How to adjust comparable companies that acquired another company
Hey guys!
I am currently preparing for some upcoming interviews and I saw this issue:
Assume that we are doing a comparable companies analysis with a time horizon of two years, and you find out that one of the companies acquired another company during one of these two years. How can we adjust this issue? How does it affect the valuation?
I appreciate your help and your thoughts about this - thank you!
There are 2 main things to adjust. The current price and TEV that you are using for multiples will already reflect that the acquisition happened. As such, it wouldn't be accurate to analyze an LTM Revenue / EBITDA multiple or P / E multiple based on the old figures prior to acquisition. You would make a pro-forma adjustment to the metrics you used to calculate multiples as if the acquisition had happened before then. A lot of the pro-forma figures are disclosed in 10Qs / 10Ks following acquisition, so you can use those.
Compared to pre-adjustment, it would lower the valuation since you will be adjusting to a higher denominator.
Additionally, when comparing operating metrics, you need to account for the organic growth, stripping out the effect of revenue added for apples-to-apples comparability to the business you are valuing.
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