Is it appropriate to include Precedent Transaction Analysis in a comprehensive equity research report? When is it appropriate to perform such an analysis?
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http://macabacus.com/valuation/precedent-transactions
I'm not in equity research, but as a banker, I would find it useful if the company was rumored to be a potential takeover target.
If the company is heavily rumored, it's going to be trading at an inflated multiple.
It would help to see if this multiple was in-line with precedents.
yeah agreed with the above comments. the name of the valuation method alone is a guide for why it's not the most useful method for valuing a standalone entity from a going-concern perspective.
If anything, transaction comps can serve as a guide to know whether or not your multiple used to value the company of interest makes sense. if you choose a multiple above the range provided by the transaction comps, assuming that they are relatively recent and good comparables for the company of interest, you know that you're likely a bit too aggressive in your estimates. If you're relatively in line with that range, then you better have a justified reason for WHY the company should trade at the upper end of a multiple range for companies that got bought out.
Aside from a few companies in each industry, this is probably unlikely, however. So, using either just a straight comps analysis or a DCF and combo of the two is the better way to go. Either way, though, the transaction comps basis can be a "sanity check."
Thanks for the help.
Yeah, remember that any transaction is just that, a past transaction - perhaps the single most important thing is that the environment has probably changed a lot since the last transaction.
If you have no or few transactions since 2008, well, that's an issue. If it's an active industry, with lots and lots of recent transactions, OK, there's a case for it.
And remember, people do deals for all sorts of reasons, and I find many of them are done with little regard for good valuation.
Like the above posters already mentioned, I use precedent transactions when I am writing a report if I think a company will sell one of its divisions or if there is an expansionist company in our sector looking to buy someone. As most companies overpay for acquisitions anyways its a good measure to double check your other analyses.
Precedent Transactions (Originally Posted: 07/10/2014)
In Equity Research, since the assumption is the investor is buying minority share-is there any reason to use precedent transaction or is it completely ignored by ER analysts?
Does it become important when M&A activity is high in sector?
Same thing with LBOs?
Transaction comps are for M&A... good ways to benchmark enterprise value, because you need to take into account the premium paid for the target.
No reason to use this in ER, or any other type of equity investing. Levered dcf and public comps are always good for finding equity value.
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