PRECEDENT TRANSACTION ANALYSIS

Saturday Brain Storming Thought (217) 06/04/2024

PRECEDENT TRANSACTION ANALYSIS

Precedent Transaction Analysis is a valuation method in which the price paid for similar companies in the past is considered an indicator of a company’s value. Precedent Transaction Analysis creates an estimate of what a share of stock would be worth in the case of an acquisition.

Steps to perform Precedent Transaction Analysis

A) Search for relevant transactions

The screening process requires setting criteria such as

1) Industry classification

2) Company type (public, private etc)

3) Financial metrics (revenue, EBITDA, net income)

4) Geography (headquarters, revenue mix, customer mix, employees)

5) Company size (revenue, employees, locations)

6) Product mix (the more similar to the company in question, the better)

7) Buyer type (private equity, strategic/competitor, public/private)

8) Deal size (value)

9) Valuation (multiple paid, ie EV/Revenue, EV/EBITDA, etc)

B) Analyze and refine the available transactions

1) Transfer available data into Excel

2) Start filtering out the transactions that don’t fit the current situation

3) Read the business descriptions of the companies on the list and remove any that aren’t close enough it

4) Missing and limited information about companies should be removed from list

C) Determine a range of valuation multiples

1) The average or selected range, of valuation multiples can be calculated

2) Most common multiples are EV/EBITDA and EV/Revenue

3) exclude any extreme outliers

D) Apply the valuation multiples to the company in question

1) After a range of valuation multiples from past transactions has been determined

2) Those ratios can be applied to the financial metrics of the company in question

3) Low range – 4.5 X Ratio

4) High range – 6 X Ratio

E) Graph the results (with other methods) in a football field

The main valuation methods included in the chart are

1) Comparable company analysis

2) Precedent Transaction Analysis

3) DCF analysis

4) Ability-to-pay analysis

5) 52-week high/low (if a public company)

Advantages of Precedent Transaction Analysis

1) Implied value is determined by the price paid in real life to purchase similar companies

2) Multiples-based approach with the control premium estimated, which can be very practical in pricing guidance

3) Comparable acquisitions can function as a frame of reference for participating parties ie insights from similar deals

Disadvantages of Precedent Transaction Analysis

1) Implicit assumption that buyers are rationale, yet poor decisions are often made in M & A, namely overpaying

2) Limited public information about M & A make the process more challenging and time consumin

3) Necessity for transaction recency and occurrence in relatively similar market conditions further reduces pools of camps

Deal considerations

1) Transaction rationale

2) Buyer profile

3) Sale process dynamics

4) Auction V/s Negotiated sale

5) M & A Market conditions

6) Transaction Nature

7) Purchase consideration

8) Industry trends

Key Takeaways of Precedent Transaction Analysis

1) Precedent Transaction Analysis uses past performance results of a company to help determine that company’s valuation

2) This kind of analysis is difficult because it is hard to apply market conditions at the time of a previous valuation or during a certain performance period to a current valuation

3) Precedent Transaction Analysis is a good tool to use when considering a base line valuation of a company but needs to be bolstered by more intricate analysis

Uses of Precedent Transaction Analysis

1) To determine the worth of a private company that does not have public trading comparable

2) A Market demands acquiring a company is determined by looking at the total dollar volume and the number of recent transactions in a particular industry

3) To provide data analytics for the purpose of assessing merger and acquisition activity and consolidation trends

4) A company’s acquisition target list is used to identify potential bidders, and a company’s acquisition target lust is used to identify potential sellers when buying a business

5) Assisting the Board of Directors in determining whether an acquisition or sale of all or part of an existing business is fair, orcwhen a company is in the process of being acquired