Sensitivity Analysis

Any financial valuation is only as accurate as the estimates on which it is based. Before concluding our analysis, it is important to assess the uncertainty of our estimates and to determine their potential impact on the value of the deal.

Having developed the spreadsheet model for Kleiner Perkins’ investment in Ideko, it is quite straightforward to perform a sensitivity analysis to determine the impact of changes in different parameters on the deal’s value.

For example, the spreadsheet below shows the sensitivity of our estimates of the value of Kleiner Perkins; investment to changes in our assumptions regarding the exit EBITDA multiple that Kleiner Perkins obtains when Ideko is sold, as well as Ideko’s unlevered cost of capital.

EBITDA multiple

In our initial analysis, we assumed an exit EBITDA multiple of 9.1. The spreadsheet above shows that each 1.0 increase in the multiple represents about $20 million in initial value. Kleiner Perkins will break even on its $53 million investment in Ideko with an exit multiple of slightly more than 6.0. The table also shows, however, that an exit multiple of 6.0 is consistent with a future growth rate for Ideko of less than 2%, which is even less than the expected rate of inflation and perhaps unrealistically low.

Unlevered Cost of Capital

The second table illustrates the effect of a change to our assumption about Ideko’s unlevered cost of capital. A higher unlevered cost of capital reduces the value of Kleiner Perkins’ investment; yet, even with a rate as high as 14%, the equity value exceeds Kleiner Perkins’ initial investment. However, if the unlevered cost of capital exceeds 12%, the implied long-term growth rate that justifies the assumed exit EBITDA multiple of 9.1 is probably unrealistically high. Thus, if we believe the unlevered cost of capital falls within this range, we should lower our forecast for the exit EBITDA multiple, which will further reduce the value of Kleiner Perkins’s equity. Conversely, if we are confident in our estimate of the exit multiple, this analysis lends further support to our choice for the unlevered cost of capital.