hey all,
im preparing for FT interviews and have a few quick technical questions.
1) why do companies pay a control premium for a target company, and how do they decide how much to pay? is it simply through the bidding process?
2) at the company i worked for, some of the LBO models i worked on (with a senior analyst) had IRRs of 30-40% in the terminal year. does this seem too high to be feasible in the current market? especially in an industry like auto parts, for instance?
3) why does LBO provide a "floor valuation" for a company?
thanks so much in advance for your help
Why? I say by tradition because target Board's and shareholder expect it. The theory is that with control you can access all the cash flows - hence pay more money. Also if you're talking about a trade transaction - the control premium also reflects some of the synergies from the merger. How it is arrived at is dependent on many factors (e.g. competitive tension, amnt of synergies in the deal, how weak/strong the target is etc...) but traditionally the academic literature has put it somewhere between 20-30% and that is the minimum usually required...
that's right. I think in this environment most shops are looking to do deals north of 30%.. may I say some even 40%. Just a reflection on the increased price of risk. Take your auto parts company for example - if you were going to do a deal here - I am sure you will not be contented with 20% IRRs.
Normally if you do the LBO modelling - the LBO value will come out as the lowest compared to trans comps, dcf (wacc is typically lower than target IRRs) and trading comps + x% acquisition premium. Hence why its normally known as the floor.
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