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Transaction Comps

Transaction Comps Method

Find Comparable Deals

Recent M&A involving similar companies in same industry.

Calculate Multiples

EV/Revenue, EV/EBITDA at announcement of each deal.

Apply to Target

Median or mean multiple × target's metric = implied value.

Premium Analysis

Premium paid over pre-announcement stock price.

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Explore the transaction comparables model, a relative valuation methodology used in equity valuation, which involves comparing unaffected share price to the price paid in an M&A transaction to understand the premium buyers are willing to pay.

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.