Precedent Transactions Analysis (Reverse) Flashcards
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.
What is an implied valuation?
300 million
ABC corporation buys 18.6% of XYZ corporation’s equity for $55.8 million. What is the appropriate offer value for multiples analysis?
- When similar sized companies merge in a stock-for-stock transaction
- When a company taks a minority interest in a company or buys out a minority shareholder’s interest
What situations usually result in low to no premiums?
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 is the purpose of the pre-synergies and post-synergies adjusted TV/EBITDA multiple?
It is the number of shares issued to target’s shareholders per 1 of their shares
Formula
(Offer price / acquirer stock price) * % stock consideration
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
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?
Precedent transactions analysis
Valuations reflect control and synergy premiums.
Which typically leads to a higher valuation- precedent transactions analysis or comparable companies analysis? Why?
Offer price
Which price do you use to determine whether or not an option is in the money for an acquisition?
Acquirer stock price x exchange ratio
What is the offer price/share calculation?
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 are possible complications to using stock prices 1 day prior to the announcement?
Equity purchase price
- Offer price/share x target’s diluted shares outstanding
- (Offer price/share x total potential shares outstanding) - option proceeds
Total potential shares outstanding reflects the shares held at that time plus any additional shares from options, warrants, and convertible securities.
* Note, that the repurchases are done at the offer price/share, not current price/share
What is offer value?
What are the 2 ways to derive offer value?
Characteristics
Operations, size, financial aspects, timeframe, financing of transaction, strategic vs financial, hostile vs friendly, market conditions, potential for synergies
Challenges
Separating divisions within a company
Comparing current market conditions to past market conditions
What characteristics of a prior deal must you consider when choosing prior deals to analyze?
What challenges exist when searching for precedent transactions?
S-4 or 8-K
Which merger documents could contain information about privately held companies that were acquired?
Yes.
Does offer value reflect the control premium?
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
How is precedent transactions analysis similar to comparable companies analysis, and how is it different?
Normalize the income statement and use the LTM as of the announcement date.
What is important to consider when gathering income statement information for an acquisition comparable?
Anything published by a bank, equity researches, academia, etc
Capital IQ, S&P, and other data firms
What are the sources in search for prior transactions?
248 million
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
25%
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?
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.
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?
Size, Risk, and Growth
What are the 3 main factors affecting multiples?
= (Offer price / target’s price) - 1
Example:
= ((19/15) - 1) * 100
26.7%
What is the premium calculation?
Example:
Gotham Co.’s stock price is $15/share. Blue Coolite Corp. makes an offer for $19/share. What is the premium?
Implied Transaction Value $1,000 million
Offer Value $820 million
Offer Price $35.65
Premium 19.5%
Identify the implied transaction value and offer price/share. Identify the premium to the current price.
Shares 23.0 million
Net Debt $180 million
LTM EBITDA $125 million
Current stock price $29.83
LTM Acquisition EBITDA multiple 8.0x
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
How do you calculate transaction value?
No.
Therefore, when look at comparable acquisitions, make sure to understand how much of the company was purchased. Was it 45% or 100%, etc.
Do companies always purchase 100% of another company? Add commentary to this question.
