Precedent Transaction Analysis

What are Precedent Transactions?

Precedent Transaction are also referred to as "M&A Comps" or "Comparable Deal Transactions." It uses previously completed mergers and acquisition deals involving similar companies to value a business.

Multiples used are:
EV/Sales
EV/EBITDA
Earning/EPS

The foundation for value comparison is the price paid by the purchaser for a business. The value includes a "control premium"which allows the purchaser to control the business instead of just own equity in it. As a result, Precedent Transaction valuations will be higher than Comparable Company Analysis. Regarding timing, Precedent Transaction analysis focuses on the company's value the time it's acquisition is completed. Precedent transaction analysis should be used whenever a change in control or an acquisition is possible.

Pros and Cons of Using Precedent Transaction analysis:

Pros
Based on public information
Multiples reflect real life deals
Useful in M&A discussions. Guidance on what a buyer is willing to pay for a business.
Can reveal information regarding industry consolidation trends and potential buyers and sellers.

Cons
Public data is based on historicals and my not reflect current market conditions. Information could be misleading.
Precedent transaction dynamics not perfectly comparable.

Where to find information needed to conduct a Precedent Transaction Analysis:

1) Previous valuation analysis - Previous transaction material that has been put together in a specific industry. Check if valuations you are looking for has been conducted by your company in the past.

2) Public tender documents and merger proxy statements - opinions released on these documents could supply valuable information

3) SDC Database - Securities Data corporation is a database that holds all M&A transactions

4) Capital IQ or Factset - These are public websites that has a search option for M&A transactions.

5) Google search for M&A industry current events.

6) SEC filings and equity research

How to find the right Precedent Transaction analysis: 

The best Precedent Transactions to use are those where the company you are valuing and the target company have the most similar business and financial characteristics.

For example:
-Same Industry
-Similar size
-Similar sales growth rates and profitability margins
-Similar capital structures
-Similar reason for transaction (strategic move, bankruptcy)
-Same geographic location of operations

Best way to find relevant sets of Precedent M&A transactions

The relevant transaction filings can be found on the SEC website. In the document you look for the Fairness Opinion section and search for "Selected Transaction Analysis."

Calculating The Precedent Transaction Multiple

Key information to gather:
-Announcement Date
-Target and Acquirer Name
-Consideration Type(Cash or Stock)
-Equity Value (based on offer share price and diluted shares outstanding)
-Enterprise Value (Equity value plus net debt)
-LTM Financial results of the target

Step 1: calculate implied equity value

Calculate market value prior to announcement
Offer Price = $43 - (Acquisition price per share).
$63 million basic shares outstanding
$7 million options outstanding

Diluted share count = $63 + $7 = $70 million
Offer Price * Diluted Share Price = Implied Equity Value
Implied Equity Value = $70*$43 = $3,010 million

Step 2: Calculate Implied Enterprise Value

Find info from the target companies 10-Q filing

Equity value + total debt -total cash and short term investments.

$3010 + $49 - $340 = $2619 = Implied enterprise value

Step 3: Find the Last Twelve Months (LTM) revenue.

Use the LTM data from SEC filings. Has to be the latest filings prior to announcement.

LTM Revenue = $4711 million
LTM EBIDTA = $2200 million

From this data we can calculate the multiples for this transaction.

$4711 million * X = $3,010   Therefore the Multiple = 1.56

$2200 million * X = $3619 Therefore the multiple is =1.645

This procedure can be repeated for each relevant transaction in the peer universe. Once completed collective statistics from the multiples can be presented. (Median, Mean, Max, Min).

Price Premium Analysis 

An analyst must also account for the Control Premium to approximate the appropriate offer price premium for a target company.

Usually the difference between the share price one day prior to announcement and the offer price is used.

Formula:

Premium Paid (%) = (Acquisition Price / Last Trading Price - 1) * 100

Last trading price is usually the closing price of the stock the day before the announcement is made. Sometimes bankers use the price a week before the announcement just in case there were leaks of acquisition news and the stock jumped.