In this blog, we will be discussing Trading and Transaction Comparables. Moreover, we will cover the basic differences between the two methods of relative valuation, which have their own set of objectives and methodologies.
Let us try and understand the basics using an example where a client has asked you to evaluate his target property ‘A’ in context for the US property market
1) Trading comps can be described as, “At how much price the similar properties are valued currently, compared with property A”?
2) Transaction comps can be described as, ‘How much will be the price for similar properties sold over the past few years’?
Moving on, let’s dig deeper and start with Trading Comps and understand its various components.
Public comparables help us figure out the market value of public companies with similar characteristics, and it also helps identify the theoretical value of the target business based on multiples.
Now let’s understand the key measures/terms used in Trading Comparable.
The next sections explains how to calculate LTM and Calendarization.
The Income Statement measures are as follows:
Let’s shift our focus on multiples used during the valuation
Below is a sample of a trading comparable sheet:
Let’s begin with an introduction to ‘Transaction Comps’:
- A Company/Group of Investors aiming to takeover another one must determine the purchase price of the target. To do so, they must evaluate the actual worth of the company to be acquired. Naturally, both sides of an M&A deal will have different ideas about the worth of the target: the seller will tend to value the company at the highest possible price, while the buyer will try to arrive at the lowest possible price.
- The transaction comparables analysis is essentially a study of historical M&A transactions in an industry and is based on a few commonly used valuation multiples. It is an integral part of a pitch book and has wide application in the preparation of a fairness opinion for a transaction.
- The purpose of the transaction comparables analysis is similar to that of public comparables analysis, except that by looking at prior acquisitions, insights can be gained into the premium paid to gain control (i.e., control premium) of the target company.
- A typical transaction comparables analysis includes the acquirer and target names, announcement and closing dates, transaction value, premium paid, revenue, EBIT, EBITDA, and net income multiples. It may also include the cash/stock consideration, percentage acquired, target description, and any other details relevant to the transaction.
Lastly, below is a sample of a precedent analysis.
We hope that the blog helped clarify these concepts; we look forward to your comments. 🙂
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