Grasp the specifics of equity valuation with transaction comparables methodology. Understand the factors to consider, such as the type of buyer and deal characteristics, and how these influence the valuation process.
Key Insights
- Transaction comparables is a methodology that compares the unaffected share price to the price paid in an M&A transaction. This method helps understand the premium buyers are willing to pay for a controlling stake in a business.
- Only acquisitions where control is achieved are considered in this method. Screening for comparable transactions can be difficult and time-consuming, necessitating the review of various data sources.
- Factors such as competitive tension, scarcity of assets, and synergies often influence a buyer's willingness to pay a premium in a deal.
- The type of buyer, type of consideration, deal characteristics, buyer and/or seller’s motivation, economic cycle, and deal-specific synergies are critical considerations in this valuation method.
- The transaction comparables model is similar to the trading comps model. Both require focusing on businesses with similar operating and financial characteristics to the business being valued.
- It’s advisable to start with a large list of potentially comparable transactions and narrow it down after reviewing the specifics of each deal. A smaller list of good comparable transactions is preferable to a larger list of less comparable ones.
Transaction Comps Method
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Find Comparable Deals
Recent M&A involving similar companies in same industry.
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Calculate Multiples
EV/Revenue, EV/EBITDA at announcement of each deal.
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Apply to Target
Median or mean multiple × target's metric = implied value.
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Premium Analysis
Premium paid over pre-announcement stock price.
The second comparable equity valuation method is transaction comps.
- Transaction comparables is a relative valuation methodology similar to trading comparables
- It involves comparing the unaffected share price to the price paid in an M&A transaction to understand the size of the premium buyers are willing to pay to acquire a controlling stake in a business
- Only acquisitions where control is achieved are considered
- Screening for comparables transactions is difficult and time-consuming and it is best to review several sources of data
- There are many reasons why a buyer is prepared to pay a premium in a deal and common reasons include competitive tension, scarcity of assets, and synergies
Similar to trading comps, to narrow down the search, focus on businesses with similar operating and financial characteristics to the business being valued. Other qualitative aspects are also important and knowing the deal “story” is critical to understanding the value implications of prior transactions. Other considerations include:
- Type of buyer (financials sponsors often pay lower prices compared with trade buyers)
- Type of consideration (stock compared with cash)
- Deal characteristics (friendly, auction process, or hostile approach)
- Buyer and/or seller’s motivation (seller needs the money or the buyer really wants the asset)
- Economic cycle (of the buyer or seller and also of the general market)
- Deal specific synergies
The transaction comparables model is very similar to the trading comps model.
Here you can find an example of transactions in the retail space with the information about the date of transaction, acquirer and target companies, and relative multiples.
After listing the transactions and relative multiples, we’d need to calculate the high, low, and mean of these values.
And then calculate the range of the implied enterprise value for the target company based on the chosen multiple.
As with trading comparables, a smaller list of good comparable transactions is preferable to a larger list of less comparable transactions.
The best approach is to aim for a large list of transactions that might be comparable and expect to narrow this down once the specifics of the deals have been reviewed.
