What is “Transaction Comparables”?
Transaction comparables (also referred to as deal comps or precedent transactions) is a relative valuation methodology similar to trading comparables.
Instead of the traded share price, the price paid in an M&A transaction is used for the analysis. It is a relative tool where the valuation insight comes from the analysis and understanding of a peer group of transactions. Only acquisitions where control is achieved are considered since a key objective of the analysis is the understanding of the size of the premium buyers are willing to pay to acquire a controlling stake in a business.
Key Learning Points
- 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
Screening for Comparable Transactions
There is no shortcut method for the compilation of a list of comparable transactions. The most common approach is to review several sources. These include:
- The M&A database of a data provider such as Factset or Bloomberg which allows screening using multiple search criteria
- Research reports for the sector may provide details of transactions
- Acquisition and divestiture history of the target and of its comparables
- Fairness opinions (within merger proxies) for lists of transactions
- Existing precedent transactions analysis and or pitch books
- Industry teams
- News runs
The best approach is to aim for a large list of transactions which might be comparable and expect to narrow this down once the specifics of the deals have been reviewed.
Similarly 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 understand 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
What Increases the Premium Paid?
The table below outlines key aspects and their reasons to higher premiums:
As with trading comparables, a smaller list of good comparable transactions is preferable to a larger list of less comparable transactions.