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Transaction Comps

1) Transaction comps are used to determine valuation multiples in M&A deals by analyzing prior comparable transactions. They typically yield a higher valuation than trading comps due to control premiums and potential synergies. 2) Key steps include selecting comparable transactions based on filters like industry and size, analyzing each transaction in depth, and sourcing financial and deal information, which is easier for public than private companies. 3) Valuation multiples like EV/EBITDA are then calculated based on the transaction price and target financials, and may be adjusted for synergies or premiums paid over the unaffected stock price to determine the implied valuation range.

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119 views

Transaction Comps

1) Transaction comps are used to determine valuation multiples in M&A deals by analyzing prior comparable transactions. They typically yield a higher valuation than trading comps due to control premiums and potential synergies. 2) Key steps include selecting comparable transactions based on filters like industry and size, analyzing each transaction in depth, and sourcing financial and deal information, which is easier for public than private companies. 3) Valuation multiples like EV/EBITDA are then calculated based on the transaction price and target financials, and may be adjusted for synergies or premiums paid over the unaffected stock price to determine the implied valuation range.

Uploaded by

Leonardo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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TRANSACTION COMPS

(valuation using multiples for comparable companies in prior transactions)


Typically employed as a guideline to determine the multiple to employ in an M&A
transaction or restructuring, it usually furnishes a higher valuation than trading
comps. This can be explained noting the existence of a control premium paid in
numerous transactions as well as considering synergies eventually occurring in an
acquisition from a strategic buyer.
1) Select the Universe of Comparable Transactions
First steps to follow when searching for transactions with comparable targets are:
search M&A databases filtering the research for industry, size, form of
consideration, time period, geography, and other criteria; examine the target M&A’s
history to observe the multiples paid and received respectively in case of purchases
or sales (if possible, replicate the screening also for comparable companies);
scrutinize merger proxies for comparable acquisitions, which usually contain lists
of comparable transactions used in the sector used for the fairness opinion by the
advisors; review equity and fixed income research reports for the target, its
comparables, and sector.
Each of the transactions must be analyzed in-depth as to gain comfort with the
reasons behind multiples and premiums. Considerations must primarily concern
market conditions (due to the strong correlation between M&A multiples and
economic/financial environment) as well as deal dynamics (Strategic Buyers vs.
Financial Sponsors, motivations such as synergies or diversification as well as, by the
seller’s side, need of cash, purchase consideration, sale process employed, and nature
of the parts involved in the deal).
2) Locate the Necessary Deal-Related and Financial Information
The process is much easier for public companies and issuers, due to SEC disclosure
requirements. It is much more difficult for private companies, mostly relying on
informal sources, such as newswires, or on databases, if available. Thus, it’s possible
not to source complete (or any) information on transactions between private
companies. In Appendix A and B, a complete list of the SEC requirements for public
companies as well as a scheme of different sources of data for both public and private
targets are presented.

3) Spread Key Statistics, Ratios and Transaction Multiples

To begin, equity value is computed in the same manner as for trading comps with
small differences: instead of the closing share price of a given day, the base is
constituted by the announced offer price per share; the fully diluted shares
outstanding are calculated considering the exercise of all the ITM options and
warrants, although not exercisable, as well as the conversion of the ITM converts and
equity-linked securities in accordance with the terms and change of control
provisions. Anyway, for private entities, equity value can be computed as enterprise
value less any assumed/refinanced debt.

The offer price can be proposed as payable in different forms of considerations:


all-cash, mixed and stock-for-stock. Thus, in case of an all-cash consideration, equity
value can be computed with ease, multiplying the offer price per share for the number
of FDSO. On the opposite, in a stock-for-stock transaction the equity value is harder
to compute. If the parts opt for a fixed exchange ratio1, the offer price can be
computed as Offer Price per Share=Exchange Ratio× Acquire r ' s Share Price , with the share
price observed in the day before the announcement. If the offer is in the form of a
floating exchange ratio2, the calculation is similar to the case of an all-cash
contribution. Finally, in a cash and stock transaction3, assuming in this case a fixed
rate for the stock portion, the offer price per share is
Offer Price per Share=Cash Offer per Share+(Exchange Ratio × Acquire r s Share Price).
'

Key Transaction Multiples For the multiples calculation, LTM financials are
employed because the banker usually doesn’t know on which projections the acquirer
has based its offer price and is reluctant to rely on equity researches and other
projections. Thus, adjustments for non-recurring items and recent events must be
applied to the figures sourced from the SEC filings as to normalize the performances
and to compute realistic multiples.

Other than standard multiples (P/E, EV/EBITDA and their variants), computed in
the same manner as for trading comps, the banker must reserve attention to the
Offer Price per S h are
calculation of the premium paid4: Premium Paid = Unaffected S h are Price −1. In addition,
it’s common to verify the eventual synergies occurring in an acquisition, whose value
can affect robustly the multiples computed. This is especially true for strategic
buyers. In a public transaction, it’s common for the acquirers to communicate to
newswires and/or in investor presentations, the estimated synergies. Other source of
estimation of the expected synergies, together with their likelihood of realization, are
equity research reports. Once obtained the expected measure of those incremental
revenues or cost savings, the multiples can be adjusted to their measure (typically
the multiples reporting a measure of operative profitability):
1
A fixed exchange ratio defines the number of shares of the acquirer to be exchanged with each target’s stock. In this
form of consideration, the risk of a fluctuation in the acquirer’s share prices is divided between the parties equally
(assuming no collar, which is a contractual clause that limits the range of fluctuation of the consideration promised).
2
A floating exchange ratio defines the value of the acquirer’s shares to be exchanged with each target’s stock. Thus, the
risk of any fluctuation in the acquirer’s share price, assuming no structural protection, burdens the acquirer itself. This
consideration is often adopted when the acquirer is relevantly bigger than the target.
3
For each of the target’s stocks, an amount in cash to be paid is agreed, while the rest of the consideration in stock can
be defined either with a floating or a fixed exchange ratio.
4
Incremental dollar amount per share that the acquirer offers relative to the target’s unaffected share price (in
percentage). Moreover, the share price reported on the day before the announcement can be usually used as a proxy of
the unaffected price, even though, to avoid miscalculations due to information leakage and rumors, the premium paid is
usually calculated for multiple periods and compared by the banker.
Enterprise Value Enterprise Value
> .
LTM EBITDA LTM EBITDA+ Synergies

4) Benchmark Comparable Transactions

This phase of the analysis involves the same steps as for trading comps. It may be
worth specifying that in each case a number of considerations must be taken as to
correctly benchmark comparable transactions, as explained in the steps above.

5) Determine Valuation
Again, the process is similar as for trading comps, basing the valuation on means,
medians, highs, and lows, but still reserving the most relevance to a relatively
restricted number of comparable transactions. The process, once finalized, requires a
comparison between the output obtained and the valuation implied by trading comps,
trying to explain the possible differences (usually positive for transaction comps).

APPENDIX A (SEC Filings Requirements)


APPENDIX B (Sources of Transaction Information)

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