Summer Techs (W3)

How do we select comps for comparable companies analysis?

1. Are in the same industry

2. Have similar financial metrics (Growth rate, margin structure, etc)

3. Similar in size (looking at market cap and enterprise value)

4. Are in the same geography

1. What are the pros and cons of comparable companies analysis?

1. Pros: Quick and easy to throw comps analysis together. Also let’s you see how it is valued relative to it’s competitors

2. Cons: No company is 100% comparable to another.

1. Why could we not use EV/Earnings as a multiple?

1. We can’t use a multiple like EV/Earnings because the numerator and the denominator are not the same thing. 

2. Enterprise Value is attributable to ALL capital providers (Equity holders and Creditors).

3. However, Net Income (Earnings) is AFTER we have paid creditors (through interest expense). Therefore, Net Income is only attributable to Equity holders. 

4. Numerator and denominators must be “apples-to-apples,” and we therefore cannot use a multiple like EV/Earnings

Would we usually use Last Twelve Months (LTM) or Next Twelve Months (NTM) numbers for comps analysis?

Next Twelve Months (NTM). Investors typically value a company based on future projections rather than past performance.

Can you use private companies in a comps analysis?

No, private companies cannot be used for two reasons: 1. We don’t have access to a private company’s financials. 2. Private companies don’t have a share price and are not trading at a multiple.

How do we select transactions for precedent transactions analysis?

Similar to comps, but we also consider the timing of the transaction. For example, a transaction from 20 years ago is not relevant to today's market.

Why do precedents typically value a company higher than other valuation methods?

Purchasing a company often includes a 'control premium,' which is the extra amount paid to acquire control of the company.

How far back is too far back when selecting a precedent transaction?

Traditional Answer: Avoid transactions more than 2-3 years old. Practical Answer: Transactions within the last M&A cycle are considered fair game.

When would precedents imply a lower valuation than comps?

If there's a mismatch between M&A activity and public markets, such as lower M&A activity while public markets are performing well. This may result in comps trading at higher multiples than recent acquisitions.

Why do we not use a P/E multiple when looking at precedents?

The P/E multiple accounts for share price/equity value, while acquisitions consider the entire value of the business (Enterprise Value).