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.
or... just find a listed company/BU and pitch a take private.
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-Abandoning/dp/15785195…)
"Build, Borrow or Buy" by Lawrence Capron (http://www.amazon.com/Build-Borrow-Buy-Solving-Dilemma/dp/1422143716/re…)
BHB
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.
This is a good post.
+1
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.
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.
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.
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?
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!
Where do I find small acquisition targets? (Originally Posted: 07/16/2007)
I am a college junior, finished working for my summer internship at a bulge bracket I-bank this summer and in an entrepreneurial move I promptly got another internship at a boutique for the rest of summer. I have been given the assignment of finding small companies with strong growth potential and EBITDA around $3 to $5 million for a private client's acquisition. Ideally in technology or healthcare. I want to close a deal here as the client has deep pockets and there is a commission based incentive.
Where do I begin? Any thoughts? I don't have access to dealogic or thompson financial...
Do you have access to Capital IQ? If so, I've found their screening platform useful for potential target screens.
If you have FactSet you can run a screen in IBCentral
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?
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.
Interview Question: As an acquiring company, how do you value a target company and decide on what price to pay? (Originally Posted: 05/08/2016)
I have heard that this sort of question is frequently asked in interviews. Through the search function, I haven't been able to find a direct answer. What is the general approach to answering such a question? Wouldn't the type of valuation and acquisition price depend on the industry of the target company?
Thanks!
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?
Yeah this is just testing whether you know the 3 main types of valuation methods and any industry specific multiples.
Isn't this a more in depth question that requires you to understand the merger model?
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.
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.
LBOs Model to Value Target (Originally Posted: 10/28/2006)
Okay, I've done LBOs for while, but is it typical to use an LBO to "triangulate" the value of a company?
I'm working on a buy-side and I'm showing the Board the value of a potential target. I've done all of the methods under the sun (Sum-of-the parts, acq/public comps, etc...).
It seems odd to use a LBO model b/c you need the fin sponsors "required" irr in order to help dervie the enterprise value of the company. I understand you can use a rough estimate of that "required IRR." I know it's another method, but it seems odd in this case.
Thoughts?
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.
How do PE firms value their targets if financials arn't disclosed (Originally Posted: 06/10/2011)
Even something as simple as earnings-multiple valuation still requires EBITA, so how would PE firms value a potential target when the company doesn't disclose earnings such as EBITA or any financial information at all for that matter.
Im not talking about VC, but large, long established privately held companies, where presumably you would need a pretty precise valuation based on actual earnings versus the rough valuations usually reserved for start-up's such as FB or Linked-in.
Would this company simply not be considered a target in the first place because financial information is held so tightly?
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.
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).
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