What is a comparable transaction?
The cost of a comparable transaction is one of the main factors in estimating the value of a company that is considered a merger and acquisition (M&A) target. The reasoning is the same as that of a prospective home buyer checking recent sales in a neighborhood.
This is commonly known as an offset transaction.
- Comparable transactions are used to assess fair value for a corporate acquisition objective.
- The ideal comparable transaction is for a company in the same industry with a similar business model.
- The fair value of the acquisition target is based on your recent earnings.
Understanding the comparable transaction
Companies are looking to acquire other companies to grow their businesses, gain access to valuable resources, expand their reach, eliminate a competitor, or some combination of all of these reasons.
In any case, overpaying for that acquisition could be disastrous. Therefore, the company and its investment bankers look for comparable transactions – the more recent the better. They observe companies with a business model similar to that of the company they are targeting. The more comparable transaction data available for analysis, the easier it is to get a fair valuation.
In contrast, a company that has become an acquisition target does the same kind of analysis to determine whether an offer on the table is good for its own shareholders.
In either case, the comparable transaction valuation method can help a company arrive at an acquisition price that shareholders are willing to accept.
The valuation metric
The specific valuation metric in general use for comparable transaction analysis is the EV-EBITDA multiple. EV is business value and EBITDA is earnings before interest, taxes, depreciation, and amortization. In this formula, a 12-month period is used for EBITDA.
The comparable transaction valuation is generally used in conjunction with other data, including the company’s discounted cash flow, price-earnings ratio, price-sales ratio, and price-cash flow ratio. Other factors are relevant to particular industries.
All issues above are available to public companies. If the target of the acquisition is not a publicly traded company, the data available may be limited.
Real world example of a comparable transaction
Becton, Dickinson and Company (BDX) filed a Form S-4 with the SEC in mid-2017 for its future acquisition of CR Bard, Inc. Both companies are developers and manufacturers of medical devices.
The Equity Opinion
The filing revealed that Bard hired Goldman Sachs as a financial advisor to provide a fair opinion on the price offered by BD. As the healthcare supply industry had undergone significant consolidation in recent years, Goldman Sachs had a series of comparable transaction data at its disposal.
Nine comparable transactions from 2011 to 2016 are listed in the presentation. That allowed for robust analysis for Bard shareholders and the company’s board of directors to consider for the BD takeover offer.
Comparables are analyzed both by the acquisition objective and by the possible acquirer.
Bard’s financial advisor calculated the range of EBITDA multiples from EV to LTM from past transactions, as well as the median multiple. Comparable transaction analysis was one of several valuation techniques analyzed for this deal, the others included price-earnings and price-earnings-growth multiples. But it was also the leader, as is standard practice for mergers and acquisitions.
The usual warning
Although it is standard practice, it is not considered the last word on the valuation of a target company. In this example, Goldman Sachs issued a disclaimer that its analysis of comparable transactions, in conjunction with the other valuation metric analyzes, are not intended to be appraisals or necessarily reflect the prices at which the companies or securities may be sold.
The deal was ultimately approved at a price of $ 24 billion.