Precedent Transactions Analysis Flashcards
How do you calculate transaction value?
Offer value + value of debt + value of preferred stock + minority interest - cash
Simply put, it is the offer value plus net debt assuming no preferred stock or minority interests
What are the sources in search for prior transactions?
Anything published by a bank, equity researches, academia, etc
Capital IQ, S&P, and other data firms
What is the purpose of the pre-synergies and post-synergies adjusted TV/EBITDA multiple?
This is used to show the positive impacts of the synergies towards lowering the acquisition multiple.
Pre-Synergies
TV/EBITDA
Post-Synergies
TV/EBITDA + Synergies
Thus, the acquisition multiple becomes lower.
What characteristics of a prior deal must you consider when choosing prior deals to analyze?
What challenges exist when searching for precedent transactions?
Similarities
Operations, size, financial aspects, timeframe, financing of transaction, strategic vs financial, hostile vs friendly, market conditions
Challenges
Separating divisions within a company
Comparing current market conditions to past market conditions
Which price do you use to determine whether or not an option is in the money for an acquisition?
Offer price is above strike price
Does offer value reflect the control premium?
Yes.
What is the implied offer value?
Facts
Share price one day prior to announcement $20/share
Offer price $24/share
Basic shares outstanding 10.0 million
Options outstanding 0.5 million
Average option exercise price $8
Net debt $17.5 million
248 million
What is the exchange ratio? What is the formula?
Example:
An acquirer with a stock price of $20/share makes an offer in all stock for 100% of the target company at $30/share. What is the exchange ratio?
It is the number of shares target’s shareholders’ receive per 1 share of acquirers shares
Formula
(Offer price / acquirer stock price) * % stock considerations
Example
= (30/20)*100% = 1.5
Use the stock price recorded 1 day before the announcement of the acquisition for the acquirer’s stock price
How is precedent transactions analysis similar to comparable companies analysis, and how is it different?
Similarities
Both utilize multiples to create valuations
Differences
Precedent transactions analysis derives multiples that are based on a control and synergies premium, which is not present when analyzing current situations
Do companies always purchase 100% of another company? Add commentary to this question.
No.
Therefore, when look at comparable acquisitions, make sure to understand how much of the company was purchased. Was it 45% or 100%, etc.
Based on an acquisition comparables analysis, assume that the appropriate LTM EBITDA multiple for a takeover is 8.0x. Also, assume that XYZ company has 40 million shares outstanding, no options, $100 million of net debt, $125 million LTM EBITDA, and a current share price of $18. What is the implied premium assuming an 8.0x EBITDA transaction multiple?
25%
Does the offer value formula use outstanding options or exercisable options? Why?
Do you use in-the-money options as well? If so, what determines whether the option is in the money?
Outstanding options. The options will tranfer in the acquisition.
Yes, use only in-the-money options. If the offer price is greater than the strike price, then the option is in-the-money.
Outstanding and in-the-money
What are the steps in an acquisition comparables analysis?
- Create the list of deal comparables (COMPS/Stategic vs Financial/Hostile vs Friendly)
- Derive offer value and transaction value based on median/average multiples from precedent transactions and put into football field
- Normalize target’s income statement as of announcement and derive multiples and plug into the football field
- Quantify synergies and created adjusted multiple
What are possible complications to using stock prices 1 day prior to the announcement?
If news has leaked of the acquisition, stock prices might have risen, thus showing the control premium prematurely. Thus, you want to show an unaffected share price, which may be a date 1 week or months prior.
What is an implied valuation?
A valuation methodology assuming a set multiple to EBITDA, etc. Other calcs are based on that implied valuation. Typically, it starts with transaction value, and then offer value and offer price are derived based on the implied valuation.
The way implied valuations are calculated is different from the way the valuations are typically calculated.
