Advanced Qs

Question 1

Walk me through an M&A premiums analysis

Answer 1

To look at similar transactions and calculate premiums buyers have paid over public seller’s share prices.
1. Select precedent transactions based on industry, date and size
2. For each, get seller’s share price 1,20 and 60 days before transaction was announced
3. Calculate 1 day premium, 20 day premium, etc by dividing per share purchase price by each day share price
4. Get medians for each set then apply them to company’s current share price, 1, 20 and 60 days go to estimate how much premium buyer may pay for it.

Question 2

Both M&A premiums and precedent transactions involve analyzing previous M&A transactions. What’s the difference in how we select them?

Answer 2

• all sellers in the M&A premiums analysis must be public
• usually we use a broader set of transactions for m&a premiums - we might use fewer than 10 precedent transactions for but we might have dozens of m&a premiums
• screening criteria is similar

Question 3

Walk me through a future share price analysis.

Answer 3

Purpose here is to project what a company’s share price might be 1 or 2 years from now, and then discount it back to its present value.
1. Get the median historical P/E multiple of the public company comparables
2. Apply this P/E multiple to your company’s 1-year or 2 year forward projected EPS to get its implied future share price
3. Then discount this share price back to present value by using a discount rate in line with company’s cost of equity.
Usually look at a range of P/E multiples as well as a range of discount rates, then create sensitivity tables.

Question 4

Walk me through a sum of the parts analysis

Answer 4

Value each division of company using separate comparables and transactions, get to separate multiples, then add up each division’s value to get the total for the company.

Question 5

How do you value Net Operating Losses (NOLs) and take them into account in a valuation?

Answer 5

Determine how much the NOLs will save the company in future years, then calculate NPV of total future tax savings by:
- assume company can use its NOLs to completely offset its taxable income until NOLs run out
- in an acquisition scenario, multiply the highest adjusted long term rate of past 3 months by EPP of seller to determine maximum allowed NOL usage each year.

Question 6

Would you really look at NOLs in valuations?

Answer 6

Might fo, but if you did factor them in, usually treated similar to cash and allows to go from EV to enterprise value.