Chapter 2 - Precendent Transactions Analysis Flashcards
What are the two reasons that precedent transactions analysis provides higher trading comps?
1) buyers have to pay a “control premium”, giving them the right to control the acquisitions decisions
2) synergies
What are the steps to a precedent transactions analysis?
- Select the universe of comparable acquisitions
- Locate the necessary deal-related and financial information
- Spread key statistics, ratios, and transaction multiples
- Benchmark the comparable acquisitions
- Determine valuation
Where are some places you could find comparable companies to begin creating your universe of comparable companies?
M and A databases, the target’s M and A history, the M and A history of comparable companies you’ve already identified, merger proxies (the fairness opinion in particular), and equity and fixed income research reports.
What factors should you look at for each comparable company to better understand the transaction and its “story”?
Market conditions, deal dynamics, strategic buyer vs. financial sponsor, motivations, sale process and nature of the deal, and purchase consideration
When looking to gain the relevant financial and deal-related info needed for a precedent transactions analysis, where do you search?
For public companies: proxy statements, schedule TO/ schedule 14D-9, registration statement/ prospectus, schedule 13E-3, the 8k, 10k and 10q and equity and fixed income research
For private companies: press releases, sector specific trade journals. (This info isn’t verifiable though so shouldn’t be entirely relied on)
Equity value is used as a multiple of what?
Enterprise value is used as a multiple of what?
Equity value is used as a multiple of net income
Enterprise value is used as a multiple of EBIT, EBITDA, and sometimes sales
P/E ratio = ?
Offer price per share / LTM diluted EPS
This would be used as an equity multiple where capital structure matters or enterprise value may be negative
How do you calculate the premium paid?
Premium paid percentage = offer price per share / (unaffected share price) - 1
How would you use synergies to adjust a multiple?
You would add it in the denominator of an enterprise value multiple such as Enterprise value / EBITDA so it would look like EV / (EBITDA + Synergies)
What are the key pros of precedent transactions?
- market based
- current
- relativity - provides straightforward reference points across sectors and time periods
- simplicity
- objectivity - precedent based so avoids making assumptions
What are the key cons of precedent transactions?
- market based
- time lag
- existence of comparable transactions
- availability of information
- acquirers basis for valuation - may be based on forward projections of future performance