I heard people at EB's can get grilled on the precedent transaction valuation method, but don't really understand what can be asked here as it seems quite basic. It's essentially the same thing as comps except you also look at additional things like the circumstance of the deal, economic cycle, etc.
So what kind of questions can really be asked?
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Give me an example or 2 written out and I’ll spit off some questions that come to mind, or have others also weigh in too
How do the valuations that come from Precedent Transactions compare with comps and an intrinsic valuation like a DCF?
What are some of the pros of using precedent transactions? What are the drawbacks?
Would using the comps methodology ever produce a higher valuation than precedent transactions? Why or why not?
How do you calculate multiples in precedent transactions (how do they differ from comps/dcf)?
Taking a stab at these, can you let me know if i'm in the ballpark? Not entirely sure what you're getting at in points 1 and 4
1) Precedent transactions are a relative valuation method that will typically produce a higher valuation than both DCF and comps given the control premium
2) The pro's are that it's based on real market data and is quick to calculate, the main con would be the data is often spotty and you need to consider the circumstance the deal was under as well i.e. economic cycle
3) No, typically precedent transactions will produce a higher valuation becuase of the control premium
4) You would take the transaction values and spread your comps, benchmark your target to see where you think they fall and apply those comps to your target in order to come up with your valuation - quick q, which values would you use? would it be the most recent filings and purchase EV for example?
Also how would you answer "walk me through precedent transaction analsyis"? would it just be "select a universe of companies, locate financials, spread comps, benchmark, determine value" and then let them drill from there?
The point is they kill you on the details and nuances of these kinds of questions that aren’t very important but they want you to know your stuff. Depends on the interviewer.
1) Typically higher than comps, but make sure to mention that since a DCF is the most assumption heavy model, it could go either way. Know a few MM firms who immediately disqualify someone for messing up the “rankings” question.
2) good
3) Prec transactions will pretty much always be higher, but this is where they trick you. It’s possible it would be higher if there’s a substantial mismatch between the M&A mkt & public mkts. An example could be no recent public company transactions but lots of low valuation private acquisitions.
4) yeah you have to use the offer price in calculating your Equity Value and EV value. No point in using old valuations, and you have to account for the premium.
For a walk me through a prec transactions process I would say that yeah. Think it’s good to mention that in the real world we wouldn’t just rely on this but would use comps + dcf to pinpoint/triangulate a range of valuations for the company.
Sorry for the typos I’m on my phone.
Could you argue that the dot com bubble in the early 2000s might have comps being greater than precedent transactions?
Maybe stuff about floating and fixed exchange ratios? When a collar might be present? When would floating exchange be used over fixed exchange?
How would you calculate the control premium?
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