Valuation Multiple - Part 2

Trading Comps:-

Trading Comps or Analysis of Selected Publicly Traded Companies are multiples comparisons with other similar or comparable?companies. This method utilizes benchmark multiples based on publicly traded companies. The multiples derived from this?analysis are at a given point in time and generally change over time. It is important to note that trading multiples do not reflect?control premiums or potential synergies from a buyer.?

The following steps and methodologies would be applied in a “comps” analysis, in addition to the process described in the?multiples approach:?

1. Determine the universe of comparable companies?
2. Gather all necessary information, usually 10K’s, 10Qs, other SEC filings, and press releases?( Indian quarterly filings are equivalent to us 10q and the annual report is equivalent to 10k and SEC is equivalent to SEBI.
3. “Normalize” the financials to adjust for one-time/non-recurring items that temporarily distort earnings.
4. Calculate relevant multiples
5. Determine the implied valuation range.

It is not enough to simply use the same multiple as another publicly traded company. In most, if not all cases, the multiples that? the “comps” universe is trading at must be subjectively adjusted for factors including, but not limited to:?

• Public vs. private status – generally, publicly traded companies have had a longer track record of disclosure and?familiarity in dealing with the investment community and thus, would command a premium over smaller private?companies.
• Liquidity – the stocks of publicly traded companies are significantly more liquid than that of private companies and thus, would command a premium over private companies
• Size – generally, public companies are larger than private companies and thus, would be able to absorb negative shocks?more easily than private companies.
• Access to resources – generally, publicly traded companies have greater access to cheaper sources of capital than private companies.
• Imperfect comparables – very rarely are there two identical companies; thus, adjustments should be made to reflect?differences, such as business mix and geographic spread.

A major disadvantage of this valuation method is that often, it is difficult to determine “the right comp”. Multiples are sensitive?to the following qualitative factors when comparing similar companies:?

Operations?

– Relative competitive position?

– Industry?

– Products?

– Markets?

– Distribution channels?

– Customer base?

– Seasonality?

– Cyclicality

Financial Aspects?

– Size?

– Leverage?

– Margins & Profitability?

– Growth prospects?

– Shareholder base?

– Market conditions?

– Consideration paid?

– Surrounding circumstances

Deal Comps

Deal Comps or Analysis of Selected Acquisitions are very similar to trading comps except deal comps utilize actual transactions instead of publicly traded companies as the universe of comparable companies. All else being equal, deal comp multiples can be higher than trading comp multiples due to control premiums (premiums paid for a controlling stake in a company) and/or?potential synergies, such as cost savings and revenue synergies resulting from a combination of the two entities. They can also?be lower due to a lack of liquidity and smaller size, etc.

Deal comps are highly subjective in nature due to numerous factors:?

1. Industry trends – did the transaction take place at the high or low of industry cycles??
2. Nature of transaction and negotiations – was it a “beauty contest” or a hostile deal??
3. Consideration – was cash or stock or a combination used?
4. Structure – was the transaction structured as an asset sale or stock sale? Were earnouts based on future performance used??

The process of compiling deal comps is not unlike that of trading comps. However, data can be more difficult to locate. Sources?of information for public deals include press releases, 8K’s, Proxy’s, and other SEC filings.