Trading Comps Modeling Exam Wall Street Prep

Transaction Comps 6


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1. Why do transaction comps provide a higher multiple range than trading c
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omps?: 1. Buyers pay a control premium, in return receiving the right to control de
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cisions about the target's business and cash flows.
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2. Strategic buyers realize synergies (expected cost savings, growth opportunities,
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and other financial benefits occurring from the combination of two businesses)
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2. Transaction and trading process: 1. Determine Comparable Peer Group: The fi 6 6 6 6 6 6 6 6 6 6

rst step to perform comps is to select the peer group. For trading comps, the peer gr
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oup will be composed of publicly traded comparable companies that are
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competitors in the same industry or operate within a nearby industry. For transaction co
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mps, the peer group would include companies recently involved in M&A deals within
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he same or a similar industry.
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2. Collect Relevant Information 6 6

3. Input Financials: With the industry research completed, you'll then pull the financial d
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ata of each comparable company and then "scrub" the financials for non-
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recurring items, accounting differences, financial leverage differences, and busines
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s life cy-
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6cles (cyclicality, seasonality) to ensure consistency and allow for a fair comparison
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among the companies. If relevant, you'll also calendarize each peer group compa-
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6ny's financials to standardize the metrics to ensure comparability.
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4. Multiples Calculation: Then, the peer group's valuation multiples will be calculated a
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nd benchmarked in the output sheet. At a minimum, the multiples are shown on a las
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t twelve months (LTM) and the next fiscal year (NTM) basis, and as a general conve
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ntion, the minimum, maximum, 25th percentile, 75th percentile, mean and median w
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ill be listed. Using the research collected in previous steps, you'll then attempt to und
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erstand the factors causing the differences and remove any outliers if deemed appr
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opriate.
5. Apply Multiple to Target: In the last step, the target company being valued will hav
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e the median (or mean) multiple applied to the corresponding metric to arrive at its ap
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proximate comps- 6

derived value. Understanding the fundamental drivers used to value companies with
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in a particular industry makes comps-derived valuations defensible -
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6otherwise, justifying whether the target should be valued on the higher or lower end
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of the valuation range will be difficult.
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3. Transaction comps process: 1. Select universe of comparable acquisitions 6 6 6 6 6 6 6 6

2. Locate the necessary deal-related and financial information
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3. Spread Key statistics, ratios and transaction multiples: Key difference between tr
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ansaction and trading comps is multiples for precedent transactions reflect a premi
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um paid by the acquirer. In addition, multiples for precedent transactions are typicall
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y calculated on the basis of actual LTM financial statistics (available at the time of d
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eal announcement) 6
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, Transaction Comps 6


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4. Benchmark the comparable acquisitions:
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