Valuation Multiples 2 - Precedent Transaction Analysis

Valuation Multiples 2 – Precedent Transaction Analysis

My name is Joris Kersten (1980) and I am an independent M&A consultant and trainer in Business Valuation from the Netherlands.

I have decided to write a sequence of 6 blogs on the topic “Business Valuation”. Since for Business Valuation you have different techniques. In addition, “Microsoft Excel” plays an important role as a tool to build the business valuation models.

This is the 6th and last blog in this sequence with topic: “Valuation Multiples 2 - Precedent Transaction Analysis”.

The topics of all the six blogs can be found under here. Here you can also find the links to read all the blogs:

1.    Leveraged Buyout Analysis (LBOs);

2.    M&A Analysis” (M&A model – Accretion/ Dilution);

3.    Discounted Cash Flow Valuation (DCF);

4.    Valuation Multiples 1 – Comparable Companies Analysis (comps);

5.    Excel Shortcuts & Business Valuation;

6.    Valuation Multiples 2 – Precedent Transaction Analysis.

Links:

1)    LBO Analysis (June 9th 2019): https://www.dhirubhai.net/pulse/leveraged-buyouts-lbos-joris-kersten-msc-bsc-rab/

2)    M&A Analysis (June 20th 2019): https://www.dhirubhai.net/pulse/ma-model-accretion-dilution-joris-kersten-msc-bsc-rab/

3)    Discounted Cash Flow Valuation (July 24th 2019): https://www.dhirubhai.net/pulse/discounted-cash-flow-valuation-dcf-joris-kersten-msc-bsc-rab/

4)    Valuation Multiples 1 – Comparable Companies Analysis (August 26th 2019): https://www.dhirubhai.net/pulse/valuation-multiples-1-comparable-companies-analysis-joris

5)    Excel Shortcuts & Business Valuation (August 28th 2019): https://www.dhirubhai.net/pulse/excel-shortcuts-business-valuation-joris-kersten-msc-bsc-rab

6)    Valuation Multiples 2 – Precedent Transaction Analysis (August 29th 2019) (the blog under here).

Precedent Transaction Analysis (PTA): An Introduction

PTA helps the M&A consultant to get a valuation range for a specific target company. And this valuation range is built through looking at prior M&A transactions and the prices paid. This of course can be of good help in cases like M&As and restructuring.

In order to find the precedent deals one needs to take a look at deals with similar companies involved, in similar market conditions, and they ideally took place recently.

Under normal conditions, the “transaction comps” have an higher multiple range than the “trading comps” for two reasons:

1)    Buyers pay a “control premium” when they purchase another company;

2)    Strategic buyers often have opportunities to realize synergies (so they can pay more).

So potential buyers and sellers look closely at multiples that have been paid in the recent past in comparable M&A deals.

How to select comparable deals?

You want to find as many relevant transactions as you can. For example you can:

-Review equity and fixed income research;

-Search M&A databases;

-Examine the M&A history of the target (or peers);

-Look in Merger Proxies for comparable acquisitions.

Concerning the databases, under here are some examples:

Bloomberg, Bureau van Dijk (Amadeus, Reach and Zephyr), company.info, Factiva, MD info, MergerMarket, OneSource, Thompson one banker etc.

Carefully study the “deal dynamics”

When you have found some deals that are potentially good to use, then it is time to look in the details. For example, what where the market conditions of the deal?

This since the market conditions have a big impact on a deal. Extreme examples are for example the height of the technology bubble in the beginning of 2000 when crazy prices were paid.

But this is not all, you also need to look at other considerations which we call “deal dynamics”:

1)    Was the buyer a strategic buyer of financial sponsor? Traditionally strategic buyers will pay more due to the ability to realise synergies;

2)    What where the buyer’s and seller’s motivations for the transaction? E.g. strategic buyers are willing to pay more when the target fits in a strategic plan. And financial sponsors are willing to pay more when the target fits well within an existing portfolio company. And corporations in need for cash might sell non-core businesses relatively cheap when there is great speed of execution etc. etc. (use your common sense here).

3)    Was the target sold through an auction process or negotiated sale? Auctions in general (when performed well) produce a higher price.

4)    How did the buyer pay for the company, with cash or with stock? Stock in general results in a lower valuation.

Statistics, ratios and multiples

As with comparable companies analysis (comps) we put all the info of a precedent transaction into excel.

And here we want to have all the statistics and ratios as well in order to derive at a certain multiple.

First we start with multiplying the offer price times the target’s fully diluted shares outstanding. Herewith all of the “in-the-money” options, warrants and convertible securities are converted (because of “change of control”). And then we follow the "equity bride" with debt (like) and cash (like) items to arrive at enterprise value.

We also want to know the purchase consideration. This refers to the mix of cash or stock that the acquirer offered to the shareholders of the target.

When an acquirer payed with cash, the acquirer can get the cash from its balance sheet, or by issuing equity and/ or by issuing debt in the markets. But they can also exchange their own shares for the shares of the target shareholders on a "fixed exchange ratio" or "floating exchange ratio". We need to know this info to assess the “deal dynamics” as discussed above.

When we have all the information, statistics and ratios, we can calculate the multiples. The most common multiple would be: (enterprise value/ LTM EBITDA).

On top of that we also like to know the premium that was paid = Offer price per share/ unaffected share price – 1 = premium paid.

And of course, we also like to know the synergies, we can even take the synergies up in the multiple: Enterprise Value/ (LTM EBITDA + synergies) = multiple with taking synergies into account. Again, we need to know this to assess the “deal dynamics”.

An example of the “input sheet of a precedent transaction” is given under here. The example comes from the book: 

Investment Banking: Valuation, leveraged buyouts and mergers & acquisitions of Joshua Rosenbaum & Joshua Pearl (chapter 2 (precedent transaction analysis) in the book). (*)

This is the main book I use in my training “Business Valuation & Deal Structuring” and my participants receive a hard-copy of this book when they register.

Benchmark Comparable Acquisitions

For all the comparable transactions we want to produce the input sheet.

And then in the end we can produce the overview of all the comparable acquisitions.

An example of the “benchmark comparable acquisitions” is given under here. The example comes from the book: 

Investment Banking: Valuation, leveraged buyouts and mergers & acquisitions of Joshua Rosenbaum & Joshua Pearl (chapter 2 (precedent transaction analysis) in the book). (*)

This is the main book I use in my training “Business Valuation & Deal Structuring” and my participants receive a hard-copy of this book when they register.

When we eventually choose the few closest comparable transactions we can then take the valuation range up in the “valuation football field”.

Together with DCF, comps and (sometimes) LBO analysis you have then a complete “valuation football field”.

After that you only need to check whether a deal is expected to be “accretive or dilutive” with a “M&A model”.

You can find more explanation on: comps, DCF, LBOs and the M&A Model (accretion/ dilution) in my other blogs (see links above).

*source: Investment Banking: Valuation, leveraged buyouts and mergers & acquisitions. Second edition (2013). Joshua Rosenbaum & Joshua Pearl. Wiley Publishing company. 9781118472200.

This is the main book I use in my training “Business Valuation & Deal Structuring” and my participants receive a hard-copy of this book when they register.

Training “Business Valuation & Deal Structuring” @ Amsterdam (2 until 8 October 2019)

When you are interested in being able to prepare all the main valuation models for real in excel, then follow my valuation training in Amsterdam South (6 days from 2 until 8 October 2019). Here I will explain you all the valuation models in great detail with excel. 

More info can be found below, and here you can also find my profile as an international trainer in Corporate Finance.

Training Business Valuation & Deal Structuring

This is a practical 6-day training in “Business Valuation & Deal Structuring” (Investment Banking M&A) and the main topics are: valuation, leveraged buyouts (LBO’s) and mergers & acquisitions (M&A’s).

The training mainly focusses on giving the participant hands on tools to build financial models in excel to determine the value of a company on 1) a stand-alone basis, 2) in a LBO situation and 3) in a buy-side M&A scenario.

In the training we will look at different valuation techniques to calculate “enterprise value” like: 1) Comparable companies analysis, 2) Precedent transaction analysis, 3) Discounted cash flow analysis (DCF), 4) LBO analysis and 5) Buy-side M&A analysis.

And we will look at different techniques to get from “enterprise value” to the “value of the shares” taking (adjusted) net debt into account.

The training is very practical in a sense that the trainer will explain the concepts first and will then apply them in class to real life companies with the participants. With all the calculations “Microsoft excel” is used to build the needed financial models.

This training is meant for analysts and associates from international investment banks. Moreover, the training is meant for analysts and consultants in: M&A, private equity, venture capital and strategy. In addition, the training is meant for accountants, tax lawyers, bankers in credit analysis, financial managers, CFO’s etc.

During the training will be focused on international companies listed on the stock exchange. But the valuation techniques are also applicable to (non-listed) private firms.

For any more question on this training feel free to contact by email: [email protected] and/ or by phone: +31 6 8364 0527 (time zone: Amsterdam). 

Planning & location:

1.    Wednesday October 2nd 2019: 10 AM – 6 PM;

2.    Thursday October 3rd 2019: 10 AM – 6 PM;

3.    Friday October 4th 2019: 10 AM – 6 PM;

4.    Saturday October 5th 2019: 10 AM – 6 PM;

5.    Monday October 7th 2019: 10 AM – 6 PM;

6.    Tuesday October 8th 2019: 10 AM – 6 PM.

Sunday October 6th: Not a training day.

Location: Crowne Plaza Hotel – Amsterdam South. George Gershwinlaan 101. 1082 MT Amsterdam.

The hotel is located in Amsterdam South (financial district), right across train station “Amsterdam South” and about 15 minutes from “Schiphol Airport”.

Price & payment:

The price for this 6-day training is 3.900 euro excluding vat. And only 2.900 euro ex vat when you book before 31stJuly 2019 (1.000 euro early bird discount).

This price is for the 6-day training including study materials (A hardcopy of the theory + workbook of: Investment Banking: Valuation, leveraged buyouts and mergers & acquisitions of Joshua Rosenbaum & Joshua Pearl), coffee and tea all day, luxury lunch at lunchtime and a snack in the afternoon.

There is a maximum of 20 participants for the training based on first come first served. This way there is room for interaction in class. 

You can register yourself by sending an email to: [email protected].

You will then receive a registration form and additional details for registration. Or download the registration form and training manual at: www.kerstencf.nl/training

Trainer & Consultant: J.J.P. (Joris) Kersten, MSc BSc RAB

·     130 recommendations on his training can be found on: www.kerstencf.nl/referenties

·     His full profile can be found on: www.dhirubhai.net/in/joriskersten

J.J.P. (Joris) Kersten MSc BSc RAB (1980) is owner of “Kersten Corporate Finance” in The Netherlands, under which he works as an independent consultant in Mergers & Acquisitions (M&A’s) of medium sized companies. 

Joris performs business valuations, prepares pitch books, searches and selects candidate buyers and/ or sellers, organises financing for takeovers and negotiates M&A transactions in a LOI and later in a share purchase agreement (in cooperation with (tax) lawyers).

Moreover, Joris is associated to ‘AMT Training London’ for which he provides training as a trainer and assistant-trainer in Corporate Finance/ Financial Modelling at leading investment banks in New York, London and Hong Kong.

And Joris is associated to the ‘Leoron Institute Dubai’ for which he provides finance training at leading investment banks and institutions in the Arab States of the Gulf. This for example at Al Jazira Capital in Saudi Arabia and TAQA in Saudi Arabia.

In addition, Joris provides lecturing in Corporate Finance & Accounting at leading Universities like: Nyenrode University Breukelen, TIAS Business School Utrecht, the Maastricht School of Management (MSM), the Luxembourg School of Business and SP Jain School of Global Management in Sydney. 

Moreover, he provides lecturing at partner Universities of MSM in: Peru, Surinam and Mongolia. And at partner Universities of SP Jain in Dubai, Mumbai and Singapore.

Joris graduated in MSc Strategic Management and BSc Business Studies, both from Tilburg University. In addition, he is (cum laude) graduated as “Registered Advisor Business Acquisitions” (RAB), a 1-year study in the legal and tax aspects of M&A’s. And Joris obtained a degree in “didactic skills” (Basic Qualification Education) in order to lecture at Universities.

Currently Joris is doing the “Executive Master of Business Valuation” to obtain his title as “Registered Valuator” (RV) given out by the “Netherlands Institute for Registered Valuators” (NIRV). This title will enable Joris to give out business valuation judgements in for example court cases.

J.J.P. (Joris) Kersten, MSc BSc RAB. Email: [email protected]. Phone: +31 6 8364 0527