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08 Lecture PrecedentTransactions

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4 views

08 Lecture PrecedentTransactions

Uploaded by

bobbiecarter87
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Precedent Transaction

Analysis

(RP Chapter 2)
Precedent Transaction Analysis
(“transaction comps”)
• Multiple-based approach to determine valuation.
– Comparable transactions
• Broad applications, in particular: determining a
sales price range for a company in an M&A
transaction or restructuring.
• M&A deals have control premium
– Gives higher valuation than other methods (if control
premium not considered in other approaches)
Procedure of Transaction Comps
• Step 0: Study the target & proposed transaction.
• Step 1: Select the universe of comparable
transactions.
• Step 2: Locate necessary deal-related and
financial information.
• Step 3: Calculate key financial statistics and
transaction multiples.
• Step 4: Benchmark the comparable acquisitions.
• Step 5: Determine valuation.
Step 1: Select comparable acquisitions
• Locate as many potential transactions as possible for
a recent time period and then refine.
– Search M&A database (such as Bloomberg)
– Check target’s M&A history
– M&A history of comparable companies
• Regulatory filings: lists related deals
– Research reports may list comparable transactions
– Capital IQ
Select comparable acquisitions
(continued)
• Targets comparable?
– Same industry, etc.
• Market conditions comparable?
– Relevant for financing and ultimately the offer price
• Deal dynamics comparable?
– Strategic buyer vs. financial sponsor
– Buyer motivations
– Sale process and nature of the deal
– Method of payment
Step 2: Locate deal-related and
financial information
• Public vs. private target
– Information more readily available for public targets
– Private targets: information availability depends on
type of acquirer and acquisition financing
• Information sources:
– Merger filing documents
– Quarterly/Annual financial reports
– Research reports
– Capital IQ
Step 3: Spread key numbers for
comparable transactions
• Like comparable company analysis with some differences
– Calculations for comparable transaction but also companies
involved in the transaction
– We will focus on differences from comparable company analysis
• Let’s start with equity value (or offer value)
– Offer price times fully diluted shares outstanding
– If private target, use enterprise value less debt, preferred stock
and cash
• Purchase considerations (method of payment)
– Cash, stock, or mix
Purchase consideration (method of payment)
• All-cash transaction:
– “Target shareholders receive $20 for each target share”
– Equity value = Offer price x Target fully diluted shares out
• Stock-for-Stock transaction:
– Fixed exchange ratio or a floating exchange ratio
• Fixed exchange ratio:
– “Target shareholders will receive 0.50 shares of acquirer’s
common stock for every share of target common stock.”
– Offer price = Exchange ratio X Acquirer’s share price
– Equity value = Offer price X Target fully diluted shares out
– Exchange ratio fixed; price target shareholders receive
(offer price) fluctuates until deal closes
Purchase consideration (method of payment)
• Floating exchange ratio:
– “Target shareholders receive $20 of acquirer stock for
each share of target stock”
• So, target equity value (or offer value) collapses to cash example:
Offer price X Target diluted shares outstanding
– Number of shares exchanged fluctuates (i.e., number of
acquirer shares needed is uncertain); offer price constant
• Cash and stock (mix) transaction
– Offer value computed by combining cash and stock value
Example: calculate equity and enterprise
value of target in comparable deal
• The deal is an all-cash transaction with $20.00 offer price
per share.
– Target’s fully diluted shares outstanding is 125 million.
– Target’s total debt is $1350 million, and cash is $25 million.

• Target Equity Value = 20 x 125 = $2,500 million

• Target Enterprise Value = 2500 + 1350 – 25 = $3,825


million
Computation of other key financials
• Computation of adjusted LTM financials and
associated statistics for companies involved in
comparable transactions
– Same process as comparable company analysis
Calculation of key transaction multiples
• Similar process to comparable company analysis, except
use values from transactions
– P/E or EV/EBITDA, etc. of the transactions
– Use financials from when those deal were announced
• These multiples are typically higher than those from
trading comps due to premium for control/synergies
• Can adjust multiple for synergies – though typically report
multiples without adjusting
– Difficult to estimate synergies (press releases or research
reports may estimate synergies’ impact on EBITDA, etc.)
Enterprise value multiples for target in
comparable acquisition
• From earlier example: target’s enterprise value is $3,825
million

• Target’s LTM EBITDA is $450 million

• EV/EBITDA = 3825/450 = 8.5x


Step 4: Benchmark the Comparable
Acquisitions
• Choose most relevant transactions
– Business profile and key financial statistics of target
firms
– Also, characteristics of the transactions: type of buyer,
market conditions, deal dymanics, etc.
• Beware of outliers
Step 5: Determine Valuation
• Part art, part science
• Consider mean/median and range of multiples of
comparable transactions
• Comparable to other methods?

• Multiples from comps: Range of EV/EBITDA is 7.5-8.5


• Target’s LTM EBITDA is $700 million
• Target’s EV is $5,250 million - $5,950 million
Precedent transaction analysis: Pros and cons
• Pros
– Market-based: actual prices paid
– Current: often reflects current market conditions
– Relativity: provides reference points
– Simplicity
– Objectivity: avoids assumptions about future performance
• Cons
– Market-based: may be clouded by environment
– Time lag: have market conditions recently changed?
– Availability of information on previous deals?
– Are there comparable acquisitions?

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