PRECEDENT

TRANSACTION
ANALYSIS
-Parvesh Aghi
Relative valuation techniques

»There two techniques under relative valuation

method to value a company

Comparable
Company
Analysis PRECEDENT
TRANSACTION
ANALYSIS

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Defining Comparable Company Analysis

Idea: You calculate a company’s “Implied Value” – what it should

be worth – based on what other, similar companies are worth

Example: Company A has an Enterprise Value of $1,000, with

an EBITDA of $100 and, therefore, an EV / EBITDA of 10x

But: Other, similar companies in the market have EV / EBITDA

multiples between 11x and 13x

So: Company A should also trade at an EV / EBITDA of 11x to

13x, and its Enterprise Value should be between $1,100 and
$1,300
PRECEDENT TRANSACTION ANALYSIS

The goal of precedent

transaction analysis is to
value a company by
comparing with similar
companies which have been
bought out in a merger and
acquisition transaction

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PRECEDENT TRANSACTION ANALYSIS

Precedent transaction analysis is a method of company

valuation where past M&A transactions are used to
value a comparable business today.

Commonly referred to as “precedents”, this method of

valuation is common when trying to value an entire
business as part of a merger/acquisition and is
commonly prepared by analysts working in investment
banking, private equity, and corporate development.

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Precedent transaction analysis

Precedent transaction analysis is a

valuation method in which the price paid for
similar companies in the past is considered
an indicator of a company's value.

Precedent transaction analysis creates an

estimate of what a share of stock would be
worth in the case of an acquisition. Also
known as "M&A comps."

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Process

Step 1: Selecting the Universe of Transactions. The first step is

selecting your universe of historical transactions you will be
using in your valuation. ...

Step 2: Locating the Necessary Financials. ...

Step 3: Spreading the Key Trading Multiples. ...

Step 4: Determining Valuation.

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Historical Transactions

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 Acquisition of J.Crew Group for $43.50 per share in cash by
TPG Capital and Leonard Green & Partners. 2010.
J Crew Equity Enterpris ENTERPRISE VALUE
Group Value e Value

$ million $ million LTM LTM 2011E

EV/Revenue
sales EBIDTA

3,120 2,828 1.7x 8.8 x 1.1x

Basic shares Options Total Offer Implied Cash Debt
price Equity Val
63.741 7.977 71.718 $ 43.5 3,120 $340.5 $49.2
million million million
EV $2,828
LTM LTM Expected revenue Control 29% 43.5/33.70-1
next year 2011
revenue EBITDA Premium
$1.711 $320.78 $2.5 billion Premium Paid (%) = (Acquisition Price ÷ Last
Trading Price – 1) × 100
billion million

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Determine the value

» Enterprise Value based on EBIDTA = 10.2 X 320.78 = 3,271.95

» Enterprise Value based on Sales = 2.2 x 1711= 3,762
» Valuation Range of J Crew Group : 3.27 to 3.76 billion dollars

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J crew value per share

» J crew group might be worth $56.50 per share

according to revenue multiples, or $49.65.00 an per
share according to EBITDA multiples.”
Based on EBIDTA Based on Revenue
Multiple multiple
Enterprise value 3,271.95 3,762

Cash 340.5 340.5

Debt 49.2 49.2
Equity Value 3563.25 4053.3
# shares outstanding 71.78 71.78
$ value per share 49.65 56.47

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WHY USE PRECEDENT TRANSACTIONS?

» There are many reasons why a Precedent Transaction Analysis

should be used as part of a valuation exercise:
» To value a private business that does not have public trading
comparables.
» To evaluate the market demand for acquiring a company, based on the
total dollar volume and number of recent transactions in a certain
industry.
» To provide data analytics in assessing M&A activity and consolidation
trends.
» To identify potential bidders if the company is looking to be acquired or
identify potential sellers if a company is looking to buy a business.
» To provide a fairness opinion to a Board of Directors when a company
is acquiring or selling all or part of a business, or is being acquired.

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» Precedent Transaction Analysis typically uses the same multiples as
Comparable Companies’ Analysis (or “Comps”).
» In particular, Enterprise Value/Sales, Enterprise Value/EBITDA and
Earnings/Earnings Per Share (EPS) are the most commonly used
metrics.
» However, unlike in Comparable Company Analysis, the basis for
value comparison is the price paid by the purchaser for a business,
rather than the traded market values of the company’s securities.
» These prices can be different because there is a control premium—
the value ascribed to being able to control a business rather than
simply own a percentage of the equity in it. Thus, Precedent
Transaction Analysis will typically result in valuations that
are higher than standard Comparable Company Analysis.

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» Additionally, Precedent Transaction Analysis tends to focus on the
value of a business as of the time an acquisition of the business can
be completed, rather than today. This is because deals take time to
close, whereas current market values for a business can be assessed
on any day. Sometimes, deals can take as long as a year (or more!)
to close, so the Precedent Transaction Analysis should reflect that
fact.
» For all of these reasons, Precedent Transaction Analysis should be
part of the valuation analysis of any company in which a change of
control (such as via an acquisition) is possible.
» Below you will find a detailed overview of Precedent Transactions
techniques used by investment bankers and leveraged buyout
investors (also known as “financial sponsors”) to value a company.

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PRECEDENT TRANSACTION ANALYSIS

»The example we will use is the acquisition of

J.Crew Group for $43.50 per share in cash by
TPG Capital and Leonard Green & Partners.
»The press release states, “The price represents a
premium of 29% to J.Crew’s average closing
share price over the last month.”
» From the press release and supporting SEC
filings, we can gather and compute the key
information described above.

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»The first step is to calculate the market value of
J.Crew prior to the announcement.
»There were 63.741 million basic shares
outstanding prior to the announcement, according
to SEC filings.
»This document shows that the company had
approximately 7.977 million options outstanding.
Therefore, we can assume the diluted share
count equals 63.741 + 7.977 = 71.718 million.

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»For the equity value of J.Crew, we use the offer
price times the dilutive shares outstanding.
»Therefore, J.Crew’s implied Equity Value is
[71.718 million × $43.50] = $3,120 million.
»Next, we calculate the implied enterprise value,
or total consideration, by taking the equity value
and adding total debt balance minus total cash
and short- term investments.

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»According to the 10-Q filing, J.Crew had $340.5
million in cash and $49.2 million in total debt as of
July 31, 2010.
»Thus, J.Crew’s implied Enterprise Value is
therefore [$3,120 + $49.2 – $340.5] million =
$2,828 million.

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»Finally, we can gather the Last Twelve Months
(LTM) financial data from J.Crew’s SEC filings.
» A review of these documents shows that
J.Crew’s LTM revenue was $1.711 billion and its
LTM EBITDA was $320.78 million.
»From this data, we can calculate the following
multiples for this Precedent Transaction:

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»In addition to the historical acquisition multiples,
investment bankers use research reports that
were published prior to the announcement of the
deal (this is very important) to get a sense of
projected financial performance estimates.
» From these, we can compute what
forward/estimated acquisition multiples were
used. For example, if J.Crew was expected to
have revenue of $2.5 billion in 2011, then we can
assume that the 2011E EV/Revenue multiple for
the transaction was 1.1x.
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» This procedure can be repeated for each revelation transaction in the Peer
Universe. Once this is completed, aggregate statistics for the multiples should be
presented (minimum, median, mean and maximum).
» An example analysis would look something like this:

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» Additional points to note as you are performing a Precedent Transaction
Analysis include the following:
» Enterprise Value = Equity Value + Total Debt – Cash + Minority Interest +
Preferred Equity.
» Calculate LTM financial performance based on latest filings prior to
announcement.
» Determine projected financial performance by using a recent research
report published prior to announcement.
» Exclude extraordinary one-time items such as restructuring charges. Make
sure to footnote any such exclusions.
» Look for convertible securities that may convert upon change of control of the
target. These securities will likely be included in the diluted share count.
» Always double-check your work! Cross check research reports, company
filings and press releases.

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»Price Premium Analysis Overview
»Investment bankers calculate the control
premium of Precedent M&A Transactions to
approximate the appropriate offer price premium
for a target company. Typically, the difference
between the share price one day prior to
announcement and the offer price is used. The
following is an example of a Precedent
Transaction Analysis that included Price Premium
data:

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»The formula for Premium Paid (as a percentage
above market) is:
»Premium Paid (%) = (Acquisition Price ÷ Last
Trading Price – 1) × 100

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» Where “Last Trading Price” is generally the closing price of the stock
the day before the acquisition announcement is made.
» For example, if Company A last traded at $100 per share upon
Wednesday’s close, and Company B announces its intent to acquire
Company A for $125 per share on Wednesday evening, Company B
is paying a 25% premium over the market price to gain control of
Company A.
» In some cases, there are rumors or leaked information regarding
potential M&A activity that can manipulate or impact the trading price
of a potential target company’s stock price. Therefore, investment
bankers can also perform a price premium analysis relative to the
price one week or one month prior to announcement.

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» Pitfalls To Avoid When Using Precedent Transactions
» There are a number of common ways that mistakes can be made when performing Precedent Transaction Analysis. Be sure to review this
checklist of pitfalls to avoid before completing the analysis:
» INCONSISTENT ANNOUNCEMENT DATE OR EFFECTIVE TRANSACTION DATE
» Always keep your data points consistent. If you are looking at a set of precedent transactions, be sure to use the LTM data points when
calculating the respective multiples (rather than, for example, using multiples based upon the prior fiscal year end). Keeping the data points
consistent in your analysis will ensure a more consistent valuation. If any data points are not consistent and difficult to make consistent,
make sure to footnote them, and at least consider removing them from the aggregate statistics for the analysis.
» INCLUDING EXTRAORDINARY ITEMS
» Make sure to exclude any one-time items from the financial results data. These items may include gains/losses on sales of assets, legal
expenses, write-offs or restructuring expenses. Always footnote any exclusion.
» INCLUDING MINORITY INTERESTS IN FINANCIAL RESULTS
» Any minority interest expense or income should be excluded from the financial data points used to calculate multiples if the minority interest
is not related to the company’s core line of business. Always footnote any exclusion.
» TAKING THE NUMBERS STRAIGHT FROM AN ONLINE FINANCIAL DATABASE
» It is imperative that you conduct your own research on any given transaction. Financial databases often have inaccurate or imprecise
metrics. Try to always use primary sources when possible, as this should help ensure that the data is accurate and appropriately adjusted for
extraordinary items.
» FAILING TO CALCULATE THE PREMIUM OVER MARKET VALUE
» Be sure to calculate the true premium of an offer price – in other words, make sure that the market price prior to the transaction has not been
manipulated by market rumors or insider trading. Charting the stock price over the previous six month prior to announcement of the
transaction can give you a sense of what the historical price was prior to any possible appreciation immediately prior to announcement
caused by information leaks or illicit behavior.

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