So this must be really obvious, but I've been studying for my technicals for a while now, and I'm bit confused about precedent transactions. Looking at this link: http://macabacus.com/valuation/precedent-transact… and what it says in the BIWS interview guide, you use EV/EBIDTA multiples for precedent transaction... but how does that build in the control premium? That's the same multiple you'd use for comps. Wouldn't a better multiple be Sale Price (transaction value)/EBITDA? Because that would include a control premium right?
Sorry for missing the obvious here...
You use transactions to determine what EV/EBITDA multiple the company X paid to buy company Y and then applying that to try and get to a valuation for your company. So, since you are using actual transactions (assuming full control transfer) the "control premium" is already baked in.
You use the same multiples for public comps, but the multiples there (and what you apply to your company to value it) are just what they are trading for in the public market (not what someone paid to take it over or buy it outright).
Make sense?
...after re-reading your question, I think you may be missing the point. You are doing this analysis (trading comps, precedent, dcf, etc) to try and arrive at a valuation for your client (or for a target acquisition Z). So you need some multiples to apply to Z's own financials...you get these by seeing what range companies similar to Z are trading at on the public mkts ("comps"), but also how much people paid for companies similar to Z ("precedent transactions")....so the latter would include the control premium
Thanks for the response.
Still confused though, EV=market cap + Net debt + preferred stock + Minority interest (well simplified) right? So, if you're looking at comps and a precedent transaction, how would you not have the same multiple in both situations? Where is the control premium in that formula?
Or am I still missing something here?
Sorry! and thanks in advance
I hope I understand where you're missing it, but:
Trading comps and transaction comps won't have the same multiples. Say a company is trading at 4.0x EBITDA. If that company were to be involved in a transaction today, it would be sold for something more than 4 (depends on the company, but maybe 5.0x-7.0x?).
Hence, with the extra money paid (premium) the multiple for the transaction ends up being higher.
Make sense?
Thanks for helping out.
Where I'm getting lost is that from what I understand transaction value does not equal enterprise value. If you're using an EV/EBITDA multiple, how is the control premium built in? Where in EV is the control premium? EV=market cap + net debt + pref stock + minority interest right?
You're a stubborn one. The EV used includes the control premium--and following your formula, it would be built into equity value (market cap if it's public).
EV = equity value + net debt +.... In the case of precedents, equity value is not simply market cap, but also includes the premium paid above share price.
EV = market cap + net debt + ... Assumes there is no control premium, essentially implying trading comps.
ohhhhhh ok. See that's where the confusion was, I just assumed that EV was always using Market cap, but you're saying that the Equity value is really the value of the offer that is paid to the target in precedents?
Thanks, SB to you.
Plus:
Transaction value (if buying 100%) is the implied enterprise value. At least that's what my shop uses for multiples.
See that's what I thought intuitively makes more sense using Transaction value instead of EV for EBITDA multiples
Precedent Transactions - Selection and Multiples (Originally Posted: 10/28/2013)
Hi,
I have two questions concerning precedent transaction analysis: - What are your criteria for selecting transactions? Industry, Business Model, Size, Revenue, etc. which one is the most important? - Do you prefer to use EV/EBITDA or EV/Revenue and why?
Thanks!
You seemed to capture most of the criteria for precedent transactions, however, one important characteristic that you missed is timing. Its important that you compare transactions that happened in a relevant space. Another might be reason for transaction, such as strategic buyer vs. financial buyer.
For relevant multiples, it always depends most on the industry, each industry will have multiples most relevant for comparison.
Depends on the industry you are looking at. The multiples are different for industrials, aviation, healthcare and financial institutions.
Thank you very much for your answers.
I would like to precise my question on multiples: What are the advantages/disadvantages of using EV/Revenue? What are the advantages/disadvantages of using EV/EBITDA?
Advantage of EV/Revenue is that its more universal across accounting standards, and is less affected by cyclical or industry trends. Disadvantage is that revenue isn't a very direct value driver, doesn't really tell the whole story (Expenses vary largely).
Advantage of EV/EBITDA is that it is close/a substitute for FCF, capital-structure neutral, and reasonably accurate to evaluate profitability. Advantage/Disadvantage is that it doesn't capture depreciation.
I'm sure you can find more depending on how in-depth of an answer you're looking for, but those are some basics.
question on precedent transactions comparison, football fields (Originally Posted: 04/28/2011)
hi guys,
had a few questions that i couldn't resolve successfully.
i'm doing a transaction comp analysis to get multiples. i have 3 companies. i use the median value and get the range. i apply the range to a target company's variable to get an EV range.
my friend says i should use a 'weighted average' based on the biggest companies. i don't think he's right because by scaling the EV by size, you're implying a multiple for the company being valued (when you actually use the multiple median) that is adjusted for advantages/disadvantages of size. i think this is incorrect as it creates a 'size biased' multiple which isn't close to the 'average' of the comparables. who is correct?
when you're using a football field comparison, is it correct to say that the precedent transaction comps tend to imply a value above what the 'pre preannouncement' price would be? i think this is so because the actual price paid will have some synergies built in as the target's shareholders try to 'cash in' on the gain.
sorry for the newbie questions thanks in advance
Get the WSO technical guide. Explains everything very well.
//www.wallstreetoasis.com/guide/wso-technical-interview-guide
+1
Weighting question is somewhat tricky because averaging ratios to start of with is incorrect.
Basic maths - when averaging ratios you got to have a common denominator.
However, the entire industry is used to averaging ratios ;)
you are correct, you don't want to necessarily weight the multiple to the larger transactions as larger companies tend to have lower growth prospects / margin expansion and will generally trade at lower multiples, all else equal. For illustrative purposes I sometimes run a regression on EV size and the multiple to see the correlation in the set of precedent transactions, then you can put the slope and intercept values into an y=mx+b equation to see a "size adjusted" transaction multiple. but only do this if there is correlation present. again, your MD probably wont want to see this in a deck but it can be very useful in choosing / justifying why you picked a certain multiple to apply to the deal.
thanks guys. highly appreciated +1 to you both
i already have the tech guide but haven't found the time to go thru it yet.. will do later... thanks also for letting me know it's in there
You can weight separate comp groups if you are comping your company to more than one group of peers. And as to what weight to use, it completely depends on what your MD wants to see, not what would truly value the company.
Precedent Private Transactions in Biz Case Scenario (Originally Posted: 03/20/2012)
Hi guys,
I have a question regarding precedent private transactions. From what I understand (aka from what I've been able to google), it seems that private transaction data is used to compare Sales/EV or EBITDA/EV across a number of private firms.
I've been given a case where the only information about private precedent transactions is the following:
Enterprise Value Company D - $8 Company E - $15 Company F - $25 Debt Outstanding ($millions) Company D - $2 Company E - $3 Company F - $6 Debt/Equity Ratio Company D - 0.33 Company E - 0.25 Company F - 0.32
From what I can tell, this information doesn't provide a market cap or offer price per share so that I can compare what the firm I would like to acquire should sell for.
I'm wondering what the hell I can do with this to compare the firms? Isn't the only information given related to the capital structure of these private precedent transactions?
Any info would help, thanks!
I'm a dummy. Pretty sure you're only suppose to use them to estimate a target capital structure to get the WACC so you can calculate FCFF. Mods feel free to delete this.
Could be wrong here, but I think you can do a price / book multiple with this information. For example, using Company D's numbers:
EV = market cap + debt, minority interest and preferred shares - total cash and cash equivalents Simplified for this case you have EV = market value of equity + debt Since you know EV and debt, solve for market value of equity: $8 - $2 = $6 market value of equity
You can also solve for the book value of equity given the dollar value of debt and debt/equity ratio. If debt equals $2 and the debt to equity ratio is 0.33, the book value of equity is also $6 ($2/0.33). Therefore, the firm is valued at book.
Company E has market value of equity equal to $12 ($15-$3) and book value of $12 ($3/0.25); also valued at book
Company F has a market value of equity equal to $19 ($25-$6) and book value of $18.75 ($6/0.32); valued at 98.7% of book ($18.75/$19).
Price to book multiples are used much less frequently than EV/EBITDA or EV/sales multiples, but they are common in FIG and insurance deals. Given that you have no cash flow information or sales/EBITDA figures, I think that's your only choice.
Precedent Transaction (Originally Posted: 09/12/2008)
Hi,
Can someone please direct me to a site where I can find the most recent transactions for a specific industry?
Thank you, Nikita
if you are not in banking yet and dont have access to tools, use google.
if you are in banking, please tell me you know this.
Problem with Precedent Transaction Comps? (Originally Posted: 07/31/2009)
Could anybody give a right answer for "what is the problem with using precedent transaction comps going back to 10 years?"
my guess is the premium given to companies going back 10 years are much smaller then the premium's given today.
different economic times may have caused "bubbles" inflating their multiples...
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