Ryan Teichmann

Executive Summary
Should Palamon Capital Buy 51% of TeamSystems Equity for EUR 25.9 Million?
Palamon Capital, a generalist private equity fund, is based in the United Kingdom.
Palamon did not limit itself to investing in one specific country or to one industry. Instead,
Palamon focused on small to midsized European companies it could acquire a controlling stake
from between EUR 10 million and EUR 50 million. Palamon is interested in acquiring
TeamSystem, S.p.A Italys leading provider of accounting tax and payroll management software
for small to medium sized businesses. Palamon Capital is interested in acquiring 51% of
TeamSystems common shares for EUR 25.9 million, but is unsure how much 51% of equity is
really worth. Using the discounted cash flow method, 51% of equity in TeamSystem is worth
EUR 30.69 million (exhibit 1) and using the multiple comparables method, 51% of equity is
worth EUR 69.14 million from comparing the revenue and EBIT multiple, and EUR 59.46
million from comparing the price to book multiple (exhibit 6).
In the discounted cash flow model, there are two calculations that might not be so obvious.
Change in NWC occurred after the cash restructuring that Palamon required of TeamSystems.
Because of this, current assets decreased causing the change in NWC be 14% of sales increase.
Capital expenditures are calculated by the change in end of the period noncurrent assets plus
depreciation. The tax rate of 48% seems very high but is within reason, according to Trading
Economics the average corporate tax rate for Italy is 38.52% from 1995 until 2014.
(http://www.tradingeconomics.com/italy/corporate-tax-rate). Exhibit 2 shows Italys corporate
tax rate from 1999 to 2007. From the discounted cash flow model, three sensitivity analysis
comparing the terminal growth rate to the discount rate (exhibit 3), the sales growth to the

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discount rate (exhibit 4), and the tax rate to the discount rate (exhibit 5). The three sensitivity
analysis show that Palamons valuation of TeamSystem is very sensitive to the discount rate and
that there is not much margin for error in Palamons calculated WACC of 14%.
In the multiple comparables model, a revenue multiple valuation is chosen because it
incorporates the size of all of the firms in the comparable group. An EBIT multiple valuation is
also chosen because it incorporates the profitability of all of the firms in the comparable group.
The chosen comparable group is tier 2. This is because the group has similar equity market
value, similar debt and similar total assets compared to TeamSystem. The tier 2 group also offers
similar products as TeamSystem, middle market accounting software solutions. The median
multiple is chosen for both the revenue and the EBIT from the tier 2 group. The median is
chosen because there are some outlier multiples from some of the companies that are in the
comparables group. From the revenue and EBIT comparison, 51% of TeamSystem is worth
EUR 69.14 million. Comparing the price to book ratio of TeamSystem is another way to gauge
value. Again using the tier 2 comparable group and again using the median rather than the
average because of the outlier. From this, 51% of TeamSystems equity is worth EUR 59.46
million.
From both methods, it is obvious that acquiring 51% of TeamSystems equity for EUR
25.9 million is a very attractive deal. But this is in a perfect situation and does not account for
any of the risks involved. Some of these risks include an exchange rate risk between the Euro
and Lira, and also the risk of dealing with a foreign government. Italy has a very high tax rate
and is active in the payroll industry, which causes regulations to change several times a year.

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With all of this active management, the Italian government might intervene slowing the deal or
preventing it from happening at all.

Exhibit 1

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Exhibit 2

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Exhibit 3

Exhibit 4

Exhibit 5

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Exhibit 6