Public Comps and Precedent Transactions Flashcards
Can you walk me through how you use Public Comps and Precedent Transactions?
- Select the companies and transactions based on criteria such as industry, size, and geography
- Determine the appropriate metrics and multiples for each set
- Calculate the minimum, 25th percentile, median, 75th percentile, and maximum for each valuation multiple.
- Finally, apply those numbers to the financial metrics of the company you’re analyzing to estimate its implied value.
Why is it important to select Public Comps and Precedent Transactions that are similar?
Because the comparable companies and transactions should have similar Discount Rates.
How do you select Comparable Companies and Precedent Transactions?
You screen based on geography, industry, and size, and also time for Precedent Transactions
The most important factor is industry - you’ll always use that because it makes no sense to compare a mobile gaming company to a steel manufacturing company.
Are there any screen you should avoid when selecting Comparable Companies and Precedent Transactions?
You should avoid screening by both financial metrics and Equity Value or Enterprise Value.
What are the main differences between public comps and precedent transactions?
Differences for Precedent Transactions
Screening Criteria: Industry, size, and geography, and time
Metrics and Multiples: Historical metrics and multiples
Calculations
Output: The multiples produced tend to be higher than the multiples from public comps because of the control premium
Is it valid to include both announced and closed deals in you set of precedent transactions?
Yes, because Precedent Transactions reflect overall market activity. Even if a deal hasn’t closed yet, the simple announcement of the deal reflects what one company believes another is worth.
If there’s a Precedent Transaction where the buyer acquired 80% of the seller, how do you calculate the valuation multiples?
The multiples are always based on 100% of the seller’s value.
So if the acquirer purchased 80% of the seller for the $500 million, the Purchase Equity Value would be $500 million / 80% = $625 million. And then you would calculate the Purchase Enterprise Value based on that figure plus the usual adjustments.
Are there any rules about filtering out deals for less than 100% of companies or about stock vs. cash deals in Precedent Transactions?
Your set of Precedent Transactions will include only 100% acquisition deals.
You should not include minority stake deals.
Stock vs. cash consideration affects buyers’ willingness to pay in M&A deals, but you typically include all deals regardless of the form of consideration.
Why do you look at BOTH historical and projected metrics and multiples in these methodologies?
Historical metrics are useful because they’re based on what actually happened, but they can also be deceptive if there were non-recurring terms or if the company made acquisitions or divestitures.
Projected metrics are useful because they assume the company will operate in a “steady state,” without acquisitions, divestitures, or non-recurring items, but they’re also less reliable because they’re based on predictions of the future.
How do you interpret Public Comps? What does it mean if the median multiples are above or below the ones of the company that you’re valuing?
The interpretation depends on how the growth rates and margins of your company compare to those of the comparable companies. If growth rates and margins are similar, but the multiples are different this is good. This could mean that your company is mispriced.
