FNCE90062 Capstone
Studies in Finance
2023 Semester One Week 4
Dr Zhen Shi
Department of Finance
1
What is Precedent Transactions Analysis
Steps for Precedent Transactions Analysis
Assignment Part I
Table of Contents
1 What is Precedent Transactions Analysis
2 Steps for Precedent Transactions Analysis
Overview
Step I. Select the Universe of Comparable Acquisitions
Step II. Locate the Necessary Deal-Related and Financial
Information
Step III. Key Statistics, Ratios, and Transaction Multiples
Step IV: Benchmark the Comparable Acquisitions
Step V: Determine Valuation
3 Assignment Part I
Step 3
Step 4
Dr Zhen Shi FNCE90062 Capstone Studies in Finance Week 4
What is Precedent Transactions Analysis
Steps for Precedent Transactions Analysis
Assignment Part I
Precedent Transactions Analysis
Employs multiples-based approach to derive an implied
valuation range for target
Premised on multiples paid for comparable companies in prior
transactions
Selection of appropriate universe of comparable acquisitions is
foundation for performing precedent transactions
– Involves companies comparable to the target
– Most recent transactions are most relevant
Dr Zhen Shi FNCE90062 Capstone Studies in Finance Week 4
What is Precedent Transactions Analysis
Steps for Precedent Transactions Analysis
Assignment Part I
Precedent Transactions Analysis
Under normal market conditions, transaction comps (approach
3) tend to provide a higher multiple range than trading comps
(approach 1) for two principal reasons
– Buyers pay “control premium”
– Strategic buyers: synergies
Dr Zhen Shi FNCE90062 Capstone Studies in Finance Week 4
What is Precedent Transactions Analysis
Steps for Precedent Transactions Analysis
Assignment Part I
Overview
Step I. Select the Universe of Comparable Acquisitions
Step II. Locate the Necessary Deal-Related and Financial Information
Step III. Key Statistics, Ratios, and Transaction Multiples
Step IV: Benchmark the Comparable Acquisitions
Step V: Determine Valuation
Table of Contents
1 What is Precedent Transactions Analysis
2 Steps for Precedent Transactions Analysis
Overview
Step I. Select the Universe of Comparable Acquisitions
Step II. Locate the Necessary Deal-Related and Financial
Information
Step III. Key Statistics, Ratios, and Transaction Multiples
Step IV: Benchmark the Comparable Acquisitions
Step V: Determine Valuation
3 Assignment Part I
Step 3
Step 4
Dr Zhen Shi FNCE90062 Capstone Studies in Finance Week 4
What is Precedent Transactions Analysis
Steps for Precedent Transactions Analysis
Assignment Part I
Overview
Step I. Select the Universe of Comparable Acquisitions
Step II. Locate the Necessary Deal-Related and Financial Information
Step III. Key Statistics, Ratios, and Transaction Multiples
Step IV: Benchmark the Comparable Acquisitions
Step V: Determine Valuation
The Overview of the Precedent Transactions Analysis
Step I. Select the Universe of Comparable Acquisitions
Step II. Locate the Necessary Deal-Related and Financial
Information
Step III. Spread Key Statistics, Ratios, and Transaction
Multiples
Step IV. Benchmark the Comparable Acquisitions
Step V. Determine Valuation
Dr Zhen Shi FNCE90062 Capstone Studies in Finance Week 4
What is Precedent Transactions Analysis
Steps for Precedent Transactions Analysis
Assignment Part I
Overview
Step I. Select the Universe of Comparable Acquisitions
Step II. Locate the Necessary Deal-Related and Financial Information
Step III. Key Statistics, Ratios, and Transaction Multiples
Step IV: Benchmark the Comparable Acquisitions
Step V: Determine Valuation
Step I: Select the Universe of Comparable Acquisitions
Search M&A databases for comparable acquisitions
– Requires a strong understanding of the target and its sector
– Examines the M&A history
– Review merger proxies
Dr Zhen Shi FNCE90062 Capstone Studies in Finance Week 4
What is Precedent Transactions Analysis
Steps for Precedent Transactions Analysis
Assignment Part I
Overview
Step I. Select the Universe of Comparable Acquisitions
Step II. Locate the Necessary Deal-Related and Financial Information
Step III. Key Statistics, Ratios, and Transaction Multiples
Step IV: Benchmark the Comparable Acquisitions
Step V: Determine Valuation
Step II. Locate the Necessary Deal-Related and Financial
Information
Dr Zhen Shi FNCE90062 Capstone Studies in Finance Week 4
What is Precedent Transactions Analysis
Steps for Precedent Transactions Analysis
Assignment Part I
Overview
Step I. Select the Universe of Comparable Acquisitions
Step II. Locate the Necessary Deal-Related and Financial Information
Step III. Key Statistics, Ratios, and Transaction Multiples
Step IV: Benchmark the Comparable Acquisitions
Step V: Determine Valuation
Step III: Key Statistics, Ratios, and Transaction Multiples
Key statistics, ratios and transaction multiples like in
approach 1, except
– Equity value
* Offer price per share is multiplied by the target’s fully
diluted shares outstanding at the given offer price
– Based on the announced offer price per share
* Purchase consideration
– Refers to the mix of cash, stock, and/or other securities
that the acquirer offers to the target’s shareholders
Dr Zhen Shi FNCE90062 Capstone Studies in Finance Week 4
What is Precedent Transactions Analysis
Steps for Precedent Transactions Analysis
Assignment Part I
Overview
Step I. Select the Universe of Comparable Acquisitions
Step II. Locate the Necessary Deal-Related and Financial Information
Step III. Key Statistics, Ratios, and Transaction Multiples
Step IV: Benchmark the Comparable Acquisitions
Step V: Determine Valuation
Step III: Calculation of Key Statistics, Ratios, and
Transaction Multiples
Purchase consideration
– All-Cash Transaction
– Acquirer makes an offer to purchase all or a portion of
the target’s shares outstanding for cash
Dr Zhen Shi FNCE90062 Capstone Studies in Finance Week 4
What is Precedent Transactions Analysis
Steps for Precedent Transactions Analysis
Assignment Part I
Overview
Step I. Select the Universe of Comparable Acquisitions
Step II. Locate the Necessary Deal-Related and Financial Information
Step III. Key Statistics, Ratios, and Transaction Multiples
Step IV: Benchmark the Comparable Acquisitions
Step V: Determine Valuation
Step III: Calculation of Key Statistics, Ratios, and
Transaction Multiples
CLEVELAND, Ohio – June 15, 2012 – AcquirerCo and TargetCo today
announced the two companies have entered into a definitive agreement
for AcquirerCo to acquire the equity of TargetCo, a publicly held
company, in an all-cash transaction at a price of approximately USD 1
billion, or USD 20.00 per share. The acquisition is subject to TargetCo
shareholder and regulatory approvals and other customary closing
conditions, and is expected to close in the fourth quarter of 2012.
Dr Zhen Shi FNCE90062 Capstone Studies in Finance Week 4
What is Precedent Transactions Analysis
Steps for Precedent Transactions Analysis
Assignment Part I
Overview
Step I. Select the Universe of Comparable Acquisitions
Step II. Locate the Necessary Deal-Related and Financial Information
Step III. Key Statistics, Ratios, and Transaction Multiples
Step IV: Benchmark the Comparable Acquisitions
Step V: Determine Valuation
Step III: Calculation of Key Statistics, Ratios, and
Transaction Multiples
Purchase consideration
– Stock for stock transaction – fixed ratio
– defines the number of shares of the acquirer’s stock to
be exchanged for each share of the target’s stock
Dr Zhen Shi FNCE90062 Capstone Studies in Finance Week 4
What is Precedent Transactions Analysis
Steps for Precedent Transactions Analysis
Assignment Part I
Overview
Step I. Select the Universe of Comparable Acquisitions
Step II. Locate the Necessary Deal-Related and Financial Information
Step III. Key Statistics, Ratios, and Transaction Multiples
Step IV: Benchmark the Comparable Acquisitions
Step V: Determine Valuation
Step III: Calculation of Key Statistics, Ratios, and
Transaction Multiples
CLEVELAND, Ohio – June 15, 2012 – AcquirerCo has announced
a definitive agreement to acquire TargetCo in an all stock
transaction valued at $1 billion. Under the terms of the agreement,
which has been approved by both boards of directors, TargetCo
stockholders will receive, at a fixed exchange ratio, 0.50 shares of
AcquirerCo common stock for every share of TargetCo common
stock. Based on AcquirerCo’s stock price on June 14, 2012 of
$40.00, this represents a price of $20.00 per share of TargetCo
common stock.
Dr Zhen Shi FNCE90062 Capstone Studies in Finance Week 4
What is Precedent Transactions Analysis
Steps for Precedent Transactions Analysis
Assignment Part I
Overview
Step I. Select the Universe of Comparable Acquisitions
Step II. Locate the Necessary Deal-Related and Financial Information
Step III. Key Statistics, Ratios, and Transaction Multiples
Step IV: Benchmark the Comparable Acquisitions
Step V: Determine Valuation
Step III: Calculation of Key Statistics, Ratios, and
Transaction Multiples
Purchase consideration
– Stock for stock transaction – floating ratio
– set dollar amount per share that the acquirer
– pay in the form of shares of the acquirer’s stock
Dr Zhen Shi FNCE90062 Capstone Studies in Finance Week 4
What is Precedent Transactions Analysis
Steps for Precedent Transactions Analysis
Assignment Part I
Overview
Step I. Select the Universe of Comparable Acquisitions
Step II. Locate the Necessary Deal-Related and Financial Information
Step III. Key Statistics, Ratios, and Transaction Multiples
Step IV: Benchmark the Comparable Acquisitions
Step V: Determine Valuation
Step III: Calculation of Key Statistics, Ratios, and
Transaction Multiples
CLEVELAND, Ohio – June 15, 2012 – AcquirerCo and TargetCo today
announced the execution of a definitive agreement pursuant to which
AcquirerCo will acquire TargetCo in an all stock transaction. Pursuant to
the agreement, TargetCo stockholders will receive $20.00 of AcquirerCo
common stock for each share of TargetCo common stock they hold. The
number of AcquirerCo shares to be issued to TargetCo stockholders will
be calculated based on the average closing price of AcquirerCo common
stock for the 30 trading days immediately preceding the third trading day
before the closing of the transaction.
Dr Zhen Shi FNCE90062 Capstone Studies in Finance Week 4
What is Precedent Transactions Analysis
Steps for Precedent Transactions Analysis
Assignment Part I
Overview
Step I. Select the Universe of Comparable Acquisitions
Step II. Locate the Necessary Deal-Related and Financial Information
Step III. Key Statistics, Ratios, and Transaction Multiples
Step IV: Benchmark the Comparable Acquisitions
Step V: Determine Valuation
Step III: Calculation of Key Statistics, Ratios, and
Transaction Multiples
Purchase consideration
– Cash and stock transaction
– acquirer offers a combination of cash and stock as
purchase consideration
Dr Zhen Shi FNCE90062 Capstone Studies in Finance Week 4
What is Precedent Transactions Analysis
Steps for Precedent Transactions Analysis
Assignment Part I
Overview
Step I. Select the Universe of Comparable Acquisitions
Step II. Locate the Necessary Deal-Related and Financial Information
Step III. Key Statistics, Ratios, and Transaction Multiples
Step IV: Benchmark the Comparable Acquisitions
Step V: Determine Valuation
Step III: Calculation of Key Statistics, Ratios, and
Transaction Multiples
CLEVELAND, Ohio – June 15, 2012 – AcquirerCo and TargetCo
announced today that they signed a definitive agreement whereby
AcquirerCo will acquire TargetCo for a purchase price of approximately
$1 billion in a mix of cash and AcquirerCo stock. Under the terms of the
agreement, which was unanimously approved by the boards of directors
of both companies, TargetCo stockholders will receive $10.00 in cash and
0.25 shares of AcquirerCo common stock for each outstanding TargetCo
share. Based on AcquirerCo’s closing price of $40.00 on June 14, 2012,
AcquirerCo will issue an aggregate of approximately 12.5 million shares of
its common stock and pay an aggregate of approximately $500 million in
cash in the transaction.
Dr Zhen Shi FNCE90062 Capstone Studies in Finance Week 4
What is Precedent Transactions Analysis
Steps for Precedent Transactions Analysis
Assignment Part I
Overview
Step I. Select the Universe of Comparable Acquisitions
Step II. Locate the Necessary Deal-Related and Financial Information
Step III. Key Statistics, Ratios, and Transaction Multiples
Step IV: Benchmark the Comparable Acquisitions
Step V: Determine Valuation
Step III: Calculation of Key Statistics, Ratios, and
Transaction Multiples
Key statistics, ratios and transaction multiples like in
approach 1, except
– Equity value
* Equity Value = offer price per share x fully diluted shares
outstanding
* Offer price =”unaffected share price” + premium paid
– Enterprise value
Dr Zhen Shi FNCE90062 Capstone Studies in Finance Week 4
What is Precedent Transactions Analysis
Steps for Precedent Transactions Analysis
Assignment Part I
Overview
Step I. Select the Universe of Comparable Acquisitions
Step II. Locate the Necessary Deal-Related and Financial Information
Step III. Key Statistics, Ratios, and Transaction Multiples
Step IV: Benchmark the Comparable Acquisitions
Step V: Determine Valuation
Step III: Calculation of Key Statistics, Ratios, and
Transaction Multiples
Dr Zhen Shi FNCE90062 Capstone Studies in Finance Week 4
What is Precedent Transactions Analysis
Steps for Precedent Transactions Analysis
Assignment Part I
Overview
Step I. Select the Universe of Comparable Acquisitions
Step II. Locate the Necessary Deal-Related and Financial Information
Step III. Key Statistics, Ratios, and Transaction Multiples
Step IV: Benchmark the Comparable Acquisitions
Step V: Determine Valuation
Step III: Calculation of Key Statistics, Ratios, and
Transaction Multiples
Multiples
– Multiples in precedent transactions are typically higher than
those in trading comps
Synergies
Dr Zhen Shi FNCE90062 Capstone Studies in Finance Week 4
What is Precedent Transactions Analysis
Steps for Precedent Transactions Analysis
Assignment Part I
Overview
Step I. Select the Universe of Comparable Acquisitions
Step II. Locate the Necessary Deal-Related and Financial Information
Step III. Key Statistics, Ratios, and Transaction Multiples
Step IV: Benchmark the Comparable Acquisitions
Step V: Determine Valuation
Step IV: Benchmark the Comparable Acquisitions
Dr Zhen Shi FNCE90062 Capstone Studies in Finance Week 4
What is Precedent Transactions Analysis
Steps for Precedent Transactions Analysis
Assignment Part I
Overview
Step I. Select the Universe of Comparable Acquisitions
Step II. Locate the Necessary Deal-Related and Financial Information
Step III. Key Statistics, Ratios, and Transaction Multiples
Step IV: Benchmark the Comparable Acquisitions
Step V: Determine Valuation
Valuation from Precedent Transactions Analysis
Dr Zhen Shi FNCE90062 Capstone Studies in Finance Week 4
What is Precedent Transactions Analysis
Steps for Precedent Transactions Analysis
Assignment Part I
Overview
Step I. Select the Universe of Comparable Acquisitions
Step II. Locate the Necessary Deal-Related and Financial Information
Step III. Key Statistics, Ratios, and Transaction Multiples
Step IV: Benchmark the Comparable Acquisitions
Step V: Determine Valuation
Step V: Determine Valuation
Dr Zhen Shi FNCE90062 Capstone Studies in Finance Week 4
What is Precedent Transactions Analysis
Steps for Precedent Transactions Analysis
Assignment Part I
Step 3
Step 4
Table of Contents
1 What is Precedent Transactions Analysis
2 Steps for Precedent Transactions Analysis
Overview
Step I. Select the Universe of Comparable Acquisitions
Step II. Locate the Necessary Deal-Related and Financial
Information
Step III. Key Statistics, Ratios, and Transaction Multiples
Step IV: Benchmark the Comparable Acquisitions
Step V: Determine Valuation
3 Assignment Part I
Step 3
Step 4
Dr Zhen Shi FNCE90062 Capstone Studies in Finance Week 4
What is Precedent Transactions Analysis
Steps for Precedent Transactions Analysis
Assignment Part I
Step 3
Step 4
Step 3: Precedent Transactions
Find five relevant precedent M&A transactions within the last
5 years
Use Refinitiv Workspace’s Screener to select precedent
transactions, based on criteria discussed in class
The selection criteria and process must be fully documented in
the report.
For each selection criteria, record how many companies are
selected or de-selected
Find the premium offered in those transactions
Dr Zhen Shi FNCE90062 Capstone Studies in Finance Week 4
What is Precedent Transactions Analysis
Steps for Precedent Transactions Analysis
Assignment Part I
Step 3
Step 4
Step 4: Proposed Price
Proposed offer price, based on your analysis from comparable
companies, DCF and premium offered in the precedent
transactions
Deciding upon the premium
Compare the premium you found in the precedent M&A
transactions with the premium you got in Step 2.
If the premium from Step 3 is smaller (larger) than the
premium from Step 2, please look for reasons and solution. For
example, is it because your projection in Step 2 is overly
optimistic (pessimistic)? If so, please re-do the DCF analysis
with a less optimistic (pessimistic) projection and decide how
large your final proposed premium is.
Explain how large your proposed offer price is.
Dr Zhen Shi FNCE90062 Capstone Studies in Finance Week 4