Chapter 2 - Precendent Transactions Analysis Flashcards

1
Q

What are the two reasons that precedent transactions analysis provides higher trading comps?

A

1) buyers have to pay a “control premium”, giving them the right to control the acquisitions decisions
2) synergies

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2
Q

What are the steps to a precedent transactions analysis?

A
  1. Select the universe of comparable acquisitions
  2. Locate the necessary deal-related and financial information
  3. Spread key statistics, ratios, and transaction multiples
  4. Benchmark the comparable acquisitions
  5. Determine valuation
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3
Q

Where are some places you could find comparable companies to begin creating your universe of comparable companies?

A

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.

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4
Q

What factors should you look at for each comparable company to better understand the transaction and its “story”?

A

Market conditions, deal dynamics, strategic buyer vs. financial sponsor, motivations, sale process and nature of the deal, and purchase consideration

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5
Q

When looking to gain the relevant financial and deal-related info needed for a precedent transactions analysis, where do you search?

A

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)

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6
Q

Equity value is used as a multiple of what?

Enterprise value is used as a multiple of what?

A

Equity value is used as a multiple of net income

Enterprise value is used as a multiple of EBIT, EBITDA, and sometimes sales

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7
Q

P/E ratio = ?

A

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

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8
Q

How do you calculate the premium paid?

A

Premium paid percentage = offer price per share / (unaffected share price) - 1

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9
Q

How would you use synergies to adjust a multiple?

A

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)

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10
Q

What are the key pros of precedent transactions?

A
  • market based
  • current
  • relativity - provides straightforward reference points across sectors and time periods
  • simplicity
  • objectivity - precedent based so avoids making assumptions
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11
Q

What are the key cons of precedent transactions?

A
  • market based
  • time lag
  • existence of comparable transactions
  • availability of information
  • acquirers basis for valuation - may be based on forward projections of future performance
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