capital Investment | 35,000.0 | 44,000.0 | - | - | - | - | - | ||
| Less: Working Capital | 6,415.0 | 8,981.0 | 12,573.4 | 13,830.7 | 15,213.8 | 16,735.2 | 18,408.7 | ||
| NET CASH FLOW | (19,438.0) | (22,549.0) | 26,830.6 | 29,345.3 | 32,111.4 | 35,154.1 | 38,501.1 | ||
| Discount CASH FLOW (13.5%) | (22,549.0) | 23,639.3 | 22,779.6 | 21,962.0 | 21,183.3 | 20,440.6 | |||
| Terminal Value | 272,541.7 | ||||||||
| NET PRESENT VALUE ($ 000) | 359,997.5 | ||||||||
The following assumptions have been taken for the computation of the DCF:
- The revenue figures for the period 1996 and 1997 are taken from the Standard & Poor’s estimates mentioned in the case scenario.
- From the year 1998 – 2001, modest growth of 10% is considered as the industry is booming and is considered to further increase 8-10% annually. From 2001 onwards 6% growth is considered as per the requirement mentioned.
- Operating margin of 15.5% and net income margin of 9.2% is considered throughout the valuation period.
- Goodwill is amortized as per mentioned on the 35 year rule.
- Assumption that capital investment will hold after year 1997, but the working capital requirements will eventually increase.
After the calculations, the enterprise value for the organization, is summed at a total of approximately $ 400 million, making the share price of the organization at $66.67.
| Associated Share Price | $ 66.67 |
This amount is less from the calculations through the multiples approach, but still very high considering the suggestion of the organization, placing shares at 21 ½.
According to the analysis, being provided; it is suggested that the organization should consider a share price somewhere between $ 21 ½ and $ 66.67.
Other market factors also needs to be considered before reaching a final amount for the share price.
But it is suggested that, as the organization is rich in revenues and the industry is continuously at the boom, high share price can be chosen to integrate more equity in the organization. The time is ripe for investment, and an opportunity window like this, shouldn’t be missed............
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