Precedent Transaction Analysis

What Is Precedent Transaction Analysis?

Precedent transaction analysis is a valuation method in which the price paid for comparable companies in the past is viewed as an indicator of a company's value. Precedent transaction analysis makes an estimate of what a share of stock would be worth on account of an acquisition.

How Precedent Transaction Analysis Works

Precedent transaction analysis depends on publicly accessible data to make a reasonable estimate of multiples or premiums that others have paid for a publicly-traded company. The analysis takes a gander at the type of investors that have purchased comparable companies under comparable conditions in the past and looks at whether the companies making the acquisitions are probably going to make another acquisition soon.

One of the main parts of precedent transaction analysis is recognizing the transactions that are the most pertinent. In the first place, companies ought to be picked based on having comparable financial attributes and for being in a similar industry. Second, the size of the transactions ought to be comparative in size to the transaction that is being considered for the target company. Third, the type of transaction and the attributes of the buyer ought to be comparable. Transactions that happened all the more as of late are viewed as additional significant in terms of handiness for analysis.

Precedent foothold analysis is otherwise called "M&A comps."

Data hotspots for precedent transaction analysis incorporate the Securities Data Corporation, which is a storehouse of mergers and acquisitions data. Trade distributions, research reports, and annual filings are additionally great wellsprings of data.

Advantages and Disadvantages of Precedent Transaction Analysis

While this type of analysis benefits from utilizing publicly accessible data, the amount and quality of the data connecting with transactions can at times be limited. This can make drawing ends troublesome. This difficulty can be compounded while attempting to account for differences in the market conditions during previous transactions compared to the current market. For instance, the number of contenders might have changed or the previous market might have been in an alternate part of the business cycle.

While each transaction is unique, and consequently makes direct correlations troublesome, precedent transaction analysis gives an overall assessment of the market's demand for a particular asset and a rough valuation of the asset. In spite of this, this certain type of assessment is to a greater extent a speculation since there are such countless changeabilities to consider, for example, contender size or advantage, market demand, business cycle, and more perplexing contemplations like exchange rates for import/send out companies and international effects on companies, for example, those impacted by quantitative easing measures or creations covers.

Features

• Precedent footing analysis utilizes past performance consequences of a company to assist with confirming that company's valuation.
• Precedent footing analysis is a decent device to utilize while thinking about a base line valuation of a company however should be supported by more multifaceted analysis.
• This sort of analysis is troublesome in light of the fact that it is difficult to apply market conditions at the hour of a previous valuation or during a certain performance period to a current valuation.