Preliminary Valuation: Comparable Transaction Analysis
When an investment banker is trying to figure out how much to pay for an acquisition, one idea is to simply look at what has been done before.
There are three main methods of estimating valuation: premium paid analysis, comparable company analysis, and __comparable transaction analysis__, which is, unsurprisingly, an analysis of previous transactions that are comparable.
This is similar to comparable company analysis in some ways. There are still ratios to be gathered and descriptive statistics to be used, like the mean and median. But instead of looking at ratios of market value, you're now looking at ratios of takeover value. How do you think these ratios will differ from the market value ratios?
No, this isn't likely. Takeover values can differ quite a bit. But think about whether they would be higher or lower.
Absolutely.
Takeover prices tend to be a little higher, so these ratios will reflect that. And since the takeover prices are now being estimated directly, do you think you'll need to estimate the takeover premium?
No; consider that takeovers require a price that's not lower than market value.
No, actually, you won't.
Exactly!
That's an advantage to using this method of analysis. You're going straight for the takeover value, so there's no need to estimate a takeover premium.
Another advantage is that the numbers you need are readily available. Just gather data on acquisitions of comparable target companies in the same industry and start crunching the numbers.
But think about the potential list of comparable firms with this method, compared to using comparable company analysis. Do you think you'll have more or fewer?
Good insight.
No, you'll have fewer, actually.
This is a weakness of comparable transaction analysis, and it could be a big one. It requires that there have been a sufficient number of recent, comparable acquisitions in the industry (or a similar industry) so that you can actually calculate some meaningful descriptive statistics. And it's possible that the list will be very small.
Also, there's really no guarantee that the acquisition values were accurate. If the takeover prices were off, then your metrics will be off as well. So what is that necessary ingredient, once again, that you'll need to add to your analysis?
That's right.
Use care and exercise independent, professional judgment as you do this. Hopefully that phrase sounds very familiar.
No, this is no time to be flipping coins.
No, this will severely shorten any career you might have in investment banking.
To summarize:
[[summary]]
They will be lower
They will be higher
They will have less variation
Yes
No
More
Fewer
Judgment
Guesswork
Random numbers
Continue
Continue
Continue
