Once disgraced, now rehabilitated, and always mustachioed tech banker Frank Quattrone has gotten some well-deserved congratulations for convincing Google to up its bid for Motorola Mobility from $30 to $40 despite the fact that (1) MMI was trading at $24.47 and (2) there was no other bidder. So, yay. Also his firm, Qatalyst, is getting $40mm in fees (44bps of enterprise value on a ~$9bn EV deal) for 14 days of work; co-adviser Centerview, who presumably did not come up with the plan of “try asking for more money,” is getting a piddling $12.5mm.
All that and more is in Motorola’s merger proxy filed today. Also in the proxy, though, are some internal forecasts from MMI – which might help explain Qatalyst’s success, provide ammunition to Motorola shareholders unhappy with the price, and/or raise questions about the quality of MMI’s forecasting. This table is from the summary of Qatalyst’s fairness opinion:
Teeny text, yes. It’s a summary of MMI’s trading multiples, based apparently on the $24.47 pre-announcement trading price of the stock. Which represented 17.9x analysts’ calendar 2012 EPS estimates of $1.38 or thereabouts. That 17.9x multiple was a bit of a premium to mobile comps, presumably because of expectations that Motorola would find a way to monetize its patents.
But $24.47 was only 10.6x the company’s own estimates of 2012 profits. Motorola’s disclosure of internal projections doesn’t include bottom-line earnings or EPS numbers, but some pretty simple math tells you that Motorola had – and gave Qatalyst and Google – a 2012 EPS estimate of about $2.31, or 69% higher than Street estimates. Similarly Motorola’s internal projection of 2012 EBITDA is 51% above estimates, and its internal net operating profit after taxes is 76% above estimates.
Throw MMI’s actual 17.9x trading P/E on the company’s internal $2.31 EPS projections, and you get an implied stock price of $41.32. So Google is under-paying for Motorola – if Motorola could only convince the world of its own EPS projections.
Which … first of all, the disclosure of how those projections are arrived at does not exactly make you confident that they’re grounded in rigorous analysis of reality:
For the period of 2011 through 2015, for which third party industry projections are available, the Company’s (A) projected smartphone revenue compound annual growth rate (“CAGR”) assumption of 19% is in line with third party industry projections, (B) projected tablet revenue CAGR assumption of 31% is lower than third party industry projections, (C) projected revenues for other product categories in the Mobile Devices business were assumed to decline in the aggregate based on management’s expectations of lower product portfolio investments and market trends for these categories, and (D) projected Home business revenue CAGR assumption of approximately 2.5% is in line with third party industry projections. … The Company also assumed a 24% CAGR in intellectual property licensing revenue from 2011 through 2016, based on its expectation for securing licensing arrangements over that period of time. Further, the Company assumed, on an overall Company basis, stable gross margins during the period shown.
Whether or not you believe them, though, having these sorts of generous estimates can work both ways in M&A. On the one hand, if Frank Quattrone could at least pretend to take Motorola’s estimates seriously, they’d give him some cover to ask Google for a $43.50 price for a company trading in the mid-$20s, without a risk that they’d laugh in his face / twist his mustache until he agreed to drop the shenanigans.
On the other hand, if he believed them, then it makes his fairness opinion more difficult. The difficulty is glossed over in the proxy disclosure, which focuses on DCFs and enterprise value multiples, where even Motorola’s more optimistic numbers lead to high-$20s-to-mid-$30s valuations. (Probably fair, although the analysts’ reports I’ve seen value Motorola mainly on P/E.) But any disgruntled Motorola investors who want to hold up Google’s $40 deal for being too low – and, to be fair, there probably aren’t many of them – now have a little bit of support from Quattrone and Motorola themselves.
It only took this idea 40 years to come to fruition. I'll give myself a well deserved pat on the back.
- C. Icahn
Any post containing the word "mustachioed" is an excellent post.
Sure, it's great for him. But I've got to fight the gorilla all by myself!
When I got to the table and realized there were 7 more paragraphs.
GOOG need not be too woried about the implications of the 2012 PE multiple. DE chancery is almost exclusively focused on DCF. A more likely outcome would be the fairness opinion DCF is not calculated correctly, but thats another issue.
FTW
Big deal, a 25% increase in price. Wow.
I asked Frank Quattrone for a %25 increase in pay…I got fired.
How's the cold calling going? Tell the branch manager I said hello.
Perhaps because they thought anyone dumb enough to ask their company's adviser for a raise would potentially be dumb enough to fall asleep on the RAZR assembly line?
Re the following: 1) Europe doesn't even have the ammo to bomb Libya. Is he thinking pitchforks? 2) Unfortunate what the 2nd world war did to avg IQ over there.
According to
"Europe is in danger," Polish Finance Minister Jacek Rostowski, whose country currently chairs EU meetings, told the European Parliament in Strasbourg ahead of emergency talks between leaders from Germany, France and debt-hit Greece.
"If the eurozone breaks up, the European Union will not be able to survive," Rostowski said of the currency bloc that comprises 17 of the 27 EU countries, a day before European finance ministers gather in Poland alongside US Treasury Secretary Timothy Geithner.
EU officials have warned repeatedly that Athens will not receive the next slice of aid, worth eight billion euros ($11.0 billion), unless it can persuade EU and IMF auditors, about to resume work, that it can overcome its deficit crisis.
At his most dramatic, Rostowski even warned that "war" could return to Europe if the crisis weakens fatally the EU, founded amid the rubble of World War II.
Matt, I think this is pretty common for a company to guide the street lower than their internal numbers. Real problem would have been if Motorala's #'s were below the street
(Another Former Chartmaker)
The guy is a genius liar. I give him that.
"NorTel is going to the moon and I strongly urge you to buy." I was at an investors conference and he actually said that. Not sure what to do with my NT holdings now, when the price is zero do I buy more? (of course that would be impossible) – a joke.
Anyone else think that he looks like Mr. Potato Head?
I don't get it. I am the branch manager. In fact I am in charge of the whole state of Mississippi. At first Mr. McColl didn't want us down here, but now he is rethinking all of that so I am told.
jesus…this is one ugly motherfucker
explain funny in one sentence
InfiniteGuest, is that you?