the example for AstraZeneca \/ Alexion Pharmaceuticals below<\/a>:<\/p>\n![\"Calculating](\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/11\/19075046\/11-Precedent-Transaction-Transaction-Enterprise-Value.jpg\" "\\"Calculating")
<\/p>\n
Then, you calculate metrics such as the target company\u2019s LTM EBITDA and Revenue based on their financial statements, including adjustments for non-recurring charges:<\/p>\n
![\"Non-Recurring](\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2021\/11\/19075045\/12-Precedent-Transaction-Non-Recurring-Charges.jpg\" "\\"Non-Recurring")
<\/p>\n
If you include premiums and projected numbers, you\u2019ll have to spend time finding the data for those as well.<\/p>\n
The bottom line<\/strong> is that doing this analysis manually creates a ton of extra work but rarely adds anything useful.<\/p>\nThe metrics and multiples may be a bit<\/em> more accurate, but you\u2019ll be spending hours or days getting results that are ~1-5% better.<\/p>\nFinally, if some of the target companies in the set are private<\/strong>, good luck.<\/p>\nPrivate companies do not disclose their financial statements, so you\u2019ll rely on press releases, deal announcements, and random Google searches, which means an Excel setup like the one above is impossible anyway.<\/p>\n
<\/span>The Trade-Offs and Disadvantages of the Precedent Transaction Analysis<\/strong><\/span><\/h2>\nMost textbooks, valuation guides, and Interview Guides say that Precedent Transactions tend to produce \u201chigher valuations\u201d than the Public Comps due to the control premium<\/strong>.<\/p>\nThe control premium<\/strong> refers to how the Acquirer must pay a premium on top of the Target\u2019s share price if it wants to move into a control position (i.e., own >= 50% of the shares).<\/p>\nFor example, if a Target trades at $100 per share, why would it accept an offer to sell the entire company for $100 per share?<\/p>\n
Shareholders could sell their shares individually for that price; they need a greater incentive to sell all their shares at once<\/em> and give up all future upside in the Target.<\/p>\nHowever, reality<\/strong> doesn\u2019t quite match the theory here because it\u2019s more accurate to say that the Precedent Transactions produce a wider range<\/strong> of implied values than the other methodologies.<\/p>\nYou can see this clearly if you look at the Steel Dynamics \u201cfootball field\u201d chart above.<\/p>\n
This happens because companies do deals for different reasons<\/strong>, at different times<\/strong>, and in different market environments<\/strong> \u2013 and sometimes the data<\/strong> is wrong or incomplete.<\/p>\nSo, if you look at deals from the past ~10 years, the valuation multiples might shift significantly over that time.<\/p>\n
But if you limit your set to deals done in the past 1-2 years in an attempt to make them \u201ccomparable,\u201d you may not find enough relevant transactions!<\/p>\n
It\u2019s a bit of a Catch-22, in which fixing or improving the analysis creates other problems.<\/p>\n
The bottom line<\/strong> is that Precedent Transactions take more time and resources to find than Public Comps and often require access to a paid service like Capital IQ.<\/p>\nThey don\u2019t necessarily produce \u201cbetter\u201d results \u2013 just more variable ones \u2013 and you don\u2019t need them for anything else in the analysis, such as the calculation of the Discount Rate.<\/p>\n
Therefore, we view the Precedent Transaction Analysis as \u201csupplemental\u201d \u2013 it\u2019s fine if you have the data, but don\u2019t go crazy with it if you do not have a quick and easy way to find deals.<\/p>\n","protected":false},"excerpt":{"rendered":"
In this tutorial, you’ll learn about the Precedent Transaction Analysis, when it’s useful, how to conduct one using automated and manual data sources, and some of the disadvantages of this methodology.<\/p>\n","protected":false},"featured_media":0,"template":"","class_list":["post-24119","biws_kb","type-biws_kb","status-publish","hentry","kb_category-valuation"],"acf":[],"_links":{"self":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb\/24119","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb"}],"about":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/types\/biws_kb"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=24119"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}