Takeout Value

What Is Takeout Value?

Takeout value is a company's estimated value if it somehow managed to be taken private or acquired. Different financial metrics are applied to determine how much the company could go for, including cash flows, assets, earnings, and multiples used in comparable takeovers.

The current mergers and acquisitions (M&A) environment can likewise affect the takeout value of a company.

Understanding Takeout Value

Acquisitions are a common occurrence, offering companies one of the quickest ways of expanding into new markets, get new technology, reduce costs, and secure a stranglehold over the competition. However, assuming command over another company requires a ton of due diligence. Aside from ascertaining whether a target company would represent a solid match, it is likewise pivotal to determine a fair price and not overpay.

A decent starting point is to establish how much the target and its assets are worth by examining the cash it generates and is likely to churn out from now on — both under the current regime and if it is acquired. This valuation can then be cross-referenced with the target's market value: the price that investors are presently able to pay for it.

With this data within reach, the prospective acquirer will then need to resolve the amount it will likely need to offer to get a deal over the line. The goal here is to pay as little as possible while additionally fulfilling the demands of shareholders in the target company and making the acquisition worth their while.

The takeout value is used by financial analysts to determine a range of possible price levels for takeover bids and by shareholders to estimate the return they could receive on the off chance that their shares are acquired. Acquirers typically pay a acquisition premium to close a deal and avoid competition, despite the fact that, depending on the circumstances, it is likewise possible in some cases to get a discount, securing the target for less than its fair market value (FMV).

Example of Takeout Value

Takeout valuation uses the metrics of the target company and compares them to multiples used in comparative takeover transactions. Let's use hypothetical companies ABC and XYZ as an example. ABC initiated a takeover of company XYZ, which has earnings of $5 million, for an acquisition price of $22.5 million, The implied earnings multiple is therefore 4.5 ($22.5 million/$5 million).

A comparative company, DEF, with earnings of $3 million is currently being considered as a possible takeover target. The takeout value of the new company would be $13.5 million utilizing the same multiple ($3 million \u00d7 4.5).

Of course, earnings aren't the just metric taken into account. An investor or obtaining company may and probably will use a range of different acquisition valuation gauges to determine a bid.

Important

There is certainly not an exact formula for takeout valuation since a variety of metrics, like EBITDA multiples, P/E ratio, and, surprisingly, firm-specific data can be taken into consideration.

Example: Rumors and Takeout Value

Assuming that investors merely hear tales that a company is exploring a sale, traders might bid up its share price. For instance, assuming news spread in that the hypothetical company Generic Inc. (currently trading at around $25 per share) was considering a sale, its share price could rise as much as 25% or more in a single trading day.

After the market closed, a investment bank may publish a note estimating a possible takeout value. Involving the acquisitions of comparable companies in the previous 24 months, analysts at the bank estimate a possible takeout price in the range of $35 to $45 per share.

Features

• The takeout value is employed to determine a range of possible price levels and estimate the return shareholders could receive on the off chance that their shares are acquired.
• A company's takeout value is its estimated value in the case that it is acquired or taken private.
• Different financial metrics are examined to establish how much the subject could sell for, including cash flows, assets, earnings, and multiples used in comparable takeovers.