How to frame/quantify acquisitions as part of thesis?

I have a case study coming up and this hedge fund typically likes to look at opportunities where a potential way for value to get realized is when a PE buyer steps in and buys the company. 

Since I never did IB or PE, I have a few questions regarding how to frame risk/reward of that opportunity. Especially since this is only one potential value "catalyst" and most of the focus would still be on the stock in question (at least I presume). 

Is it as simple as saying: here are the precedent transactions in the space - usually done at "xyz" EV/EBIT - in year 3 with EBIT at "xyz" and this is a potential acquisition value. With that PT, do I just frame it as here is the % upside vs. where it trades today.

- Is there a better way to frame that catalyst? 

- would it be better to show that as an annual IRR vs. today (instead of just saying here is the total return)?

- does it make sense to discount that value to today in another way?

- would I need to go in and quantify the upside for the PE firm and do a rough LBO to justify why a PE firm would buy it, or is a brief qualitative blurb enough (ex: recurring rev, high FCF, etc.) - or is this not even necessary really? 

- any other stuff like quantifying the typical premiums that these acquisitions usually occur for? 

If anyone could give some decent guidance on where to learn more about this side of the market it would be awesome. Takeover target as a catalyst was something I have never really quantified in a pitch and I want to be prepared to discuss this avenue intelligently. (especially past pitch examples that included this, past investors who talk about this, etc.) 

2 Comments
 

As a follow up comment-  in one interview they said they just like to build 3 statement models with quarterly projections out 3 years and avoid DCFs, and the investment team is not stacked with former PE / bankers, more of a mix of prior HFs and equity research + some bankers ... which I think made me question how detailed to really take the whole acquisition catalyst part of my analysis vs. focusing on the typical parts of an investment thesis... if that makes sense 

 

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