Chapter 2 - Precendent Transactions Analysis

Question 1

What are the two reasons that precedent transactions analysis provides higher trading comps?

Answer 1

1) buyers have to pay a “control premium”, giving them the right to control the acquisitions decisions
2) synergies

Question 2

What are the steps to a precedent transactions analysis?

Answer 2

1. Select the universe of comparable acquisitions
2. Locate the necessary deal-related and financial information
3. Spread key statistics, ratios, and transaction multiples
4. Benchmark the comparable acquisitions
5. Determine valuation

Question 3

Where are some places you could find comparable companies to begin creating your universe of comparable companies?

Answer 3

M and A databases, the target’s M and A history, the M and A history of comparable companies you’ve already identified, merger proxies (the fairness opinion in particular), and equity and fixed income research reports.

Question 4

What factors should you look at for each comparable company to better understand the transaction and its “story”?

Answer 4

Market conditions, deal dynamics, strategic buyer vs. financial sponsor, motivations, sale process and nature of the deal, and purchase consideration

Question 5

When looking to gain the relevant financial and deal-related info needed for a precedent transactions analysis, where do you search?

Answer 5

For public companies: proxy statements, schedule TO/ schedule 14D-9, registration statement/ prospectus, schedule 13E-3, the 8k, 10k and 10q and equity and fixed income research

For private companies: press releases, sector specific trade journals. (This info isn’t verifiable though so shouldn’t be entirely relied on)

Question 6

Equity value is used as a multiple of what?

Enterprise value is used as a multiple of what?

Answer 6

Equity value is used as a multiple of net income

Enterprise value is used as a multiple of EBIT, EBITDA, and sometimes sales

Question 7

P/E ratio = ?

Answer 7

Offer price per share / LTM diluted EPS

This would be used as an equity multiple where capital structure matters or enterprise value may be negative

Question 8

How do you calculate the premium paid?

Answer 8

Premium paid percentage = offer price per share / (unaffected share price) - 1

Question 9

How would you use synergies to adjust a multiple?

Answer 9

You would add it in the denominator of an enterprise value multiple such as Enterprise value / EBITDA so it would look like EV / (EBITDA + Synergies)

Question 10

What are the key pros of precedent transactions?

Answer 10

• market based
• current
• relativity - provides straightforward reference points across sectors and time periods
• simplicity
• objectivity - precedent based so avoids making assumptions

Question 11

What are the key cons of precedent transactions?

Answer 11

• market based
• time lag
• existence of comparable transactions
• availability of information
• acquirers basis for valuation - may be based on forward projections of future performance