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Precedent Transactions Analysis

Precedent transactions analysis is based on the premise that the value of a company can be estimated by analyzing the prices paid by purchasers of similar companies under similar circumstances. This analysis assists in the understanding of (i) multiples and premiums paid in a specific industry and (ii) how other parties assess "private market" valuations. The purpose is similar to that of comparable companies analysis, except that examining prior acquisitions can give a sense of the premium paid to gain control of the target (the "control premium"). Because of the control premium, transaction multiples are generally higher than trading multiples.

Like other valuation techniques, precedent transaction analysis is as much art as it is science. Interpretation of the data requires familiarity with the industry and the assets involved. In a valuation context, it is sometimes advisable to identify a small subset of a broader group of precedent transactions. These "most comparable deals" should be studied in more detail to get a better understanding of the circumstances leading to the specific valuation levels.

Exhibit A – Advantages and Disadvantages

Advantages   Disadvantages
 
  • Based on public information
  • Realistic in the sense that past transactions were successfully completed at certain valuation levels. The analysis therefore indicates a range of plausibility for offered multiples or premiums to public stock prices
  • May show trends such as consolidating acquisitions, foreign purchases, financial purchasers, etc. May also indicate which players in the industry are consolidators or highly acquisitive.
  • Helps assess the market demand for different types of assets (i.e. frequency of transactions and multiples paid).
 
  • Public data on past transactions can be limited and misleading
  • Market conditions at the time of a transaction can have substantial influence on valuation (e.g. business cycle, competitive environment, scarcity of the asset)
  • Not all aspects of a transaction can be captured in valuation multiples (e.g. existence of commercial agreements or governance issues; Section 338(h)(10) election)
  • Values obtained often vary over a wide range and therefore can be of limited usefulness
  • Precedent transactions are rarely directly comparable; every transaction has its own set of unique circumstances

Identifying Precedent Transactions

The quality of a precedent transaction analysis is dependent on the selection of the most relevant transactions. When choosing relevant transactions, several criteria must be considered:

  • Industry and financial characteristics – Target company's business and financial characteristics should be comparable
  • Size of the deal – Transactions that are close in size to the one being contemplated are more relevant than those that are substantially smaller or larger
  • Transaction-specific characteristics – It is necessary to understand the background and circumstances surrounding the transaction to extract meaningful insights (e.g. strategic vs. financial buyer, domestic vs. cross-border, full auction vs. negotiated deal, underlying market conditions)
  • Timing – The more recent the data, the more relevant the benchmark

Information Sources – Selecting Relevant Transactions

  • Securities Data Corporation (SDC) – SDC is a leading provider of mergers & acquisitions data, new issues data, and basic security information. An "SDC run" returns a spreadsheet of transactions meeting the search criteria you specify. A typical SDC run will look back 3-5 years, although a longer or shorter times period may be appropriate. While an SDC run is quick and easy to obtain, the list of transactions it produces is rarely exhaustive. Cross check information with news runs and research reports on the industry and consult with industry investment bankers, if available. Also, do not assume that the transaction values or multiples provided by the SDC run are accurate; all such data must be verified. An SDC run will require the following information: SIC codes, time frame, range of deal sizes, types of deals, and nationality of the acquirer/seller.
  • Merger proxies – In the "Opinion of Financial Advisor" section of the merger proxy, the financial advisors describe the valuation methodologies used to value the companies involved and will often list the transactions used in the analysis.
  • Research reports and trade publications – These often discuss significant transactions in their coverage area.
  • Annual report/10-K – These may list recent transactions in the discussion of the competitive environment.

Information Sources – Transaction-Specific Information

Once the relevant transactions have been identified, there are several sources of information that will facilitate a thorough understanding of the respective transaction The amount of information available is closely tied to the transaction.

  • Publicly traded target
    • Merger proxy – This document is filed in connection with transactions that require shareholder approval (e.g. public targets or stock-for-stock mergers involving the issuance of more than 20% of an acquirer's shares as consideration).
    • Tender offer documents – Schedule TO and Schedule 14D-9 are filed in connection with tender offers, whether friendly or hostile.
  • Publicly traded acquirer but private target
    • 8-K – An 8-K is filed by public companies in connection with significant events, such as a material acquisition. When a division or subsidiary is acquired or sold, the 8-K may be the only document filed.
    • Annual reports and 10-K – These will often include sections on significant transactions during the year.
    • Other public information (news run, trade press, research reports, etc.) may also be available to varying degrees.

Conducting the Analysis

The following exhibit shows what the spreadsheet output of a precedent transactions analysis might look like. When performing the analysis, you will often find that the data you require is not available ("NA").

Exhibit B – Precedent Transactions Analysis

  Enterprise Value Multiples   Equity Value Multiples
Announce-
ment Date
  Target
Name
  Acquirer
Name
  Equity Value   Net Debt   EV   Sales   EBITDA   EBIT   Net Inc.   Book Value
 
5/14/2013   Alpha   Bravo   $63.0   NM   $63.0   1.99x   7.2x   7.5x   NA   NA
10/24/2011   Charlie   Delta   268.4   $295.5   563.9   1.08x   7.0x   8.3x   11.4x   2.52x
9/1/2010   Echo   Foxtrot   NA   NA   165.0   0.87x   NA   NA   NA   NA
12/21/2009   Golf   Hotel   435.7   96.1   531.8   1.29x   7.6x   9.3x   16.5x   3.31x
 
  High   1.99x   7.6x   9.3x   16.5x   3.31x
  Mean   1.31x   7.3x   8.4x   14.0x   2.92x
  Median   1.19x   7.2x   8.3x   14.0x   2.92x
  Low   0.87x   7.0x   7.5x   11.4x   2.52x

Exhibit C – Definitions of Terms

Column   Comments
 
Announcement Date   Public announcement data (not rumor date). The standard is to perform the analysis as of the announcement date, rather than the closing date, to best reflect the financial and operating information available to the acquirer at the time of the decision to acquire.
 
Status   Indicate if the transaction is pending, closed, or terminated. If terminated, footnote reason for termination.
 
Acquirer   List full legal name of the ultimate target company (the parent). Do not use an acquiring subsidiary name.
 
Target   List full legal name of the target. When a company is selling a division, subsidiary, or asset, list the business being sold followed by the parent's name in parenthesis.
 
Offer Price per Share   Per share consideration offered to stockholders of the target company. If a cash offer, use the stated per share price. If a stock offer, use the exchange ratio multiplied by the acquirer's closing stock price the day before the announcement. If the target is a private company, there is usually no price per share.
 
Equity Value   Aggregate value of 100% of the target's diluted common equity (use the same currency for all transactions – preferably USD at the then-prevailing exchange rate). When calculating diluted equity value, always use the options outstanding rather than the options exercisable.
Equity value = basic shares outstanding × offer price per share + options and warrants × (offer price per share − exercise price).
 
Enterprise Value   Equals equity value plus net debt.
Net debt = financial debt (short- and long-term) + non-convertible preferred stock (at liquidation value) + out-of-the-money convertible securities + capital leases + noncontrolling interest − cash and equivalents.
 
Transaction Multiples   Typical to use EV as a multiple of revenue, EBITDA, and EBIT, and equity value as a multiple of net income (P/E) and book value of equity. In some cases, industry-specific multiples can provide additional pricing benchmarks (e.g. per subscriber in the cable industry or per square foot in the retail industry). When using these metrics, be sure to use EV to calculate the multiples.
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