Comparable Transaction
What Is a Comparable Transaction?
The cost of a comparable transaction is one of the major factors in estimating the value of a company that is being considered as a merger and acquisition (M&A) target. The reasoning is the same as that of a prospective home buyer who checks out recent sales in an area.
This is normally alluded to as a comp transaction.
Understanding the Comparable Transaction
Companies seek to obtain different companies to develop their businesses, gain access to important resources, grow their scope, wipe out a competitor, or some combination of these reasons.
Regardless, overpaying for that acquisition could be disastrous. So, the company and its investment bankers search for comparable transactions — the later the better. They take a gander at companies with a similar business model to the company being targeted. The more comparable transaction data that are accessible for analysis, the easier it is to infer a fair valuation.
Conversely, a company that has turned into a takeover target does the same type of analysis to decide if an offer that is on the table is a decent one for its own shareholders.
Regardless, the comparable transaction method of valuation can assist a company with showing up at a price for the acquisition that shareholders will acknowledge.
The Valuation Metric
The specific valuation metric in widespread usage for comparable transaction analysis is the EV-to-EBITDA multiple. EV is enterprise value and EBITDA is earnings before interest, taxes, depreciation, and amortization. In this formula, a year period is used for EBITDA.
The comparable transaction valuation is generally used related to different data including the company's discounted cash flow, price-to-earnings ratio, price-to-sales ratio, and price-to-cash-flow ratio. Others factors are relevant to specific industries.
The above numbers are all promptly accessible for public companies. In the event that the acquisition target is not a publicly-exchanged company, the accessible data might be limited.
Real World Example of a Comparable Transaction
Becton, Dickinson and Company (BDX) documented a Form S-4 with the SEC in mid-2017 for its planned acquisition of C.R. Troubadour, Inc. The two companies are developers and manufacturers of medical devices.
The Fairness Opinion
The filing disclosed that Bard retained Goldman Sachs as a financial adviser to deliver a fairness opinion at the cost offered by BD. Since the healthcare supply industry had gone through significant consolidation in recent years, Goldman Sachs had a variety of comparable transaction data at its disposal.
Nine comparable transactions from 2011 to 2016 are listed in the filing. That permitted a robust analysis for Bard shareholders and the company's board of directors to consider for BD's takeover offer.
Comparables are broke down by the takeover target as well as the prospective acquirer.
Versifier's financial adviser calculated the scope of EV-to-LTM EBITDA multiples of the past transactions as well as the median numerous. Comparable transaction analysis was one of several valuation techniques dissected for this deal, the others including price-earnings and price-earnings-growth multiples. However, it also was the leading one, as is the standard practice for mergers and acquisitions.
The Usual Warning
In spite of the fact that it is standard practice, it is not considered the last word on esteeming a targeted firm. In this model, Goldman Sachs issued a disclaimer that its comparable transaction analysis, alongside the other valuation metric analyses, don't imply to be appraisals nor do they necessarily mirror the prices at which businesses or securities might be sold.
The deal was eventually approved at a price of $24 billion.
Highlights
- Comparable transactions are used in assessing a fair value for a corporate takeover target.
- The fair value of the takeover target is based on its recent earnings.
- The ideal comparable transaction is for a company in the same industry with a similar business model.
