Valuation Methodology

Valuation Approaches Market Approach Income Approach Cost Approach

PRACTICAL : Based on market transaction : Use of market multiples eg. Price/EBITDA

DIFFICULT TO APPLY : Ideally best method : Insufficient detailed publicly available information

Page 2 Singapore, 29 September 2005

Valuation Methodology
Valuation Approaches

Market Approach

Income Approach

Cost Approach

NO CASH FLOWS : Estimation of costs required to replace the technology.

NO EXPECTED RETURNS : For technology that do not directly generate cash flows. : Fails to capture expected returns of the technology.

Valuation Methodology
Valuation Approaches

Market Approach

Income Approach

Cost Approach

MOST COMMON AND WITH VARIATIONS NO NEED FOR MARKET TRANSACTIONS : Captures expected future returns to owner without the need for comparable market transactions. FORCASTED CASH FLOWS REQUIRED : Based on cash flows or earnings generated by the technology; or : Based on the costs saved by the technology.

Valuation Methodology
Valuation Approaches

Market Approach

Income Approach

Cost Approach

Direct Methods

Indirect or Residual Methods Return on Assets or Residual Earnings Method Residual earnings left after deducting fair returns on all other assets employed from the after-tax operating earnings

Cash flow or earnings generated by the technology; or Expenses saved by the technology

Valuation Methodology
Income Approach Direct methods
Excess Earnings Method Premium Pricing Method Relief-of-Royalty or Royalty Savings Method Cost Savings or Avoided Cost Method

Indirect/ Residual Methods

Excess over guideline company earnings of companies that do not possess the intangible being valued Premium over generic product prices of products or services that do not possess the intangible being valued After-tax royalties or license fees saved by owning the intangible; requires market based royalty/ licensing data. Applied in patent, franchise or brand valuations After-tax costs saved by owning the asset; Applied to favourable contracts and workforce

Managing Risk

A variation of the Income Approach Risks associated with future cash flows (e.g. external events such as market acceptance) are dealt with using a probabilty approach Creates a more robust valuation, as multiple outcomes are considered at each point in time
Fail p=0.85 Cost =10 -

Phase II

p=0.15 Succeed

Fail p=0.25 Low p=0.70

p=0. 75 Succee Phase III d

Postlaunch NPV650 =

p=0.30 High Commercial outcome

Postlaunch NPV1020 =

Managing Risk
Running multiple simulations to obtain a probability distribution of the value Probabilistic Discounted Cash Flow

Technology Licensing
Licensor Licensee

Intrinsic Value Improve sales eg. better products Reduce cost eg. more efficient process Improve productivity eg utilisation

Synergisti c Value Enter new markets Introduce new products/services Develop new technologies

Strategic Value Forward or backward integration Minimise potential risk of infringement Block competitors

Building a portfolio of technologies

Conclusion
Technology Valuation Both an Art or a Science Know your technology Ascertain technical merits and market readiness Technology Valuation Process to Estimate the Value Know the technology and the stage of development

Funding requirements Ascertain technical merits Assess market readiness Estimate the value of the technology Understand value from the perspective of potential licensees Focus on the positive win/win arrangement