How to identify and value acquisition targets?

This is for a 3rd round interview project for a private equity company. They want me to identify 5 companies that fit their investment criteria and put a rough value on them using what limited public information I can find.

How does one even begin to search for private companies and how do you value them when there are no financial statements publicly available? The interviewer said I could use proxies for figures like revenue and EBITDA if I can't find any figures but what sort of proxies would work?

Thanks for any help guys.

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Comments (27)

Feb 23, 2016

employees, # stores.. compare per employee/store revenue with public companies. assume broadly similar margins to find something within deal size range.

or... just find a listed company/BU and pitch a take private.

    • 1
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Feb 23, 2016

I might be of a different opinion to others on this one, but there might be some value in making a couple of your "targets" (though definitely not the majority), acquisition opportunities for existing portfolio companies of the PE fund.

The trick here is that looking at such companies allows you to display knowledge of the strategy behind pursuing "inorganic growth" for existing portfolio investments (which can be a dark art in its own right and may be something your interviewers are pleasantly surprised to hear). I'd look to the following materials to aid your understanding if this is a new topic to you:

"Beyond the Core" by Chris Zook (http://www.amazon.com/Beyond-Core-Expand-Without-A...)
"Build, Borrow or Buy" by Lawrence Capron (http://www.amazon.com/Build-Borrow-Buy-Solving-Dil...)
BHB

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Feb 23, 2016

Thanks F. Ro Jo & BHB - unfortunately yes it's quite new to me as I don't have a formal background in valuations. What little I do know is based on publicly listed companies where financials are readily available.

The project is due this Friday which is only 2 days away so I won't have time to read those books you linked.

The interviewer specifically asked to identify private companies. The market is not the US so there's even less info available online than usual.

The company is focused on healthcare, insurance, financial services, and tech (SaaS). F. Ro Jo's idea of comparing similar publically listed companies is my starting point so far. Would it be too far a leap to assume similar EV and EBITDA to the publicly listed companies? What other useful metrics can I assume? I'm not sure how helpful EPS will be if I can't find the target company's total share count. Maybe I can assume similar expenses, capex, and working capital, especially for SaaS companies as I would expect they would have pretty low fixed expenses.

Array

Feb 24, 2016

This is a good post.

+1

Feb 24, 2016

Not quite sure what you're asking but same EV/EBITDA is okay, same EV or same EBITDA is of course not. Unless they are the exact same size in terms of # stores or # headcount.

Do Healthcare and use beds. Or insurance and sales force. Financial services if you can find out net book for the private company. Every industry has a generally accepted driver, typically would be the revenue generating unit.

Feb 24, 2016

Ok this is what I've got so far. I've identified 3 similar listed companies on the ASX and from these I'm taking the EV/Revenue, EV/EBITDA, Revenue/Employee, EV/Employee ratios and averaging them across the 3 companies to get a multiple.

Then I'm going to estimate the private company's revenue or EBITDA or number of employees as best I can and multiply by the multiples to give some estimates of EV.

Does that sound acceptable in terms of a very rough calculation of a private company's value? I've read that EV is the most relevant for M&A situations.

Array

Feb 27, 2016

Well make sure it's an industry where employee is a good proxy for size of business.

Another thought - if you can identify some form of likely sale situation that would be even better. Say 72 year old founder with 3 estranged kids. That's a company that would be open to offers... Shows that you understand the realities of the PE business.

Feb 29, 2016

Thanks for the tip. Looks like one more phone interview to discuss the analyses and then a half-day interview in person.

Any idea what to expect? More technical questions or more about fit and being likeable now?

Array

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Mar 2, 2016

I'm late to the party here, but FRoJo's first comment would also be my comment.

This is a PE case study and what they're looking for IMO is the structure of your thinking to deliver a realistic answer!

Mar 2, 2016

Do you have access to Capital IQ? If so, I've found their screening platform useful for potential target screens.

Mar 2, 2016

If you have FactSet you can run a screen in IBCentral

Mar 2, 2016

The boutique should have something like CapitalIQ available. Use the screener function on that.

Just wondering but what bank is it that gives out commission-based wages?

Mar 2, 2016

Working on the buy-side of a deal involves being able to section market and determine targets. In order to do this effectively, it is necessary to identify as several of the companies that meet your defined target market and then eliminate those that do not meet the standards. This is where it is essential to have deep market knowledge and expertise.

Mar 2, 2016

I might be missing something here, but isn't this a general type question where you would speak about the three main valuation methods (DCF, Comps, Deal Comps) and briefly mention LBO if it is a private equity acquisition?

Mar 2, 2016

Yeah this is just testing whether you know the 3 main types of valuation methods and any industry specific multiples.

Mar 2, 2016

Isn't this a more in depth question that requires you to understand the merger model?

Mar 2, 2016

I would definitely think so. If the question was about valuing a company then the 3 valuations would be a good answer but it seems like that would fall way short if asked the above.

Mar 2, 2016

How I'd answer:

I would start by looking at P/E ratios and making sure mine is higher, or at least in the ballpark as the target.

As the acquirer, you want to know if the deal will be Accretive or dilutive (value-creating vs. value-destroying). So you would want to create pro-forma financials for the combined companies and then value that. If you could find a really good deal comp, you would likely base your valuation heavily on that. You probably can't, so then just start rolling through your valuations (comps, DCF, LBO if it's a PE target, etc) and putting together the football field.

Once you have that done, and you really just need pro-forma I/S & B/S, you basically would figure out what deal structure makes it Accretive. If it makes sense, then it's probably a good deal and then you would want to maximize the value as long as the structure is still reasonable. If the only way for the deal to be Accretive is by paying like a 10% premium on an all cash deal, then it's probably not going to be a good buy.

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Mar 2, 2016

How is that odd? Depending on which way you're looking at the valuation, the required IRR to equity holders determines in part how you calculate an overall WACC to get to present value. That's the front end way of looking at it.

Conversely on the back end (as is typically the case in real estate), you just build out the cash flows and solve for the IRR based on your assumptions. Hopefully it comes out near what your targeted investors expect...otherwise keep tweaking assumptions until you get there. Or ditch the idea completely if the numbers simply don't work (like that ever happens!).

Maybe more to your point is how do you come up with cost of equity. Classic problem in determining a WACC, but typically you have an idea what investors are looking for. Depends on a lot of things, including existing interest rates, macro trends, market environment, etc.

Mar 2, 2016

They will reach out to companies that appear to be a fit for their strategy and speak with the ownership to get that information from them directly. If the owners are open to acquisition they would enter a CA and send over audited financials.

Usually starts off on verbal figures and if it looks promisign they will engage in all that due diligence, just like a normal public company.

We've got half a million shares in the bag!

Mar 2, 2016

Direct contact with management occurs but generally for well established private companies, investment bankers are constantly pitching acquisitions to management and making introductions with interested players even in the absence of a full blown M&A process. Peak's description is correct and constitutes cold-calling (to the extent that the PE shop does not have existing relationships with company management).

Mar 2, 2016

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Mar 2, 2016

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