Transaction Comps
Study online at https://quizlet.com/_bts5cd
1. Why do transac- 1. Buyers pay a control premium, in return receiving the right to control decisions
tion comps pro- about the target's business and cash flows.
vide a higher 2. Strategic buyers realize synergies (expected cost savings, growth opportunities,
multiple range and other financial benefits occurring from the combination of two businesses)
than trading
comps?
2. Transaction and 1. Determine Comparable Peer Group: The first step to perform comps is to
trading process select the peer group. For trading comps, the peer group will be composed of
publicly traded comparable companies that are competitors in the same industry
or operate within a nearby industry. For transaction comps, the peer group would
include companies recently involved in M&A deals within the same or a similar
industry.
2. Collect Relevant Information
3. Input Financials: With the industry research completed, you'll then pull the
financial data of each comparable company and then "scrub" the financials for
non-recurring items, accounting differences, financial leverage differences, and
business life cycles (cyclicality, seasonality) to ensure consistency and allow for a
fair comparison among the companies. If relevant, you'll also calendarize each peer
group company's financials to standardize the metrics to ensure comparability.
4. Multiples Calculation: Then, the peer group's valuation multiples will be calculat-
ed and benchmarked in the output sheet. At a minimum, the multiples are shown
on a last twelve months (LTM) and the next fiscal year (NTM) basis, and as a general
convention, the minimum, maximum, 25th percentile, 75th percentile, mean and
median will be listed. Using the research collected in previous steps, you'll then
attempt to understand the factors causing the differences and remove any outliers
if deemed appropriate.
5. Apply Multiple to Target: In the last step, the target company being valued
will have the median (or mean) multiple applied to the corresponding metric to
arrive at its approximate comps-derived value. Understanding the fundamental
drivers used to value companies within a particular industry makes comps-derived
1/7
, Transaction Comps
Study online at https://quizlet.com/_bts5cd
valuations defensible - otherwise, justifying whether the target should be valued
on the higher or lower end of the valuation range will be difficult.
3. Transaction 1. Select universe of comparable acquisitions
comps process 2. Locate the necessary deal-related and financial information
3. Spread Key statistics, ratios and transaction multiples: Key difference between
transaction and trading comps is multiples for precedent transactions reflect a
premium paid by the acquirer. In addition, multiples for precedent transactions
are typically calculated on the basis of actual LTM financial statistics (available at
the time of deal announcement)
4. Benchmark the comparable acquisitions:
5. Determine Valuation: multiples of the selected comparable acquisitions universe
are used to derive an implied valuation range for the target.
4. How to screen 1. Search M&A databases using a financial information service such as Bloomberg
for comparable 2. Examine the target's M&A history and determine the multiples it has paid and
transactions? received for the purchase and sale of its businesses
3. Examine M&A history of each comparable company in the target companies
comparable company universe
4. Search merger proxies for comparable acquisitions, as they typically contain
excerpts from fairness opinion(s)
4. Review equity and fixed income research reports for the target, its comparable
companies, and sector as they may provide lists of comparable acquisitions
5. What other fac- Market conditions (business/ economic environment), deal dynamics (i.e. strategic
tors should you buyer vs finacial sponsor, motivations- strategic buyer may pay more for a key
consider in an business), Sale process and nature of the deal (auctions, maximize competitive
M&A deal? dynamics, Hostile situations, whereby the target actively seeks alternatives to a pro-
posed takeover by a particular buyer, may also produce higher purchase prices),
purchase consideration (use of stock as a meaningful portion of the purchase
consideration tends to result in a lower valuation when target shareholders receive
stock, they retain an equity interest in the combined entity and, therefore, expect to
2/7
Study online at https://quizlet.com/_bts5cd
1. Why do transac- 1. Buyers pay a control premium, in return receiving the right to control decisions
tion comps pro- about the target's business and cash flows.
vide a higher 2. Strategic buyers realize synergies (expected cost savings, growth opportunities,
multiple range and other financial benefits occurring from the combination of two businesses)
than trading
comps?
2. Transaction and 1. Determine Comparable Peer Group: The first step to perform comps is to
trading process select the peer group. For trading comps, the peer group will be composed of
publicly traded comparable companies that are competitors in the same industry
or operate within a nearby industry. For transaction comps, the peer group would
include companies recently involved in M&A deals within the same or a similar
industry.
2. Collect Relevant Information
3. Input Financials: With the industry research completed, you'll then pull the
financial data of each comparable company and then "scrub" the financials for
non-recurring items, accounting differences, financial leverage differences, and
business life cycles (cyclicality, seasonality) to ensure consistency and allow for a
fair comparison among the companies. If relevant, you'll also calendarize each peer
group company's financials to standardize the metrics to ensure comparability.
4. Multiples Calculation: Then, the peer group's valuation multiples will be calculat-
ed and benchmarked in the output sheet. At a minimum, the multiples are shown
on a last twelve months (LTM) and the next fiscal year (NTM) basis, and as a general
convention, the minimum, maximum, 25th percentile, 75th percentile, mean and
median will be listed. Using the research collected in previous steps, you'll then
attempt to understand the factors causing the differences and remove any outliers
if deemed appropriate.
5. Apply Multiple to Target: In the last step, the target company being valued
will have the median (or mean) multiple applied to the corresponding metric to
arrive at its approximate comps-derived value. Understanding the fundamental
drivers used to value companies within a particular industry makes comps-derived
1/7
, Transaction Comps
Study online at https://quizlet.com/_bts5cd
valuations defensible - otherwise, justifying whether the target should be valued
on the higher or lower end of the valuation range will be difficult.
3. Transaction 1. Select universe of comparable acquisitions
comps process 2. Locate the necessary deal-related and financial information
3. Spread Key statistics, ratios and transaction multiples: Key difference between
transaction and trading comps is multiples for precedent transactions reflect a
premium paid by the acquirer. In addition, multiples for precedent transactions
are typically calculated on the basis of actual LTM financial statistics (available at
the time of deal announcement)
4. Benchmark the comparable acquisitions:
5. Determine Valuation: multiples of the selected comparable acquisitions universe
are used to derive an implied valuation range for the target.
4. How to screen 1. Search M&A databases using a financial information service such as Bloomberg
for comparable 2. Examine the target's M&A history and determine the multiples it has paid and
transactions? received for the purchase and sale of its businesses
3. Examine M&A history of each comparable company in the target companies
comparable company universe
4. Search merger proxies for comparable acquisitions, as they typically contain
excerpts from fairness opinion(s)
4. Review equity and fixed income research reports for the target, its comparable
companies, and sector as they may provide lists of comparable acquisitions
5. What other fac- Market conditions (business/ economic environment), deal dynamics (i.e. strategic
tors should you buyer vs finacial sponsor, motivations- strategic buyer may pay more for a key
consider in an business), Sale process and nature of the deal (auctions, maximize competitive
M&A deal? dynamics, Hostile situations, whereby the target actively seeks alternatives to a pro-
posed takeover by a particular buyer, may also produce higher purchase prices),
purchase consideration (use of stock as a meaningful portion of the purchase
consideration tends to result in a lower valuation when target shareholders receive
stock, they retain an equity interest in the combined entity and, therefore, expect to
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