Precendent Transactions Analysis

 Precedent Transaction Analysis:

  • Similar to Public Comps, but instead of comparing the company with what similar companies are currently trading for on the stock market, you are comparing the company with what similar companies have been acquired for in historical M&A transactions
  • Useful in valuing companies that lack good Public Comps or have unpredictable cash flows
  • Same problems as comps
    • Additional problems:
      • Hard to find actual data
      • Every deal has slightly different circumstances surrounding them

Why do Precedent Transactions often result in more "random data" than Public Comps?

  • Circumstances surrounding each deal might be very different
    • e.g. one company might have sold itself because it was distressed and about to enter bankruptcy, but another company might have sold itself because the acquirer desperately needed it for strategic reasons and was willing to pay a high price

Steps:
  1. Determine historical comparable transactions and screen for seller's financial metrics
  2. Calculate multiples for the transactions based on transaction prices
  3. Apply median/average/range of multiples to the target company's corresponding metrics and calculate implied valuation
Control Premium and Synergies:
  • Multiples for Precedent Transactions are often higher than public comps due to the control premium built into M&A deals
Transactions Screening Criteria:
  • Still screen by industry, geography, size, but with one additional criterion: time
    • M&A market changes dramatically over time, so multiples from 10 years ago might be misleading today. It's common to look at recent transactions from past 2-3 years.
Multiples:
  • Only focus on historical LTMmetrics rather than a mix of historical and future metrics
Strategic Buyer vs. Financial Sponsors:
  • Strategic Buyer: 
    • Business corporations
    • Strategic buyers want to acquire companies for strategic business reasons such as revenue and cost synergies, growth potential, defensive reasons, etc. 
  • Financial Sponsors:
    • Private equity firms
    • Financial Sponsors acquire another company purely as a financial investment. They LBO a company, operate it for around 5 years, and sell it at a favorable price

Comments

Post a Comment

Popular posts from this blog

Basic Financial Accounting: The 3 Financial Statements

Image
 Introduction: There are 3 financial statements to know:     Income Statement : details the taxes , revenues , and expenses a company incurs in a period of time     Cash Flow Statement : determines how a company manages its cash position and tracks changes over a period of time, divided into CFO (cash flows from operations), CFI (cash flows from investing), and CFF (cash flows from financing)     Balance Sheet : shows a company's assets and how it acquired them using equity and liabilities at a specific point in time
Read more

Intro to Private Credit

Intro: TLDR: private credit is any loan that isn't a bond (not publicly traded) and not issued by a bank The non-investment grade credit markets in the US and Europe have expanded threefold in size since the Global Financial Crisis (GFC), growing from $1.7 trillion to $5.1 trillion. Companies in need of debt financing can either turn to banks for a loan—which would then either hold the loan on its balance sheet or syndicate it to a group of similar investors—or they can turn to private credit.  Private Credit: loans provided by lenders other than banks. Private credit funds lend directly to companies, often without using investment banks as an intermediary. They hold the debt and collect interest, rather than sell it off in pieces to other investors like a bank would. While a PE firm buys all or some of a company, private credit firms lend money to a company directly. AKA: In private equity, you are the owner of the business, and when it comes to private credit, you should operate
Read more

Intro to Restructuring II

Recap : In the last post, we covered capital structures and some basic terminology Absolute Priority Principle: in a distressed/bankrupt situation, a company's capital structure determines the order of claims on a company's assets. This order is:  Secured Debt Unsecured Debt Subordinated Debt Mezzanine Debt Equity Bonds vs. Loans: Bonds: source of funding that can be obtained from the public and usually have a par value of $1000 Loans: obtained through bank, more restrictive covenants and not as liquid as bonds Types of secured (senior) debt: Revolver: Secured, 1st lien Corporate credit card Floating interest (LIBOR+spread) Term Loan A: Secured, 1st lien 5 Year Term Amortizing - payment schedule over time Term Loan B: May be 2nd or 1st lien 5-8 Year Term No amortization - bullet maturity (lump sum in the end) Types of unsecured (junior) debt: Mezzanine: Mix of debt and equity, e.g. convertible debt, convertible preferred stock PiK interest Reasons for Financial Distress: Bad ma
Read more