LBO Analysis: what does it mean that it provides a "floor" for valuation?
As above, what does it mean when we say that an LBO analysis provides a "floor" for valuation? Does this mean a low "baseline" valuation? If that is the case, how would we "build up" from this floor? Or is the purpose of the floor just to be something along the lines of "this is the lowest valuation possible for our company?"
The last one. Buyout firms are (in theory, now not really in practice) looking to pay as little as possible for companies.
Also in an interview don't think of it as the lowest-value valuation method possible because liquidation valuation is a thing. LBO gives you the floor that a company that is not in distress can expect for a valuation
An lbo provides the cheapest value for the company because pe firms want to pay the cheapest amount possible for the asset in order to eventually make the greatest return.
This is juxtaposed to a strategic buyer who might over pay for the asset because they think they can realize synergies or want to take out a competitor or the board is pressuring them to make a noteworthy move.
it's funny because in practice, the PE firms almost always overbid the strategics
Yea, there’s all this money these buyout funds have raised and there’s pressure to do deals and too few assets to go around.
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