Private equity bids in Australia : an exploratory study

In this study, we provide an insight into how private equity players choose their targets and the bid arrangements they prefer. We test our expectations of the unique features of private equity targets using a sample of 23 listed private equity target firms during 2001–2007. We find, relative to a benchmark sample of 81 corporate targets matched by year and industry, the private equity target firms to be larger, more profitable, use their assets more efficiently, more highly levered and have greater cash flow. Multivariate testing indicates that private equity targets have relatively greater financial slack, greater financial stability, greater free cash flow and lower measurable growth prospects. All conclusions are found to be robust to a control sample of 502 takeover bids during 2001–2007.

On being balanced in an unbalanced world

This paper examines the case of a procurement auction for a single project, in which the breakdown of the winning bid into its component items determines the value of payments subsequently made to bidder as the work progresses. Unbalanced bidding, or bid skewing, involves the uneven distribution of mark-up among the component items in such a way as to attempt to derive increased benefit to the unbalancer but without involving any change in the total bid. One form of unbalanced bidding for example, termed Front Loading (FL), is thought to be widespread in practice. This involves overpricing the work items that occur early in the project and underpricing the work items that occur later in the project in order to enhance the bidder's cash flow. Naturally, auctioners attempt to protect themselves from the effects of unbalancing—typically reserving the right to reject a bid that has been detected as unbalanced. As a result, models have been developed to both unbalance bids and detect unbalanced bids but virtually nothing is known of their use, success or otherwise. This is of particular concern for the detection methods as, without testing, there is no way of knowing the extent to which unbalanced bids are remaining undetected or balanced bids are being falsely detected as unbalanced. This paper reports on a simulation study aimed at demonstrating the likely effects of unbalanced bid detection models in a deterministic environment involving FL unbalancing in a Texas DOT detection setting, in which bids are deemed to be unbalanced if an item exceeds a maximum (or fails to reach a minimum) ‘cut-off’ value determined by the Texas method. A proportion of bids are automatically and maximally unbalanced over a long series of simulated contract projects and the profits and detection rates of both the balancers and unbalancers are compared. The results show that, as expected, the balanced bids are often incorrectly detected as unbalanced, with the rate of (mis)detection increasing with the proportion of FL bidders in the auction. It is also shown that, while the profit for balanced bidders remains the same irrespective of the number of FL bidders involved, the FL bidder's profit increases with the greater proportion of FL bidders present in the auction. Sensitivity tests show the results to be generally robust, with (mis)detection rates increasing further when there are fewer bidders in the auction and when more data are averaged to determine the baseline value, but being smaller or larger with increased cut-off values and increased cost and estimate variability depending on the number of FL bidders involved. The FL bidder's expected benefit from unbalancing, on the other hand, increases, when there are fewer bidders in the auction. It also increases when the cut-off rate and discount rate is increased, when there is less variability in the costs and their estimates, and when less data are used in setting the baseline values.

Success or failure : the NRAS

Many Australian families are unable to access homeownership. This is because house prices are very high to the severely or seriously unaffordable level. Therefore, many low income families will need to rely on affordable rental housing supply. The Australian governments introduced National Rental Affordability Scheme (NRAS) in July 2008. The scheme aims to increase the supply of affordable rental housing by 50,000 dwellings across Australia by June 2014. It provides financial incentive for investors to purchase new affordable housing that must be rented at a minimum of 20% below the market rent. The scheme has been in place for four years to June 2012. There are debates on the success or failure of the scheme. One argues that the scheme is more successful in Queensland but it failed to meet its aims in NSW. This paper examines NRAS incentive designed to encourage affordable housing supply in Australia and demonstrates reasons for developing properties that are crowded in areas where the land prices are relatively lower in the NSW using a discounted cash flow analysis in a hypothetical case study. The findings suggest that the high land values and the increasing cost of development were the main constraints of implementing the scheme in the NSW and government should not provide a flat rate subsidy which is inadequate to ensure that affordable housing projects in high cost areas.

The valuation accuracy of multiples in mergers and acquisitions, and their association with firm misvaluation

This study explores the accuracy and valuation implications of the application of a comprehensive list of equity multiples in the takeover context. Motivating the study is the prevalent use of equity multiples in practice, the observed long-run underperformance of acquirers following takeovers, and the scarcity of multiplesbased research in the merger and acquisition setting. In exploring the application of equity multiples in this context three research questions are addressed: (1) how accurate are equity multiples (RQ1); which equity multiples are more accurate in valuing the firm (RQ2); and which equity multiples are associated with greater misvaluation of the firm (RQ3). Following a comprehensive review of the extant multiples-based literature it is hypothesised that the accuracy of multiples in estimating stock market prices in the takeover context will rank as follows (from best to worst): (1) forecasted earnings multiples, (2) multiples closer to bottom line earnings, (3) multiples based on Net Cash Flow from Operations (NCFO) and trading revenue. The relative inaccuracies in multiples are expected to flow through to equity misvaluation (as measured by the ratio of estimated market capitalisation to residual income value, or P/V). Accordingly, it is hypothesised that greater overvaluation will be exhibited for multiples based on Trading Revenue, NCFO, Book Value (BV) and earnings before interest, tax, depreciation and amortisation (EBITDA) versus multiples based on bottom line earnings; and that multiples based on Intrinsic Value will display the least overvaluation. The hypotheses are tested using a sample of 147 acquirers and 129 targets involved in Australian takeover transactions announced between 1990 and 2005. The results show that first, the majority of computed multiples examined exhibit valuation errors within 30 percent of stock market values. Second, and consistent with expectations, the results provide support for the superiority of multiples based on forecasted earnings in valuing targets and acquirers engaged in takeover transactions. Although a gradual improvement in estimating stock market values is not entirely evident when moving down the Income Statement, historical earnings multiples perform better than multiples based on Trading Revenue or NCFO. Third, while multiples based on forecasted earnings have the highest valuation accuracy they, along with Trading Revenue multiples for targets, produce the most overvalued valuations for acquirers and targets. Consistent with predictions, greater overvaluation is exhibited for multiples based on Trading Revenue for targets, and NCFO and EBITDA for both acquirers and targets. Finally, as expected, multiples based Intrinsic Value (along with BV) are associated with the least overvaluation. Given the widespread usage of valuation multiples in takeover contexts these findings offer a unique insight into their relative effectiveness. Importantly, the findings add to the growing body of valuation accuracy literature, especially within Australia, and should assist market participants to better understand the relative accuracy and misvaluation consequences of various equity multiples used in takeover documentation and assist them in subsequent investment decision making.

Social capital in a tolerant society? a response to treasurer Costello’s presentation to the Sydney Institute

On 16 July 2003 the Australian Government’s Treasurer, the Honourable Peter Costello, addressed the Sydney Institute on his vision for a tolerant Australian society. Drawing from Putnam’s research Costello argued that tolerance will flow from an active voluntary sector. However, Costello’s proposed model for a “tolerant” society fails to acknowledge that all behaviour is strategic and that voluntary association based on disinterested action is not possible. Ultimately, Treasurer Costello’s notion of tolerant society fuelled by an active voluntary sector may not lead to his desired end. Indeed, the promotion of voluntary association may contribute to the ongoing exclusion of citizens with low social capital. Amid the dynamism of the modern era some citizens such as ageing workers, slow or ineffective learners and women may be especially at risk. Accordingly, rather than advocating a policy approach that seeks to build inclusiveness through an active voluntary sector this paper recommends a policy approach that explores ways in which to strengthen learning and the wider involvement of individuals through both formal and informal means.

Dewatering of microalgal culture for biodiesel production : exploring polymer flocculation and tangential flow filtration

Background: Conventional biodiesel production relies on trans-esterification of lipids extracted from vegetable crops. However, the use of valuable vegetable food stocks as raw material for biodiesel production makes it an unfeasibly expensive process. Used cooking oil is a finite resource and requires extra downstream processing, which affects the amount of biodiesel that can be produced and the economics of the process. Lipids extracted from microalgae are considered an alternative raw material for biodiesel production. This is primarily due to the fast growth rate of these species in a simple aquaculture environment. However, the dilute nature of microalgae culture puts a huge economic burden on the dewatering process especially on an industrial scale. This current study explores the performance and economic viability of chemical flocculation and tangential flow filtration (TFF) for the dewatering of Tetraselmis suecicamicroalgae culture. Results: Results show that TFF concentrates the microalgae feedstock up to 148 times by consuming 2.06 kWh m-3 of energy while flocculation consumes 14.81 kWhm-3 to concentrate the microalgae up to 357 times. Economic evaluation demonstrates that even though TFF has higher initial capital investment than polymer flocculation, the payback period for TFF at the upper extreme ofmicroalgae revenue is ∼1.5 years while that of flocculation is ∼3 years. Conclusion: These results illustrate that improved dewatering levels can be achieved more economically by employing TFF. The performances of these two techniques are also compared with other dewatering techniques.

The effects of gas and air flow distributions on the performance of the Farleigh No. 3 boiler

As more raw sugar factories become involved in the manufacture of by-products and cogeneration, bagasse is becoming an increasingly valuable commodity. However, in most factories, most of the bagasse produced is used to generate steam in relatively old and inefficient boilers. Efficient bagasse fired boilers are a high capital cost item and the cost of supplying the steam required to run a sugar factory by other means is prohibitive. For many factories a more realistic way to reduce bagasse consumption is to increase the efficiency of existing boilers. The Farleigh No. 3 boiler is a relatively old low efficiency boiler. Like many in the industry, the performance of this boiler has been adversely affected by uneven gas and air flow distributions and air heater leaks. The combustion performance and efficiency of this boiler have been significantly improved by making the gas and air flow distributions through the boiler more uniform and repairing the air heater. The estimated bagasse savings easily justify the cost of the boiler improvements.

Micropolar flow in a porous channel with high mass transfer

Two dimensional flow of a micropolar fluid in a porous channel is investigated. The flow is driven by suction or injection at the channel walls, and the micropolar model due to Eringen is used to describe the working fluid. An extension of Berman's similarity transform is used to reduce the governing equations to a set of non-linear coupled ordinary differential equations. The latter are solved for large mass transfer via a perturbation analysis where the inverse of the cross-flow Reynolds number is used as the perturbing parameter. Complementary numerical solutions for strong injection are also obtained using a quasilinearisation scheme, and good agreement is observed between the solutions obtained from the perturbation analysis and the computations.