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Comparable transaction analysis is an excellent method for analysing the cost and possible price of a merger or acquisition.
In this article, we will take you through:
Comparable transaction analysis is a way of analysing a company that is being considered for a merger or acquisition. The main objective of this analysis method is to look at similar or comparable m&a transactions.
Think of it as similar to someone purchasing a new laptop. Firstly the buyer has to analyse the computer they want to buy with others alike.
Similar to Comparable Company Analysis, Comparable Transaction Analysis means finding previous transactions that are comparable for our company to conduct the analysis.
As an amateur investor, it is difficult to know where to start looking. This often takes a lot of time.
Professional investors use various sources to get a good list of comparable deals. Sources for Investors could be:
In the end, this is a long process that can result in no exact numbers. As always, the best approach is to start at the SEC website as this an official regulator website where companies have to file documentation.
Comparable Transaction Analysis has plenty of similarities with Comparable Company Analysis. However, there are also differences.
If you look at various deal announcements, almost always the acquirer pays a premium relative to where the share price was previously trading before the announcement.
As a yardstick, this premium tends to be around 30% above where the stock was trading. Sometimes it could be even higher if the target company is in a super “hot” sector.
Just like Comparable Company Analysis, there are several steps to go through to conduct a Deal Comp.
So, let's take a look at an example of comparable transaction analysis.
The comparable transaction analysis example looks relatively similar to Comparable Company Analysis.
For our example, with AskB, we are going to use all the comps to get a better understanding.
In this example, AskB is currently trading at $11/share. Using the mean of the various previous acquisition multiples gives us a suitable parameter for what AskB could be worth in a take-over. Here the average gives $16.2 a share (almost 50% premium).
One thing this analysis shows is that the premium is higher if one uses EBITDA multiple instead of either Sales or P/E multiple.
We can assess what part of its cycle AskB is at and what multiple would be the most relevant one. We previously went through when to use various multiples in our Comparable Company Analysis article. The same analysis and logic apply to Comparable Transaction Multiple Analysis.
The positive aspects of a “Deal Comp” are:
The negative aspects of this valuation methodology are:
Comparable Transaction Analysis serves its best purpose in situations where there is an active m&a market in the space one for the company being analysed.
Again, just like our DCF analysis and Comparable Company Analysis , the valuation approach here is as much art as it is science.
Different industries focus on different multiples and result in different premiums paid. The comparable transaction might not be perfect, and the output results depend on the companies we compare.
The Comparable Transaction Analysis valuation method should be used with other valuation methods to get an excellent holistic assessment of a company.
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