VALUATION PRECEDENT TRANSACTIONS Flashcards
What is a precedent transactions analysis?
It is a multiples based approach to derive a valuation range for a given company, division, business unit, or collection of assets.
When would a banker consider transactions from much later than 2-3 years for a precedent transactions analysis?
Potentially the older transactions may be appropriate to evaluate if they occurred during a similar point in the target’s business cycle or macroeconomic environment.
What are the two reasons for transaction comparables usually providing a higher multiple range than comparable comps?
- Buyers generally pay a control premium when purchasing another company, as a result, the acquirer receives the right to control decisions regarding the target’s business and its underlying cash flows
- Strategic buyers often have the opportunity to realize synergies, which supports the ability to pay higher purchase prices. Synergies refer to expected cost savings, growth opportunities, and other financial benefits that occur as a result of the combination of businesses
What differences do multiples for precedent transactions have to comparable multiples?
Typically multiple for precedent transactions often reflect a premium paid by the acquirer for control and potential synergies. Moreover, they are calculated on the basis of actual LTM financial statistics.
What are some ways to initially create a list of comparable acquisitions?
- Search M&A databases (SDC Platinum) for required search criteria
- Examine target’s historical M&A history and determine its paid and received multiples
- Search merger proxies for comparable acquisitions for the fairness opinions and list of transactions
What are 2 other conditions that should be considered when analyzing M+A transactions for list?
- Market Conditions
- Deal Dynamics, including:
a. Strategic Buyer vs. Financial Sponsor
b. Motivations
c. Sale Process and Nature of Deal
d. Purchase Consideration
Why should market conditions be considered in M+A list creation?
Market conditions provide context to specific sectors at snapshots in time, which provides additional information regarding acquisition financing, influence on acquisition price payable by acquirer, and confidence of the transaction.
What are types of deal dynamics
a. Strategic Buyer vs. Financial Sponsor
b. Motivations
c. Sale Process and Nature of Deal
d. Purchase Consideration
What is the strategic buyer vs. financial sponsor consideration?
Strategic buyers typically pay higher prices than financial sponsors due to their ability to realize synergies from the transaction, as well as having a lower cost of capital and return threshold.
CAVEAT: during robust credit markets, sponsors are able to place higher leverage on targets and compete more effectively.
What is the motivations consideration?
This can be broken down into two sections: buyer / seller motivations:
Buyer motivations: strategic buyers may stretch to pay higher prices for assets if substantial synergies may be realized or is critical for a strategic plan (scarcity value). Financial sponsors may be more aggressive with price if synergies can be realized by combining the target with a portfolio company.
Seller motivations: a corporation in need of cash that is selling non-core business may prioritize speed of execution, certainty of completion, and other structural considerations which may result in a lower valuation.
What is the purchase consideration?
The use of stock as a meaningful portion of the purchase tends to result in a lower valuation. This is because when the target shareholder receives stock, they also receive the equity interest in the combined entity and expect to share the potential upside driven through long term growth and synergies. Target shareholders maintain the opportunity to obtain a control premium at a later date through a future sale of the company. As a result, upfront compensation may be less than for an all-cash transaction.
What is a tender offer in M+A?
A tender offer is an offer to purchase shares for cash. The acquirer mails an Offer to Purchase to the shareholders and files a Schedule TO. In response, the target files a Schedule 14D-9, which contains a recommendation from the target’s board of directors to the target’s shareholders on how to respond.
What is a schedule 13E-3?
A schedule 13E-3 is a disclosure of information used in an affiliate’s decision to go private after an LBO
What is a PREM14A or C / DEFM14A or C
They are the preliminary/definitive proxy and information statements relating to an M&A transaction
What are the nuances in calculating equity value in precedent transactions analysis?
Equity value is based on the announced offer price.
eg. Announced to offer target shareholder’s $20.00 / share and the target has 50M shares outstanding fully diluted (based on TSM) the equity purchase price is $1000M.
Note: all outstanding in-the-money options and warrants are converted at their weighted average strike price regardless of whether they are exercisable or not. This assumes that all unvested options and warrants vest upon a change of control.
