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PPR – Enterprise Value STEP 10

Our next step is to begin the purchase price ratio analysis ("PPR"). This analysis will show us what premiums and multiples the acquirer would be paying for the target at various transaction prices per share (i.e. the amount offered by the acquirer for each target share).

By evaluating the premiums and multiples at various transaction prices, we can determine what is an appropriate price to pay for the target. You might use transaction comparables analysis to see at what multiples the target's peers were acquired, and select an offer price that is inline with precedent transactions, but adjusted for the specific circumstances surrounding the contemplated transaction. For example, if TargetCo has no other viable options than to be acquired by BuyerCo, BuyerCo might seek to pay a multiple of EBITDA representing a discount to EBITDA multiples paid in precedent transactions.

The calculation of premiums and multiples is straightforward. The tricky part here is making sure you properly calculate fully diluted equity value and net debt, since whether options and convertible securities are in-the-money ("ITM") depends on the transaction price. ITM convertibles are treated as equity and out-of-the-money ("OTM") convertibles are treated as debt.

Note how we determined the range of transaction prices we wish to consider. First, we rounded the current share price up to the nearest dollar. We then added or subtracted one or more dollars from this value. Since most acquisitions of public companies offer the target's shareholders a premium to the current share price, most of the transaction prices we consider should reflect this premium (note that we only considered one transaction price that is lower than the current share price).

For a given transaction price, you should generally observe that like multiples decrease from one year to the next as the denominator (e.g. revenue, EBITDA, etc.) increases year-over-year in healthy companies. For TargetCo, we see that this is not the case. Also, check that the total enterprise and diluted equity values calculated for the target and acquirer at their respective current share prices match the values calculated on the Assumptions tab.

Although you can build your model to consider a single transaction price, your model will be more flexible and useful if you consider a range of possible transaction prices. Going forward, keep in mind that much of the apparent complexity of this model is attributable to the fact that we have built it to consider a range of transaction prices. The model would seem far more simple had we entered a single transaction price.

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