Comparables Valuation

8 Key excerpts on "Comparables Valuation"

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  eBook - PDF

  Investment Banking

  Valuation, Leveraged Buyouts, and Mergers and Acquisitions

  • Joshua Pearl, Joshua Rosenbaum(Authors)
  • 2013(Publication Date)
  • Wiley

    (Publisher)

  PART One Valuation 13 CHAPTER 1 Comparable Companies Analysis C omparable companies analysis (“comparable companies” or “trading comps”) is one of the primary methodologies used for valuing a given focus company, division, business, or collection of assets (“target”). It provides a market benchmark against which a banker can establish valuation for a private company or analyze the value of a public company at a given point in time. Comparable companies has a broad range of applications, most notably for various mergers & acquisitions (M&A) situations, initial public offerings (IPOs), restructurings, and investment decisions. The foundation for trading comps is built upon the premise that similar com- panies provide a highly relevant reference point for valuing a given target due to the fact that they share key business and financial characteristics, performance drivers, and risks. Therefore, the banker can establish valuation parameters for the target by determining its relative positioning among peer companies. The core of this analysis involves selecting a universe of comparable companies for the target (“comparables universe”). These peer companies are benchmarked against one another and the target based on various financial statistics and ratios. Trading multiples are then calculated for the universe, which serve as the basis for extrapolating a valuation range for the target. This valuation range is calculated by applying the selected multiples to the target’s relevant financial statistics. While valuation metrics may vary by sector, this chapter focuses on the most widely used trading multiples. These multiples—such as enterprise value-to-earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) and price- to-earnings (P/E)—utilize a measure of value in the numerator and a financial statistic in the denominator.

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  Investment Banking

  Valuation, LBOs, M&A, and IPOs

  • Joshua Rosenbaum, Joshua Pearl(Authors)
  • 2021(Publication Date)
  • Wiley

    (Publisher)

  PART One Valuation 13 CHAPTER 1 Comparable Companies Analysis C omparable companies analysis (“comparable companies”, “trading comps”, or simply “comps”) is one of the primary methodologies used for valuing a given focus company, division, business, or collection of assets (“target”). It provides a market benchmark against which a banker can establish valuation for a private company or analyze the value of a public company at a given point in time. Comps has a broad range of applications, most notably for various mergers & acquisitions (M&A) situations, initial public offerings (IPOs), restructurings, and investment decisions. The foundation for comps is built upon the premise that similar companies provide a highly relevant reference point for valuing a given target due to the fact that they share key business and financial characteristics, performance drivers, and risks. Therefore, the banker can establish valuation parameters for the target by determining its relative positioning among peer companies. The core of this analysis involves selecting a universe of comparable companies for the target (“comparables universe”). These peer companies are benchmarked against one another and the target based on various financial statistics and ratios. Trading multiples are then calculated for the universe, which serve as the basis for extrapolating a valuation range for the target. This valuation range is calculated by applying the selected multiples to the target’s relevant financial statistics. While valuation metrics may vary by sector, this chapter focuses on the most widely used trading multiples. These multiples—such as enterprise value-to-earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) and price- to-earnings (P/E)—utilize a measure of value in the numerator and a financial statistic in the denominator.

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  eBook - ePub

  M&A

  A Practical Guide to Doing the Deal

  • Jeffrey C. Hooke(Author)
  • 2014(Publication Date)
  • Wiley

    (Publisher)

  The large number of assumptions and calculations involved in devising a firm’s intrinsic worth limit this method’s use on Wall Street. Professionals prefer short, concise value indicators, such as the P/E and EV/EBITDA ratios, which summarize the relevant DCF statistics into one number. The subject firm’s value ratios are then compared with those of similar businesses, just as the historical analysis used comparable company data to study a firm’s financial condition.

  Note

  1. Interview with Ron Everett, Business Valuation Center, March 12, 2014.

  Passage contains an image

  CHAPTER 15 Valuing M&A Targets Using the Comparable Public Companies Approach

  For the purpose of pricing a target, the M&A industry favors the (a) comparable public company and (b) comparable acquisition value approaches, which are sometimes referred to as “relative value.” Comparable public company analysis is the subject of this chapter. To determine a price range for a takeover opportunity (most of which are private), practitioners examine what stock market investors pay for similar, publicly traded businesses.

  The objective of comparable public companies analysis (i.e., relative value) is to establish the price at which a privately owned business would trade on the stock exchange. To this hypothetical price is added a “control premium” in order to reflect the fact that an acquirer purchases 100 percent ownership, rather than the small amounts of individual firm equity that trade publicly on a day-to-day basis.

  Relative value is a favorite topic of TV talking heads, Wall Street analysts, and corporate finance executives. They discuss the positive and negative aspects of a stock, and then evaluate those attributes against firms participating in the same industry. Valuation parameters are then compared and contrasted, resulting in statements such as “Kroger is undervalued relative to Safeway because Kroger’s growth rate is higher yet its P/E ratio is lower.” Other popular ratio comparators are EV/EBITDA, EV/sales, and price/book. Rarely do commentators mention a discounted cash flow.

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  Venture Capital and the Finance of Innovation

  • Andrew Metrick, Ayako Yasuda(Authors)
  • 2021(Publication Date)
  • Wiley

    (Publisher)

  We then choose the subset of these companies with the closest match for predicted investment oppor- tunities, operating margins, and discount rates. Once these compa- nies have been chosen, we compute valuation multiples using a variety of measures and then examine the implied valuations for each company and multiple. Although all multiples provide some information, we pay particular attention to the multiples that pro- vide the most stable estimates (lowest standard deviation) across companies. Comparable companies can also be used to estimate the cost of capital used in DCF analysis. To make these estimates, it is sometimes necessary to unlever the beta estimates for the com- parable companies. K E Y T E R M S Comparables analysis = multiples analysis = method of multiples = relative valuation Market capitalization = market cap = equity market value Enterprise value (EV) Earnings before interest, taxes, depreciation, and amortization (EBITDA) Geometric mean, harmonic mean Unlevered betas, levered betas R E F E R E N C E Holthausen, Robert W. and Mark E., Zmijewski, 2018, Corporate Valuation: Theory, Practice, and Evidence, second edition. E X E R C I S E S 12.1 Softco, the company valued in Exercise 11.1, is expected to have the following business at exit: Softco provides business process integration software and ser- vices for corporations across a broad range of enterprise mar- kets. Its main product is the Softco business process integration software platform together with packaged appli- cations and content, where it expects to derive 75 percent of its revenue. In addition, the company expects to earn the remainder of its revenue from business analytics add-on capability and consulting services. Use whatever resources you want to identify at least two comparable companies for Softco and to estimate a relative valuation. 12.2 Consider the following “denominators” suggested as part of a comparables analysis: a.

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  How to Be an Investment Banker

  Recruiting, Interviewing, and Landing the Job

  • Andrew Gutmann(Author)
  • 2013(Publication Date)
  • Wiley

    (Publisher)

  The first of our three primary valuation methodologies is the comparable company methodology. Other names for this methodology include comparable companies, compcos, trading comps, market comps, public comps, or just comps. The basic purpose of comparable companies is to value a company by comparing it with other similar publicly traded companies. Specifically, we will use a set of valuation multiples to help us make the comparison.

  Bear in mind our real estate example. We said earlier that if we were trying to value an apartment we would first look for similar apartments that recently sold. Then we would calculate a valuation multiple such as price/square foot for each of the similar apartments. If similar homes have sold for $1,000/square foot then we will likely conclude that our apartment is also worth approximately $1,000/square foot. Assuming the size of our home is about 1,000 square feet, then we can say that our home should be worth about $1 million ($1,000/square foot multiplied by 1,000 square feet).

  We will do this same exercise for companies. Let's suppose that we are trying to value a manufacturing company and let's suppose that our analysis informs us that similar manufacturing companies have an enterprise value of about eight times their recent year's EBITDA. If the company we are valuing has an EBITDA of $100 million, then we can estimate our company's enterprise value at about $800 million.

  There are five steps to performing the comparable companies methodology:

  1. Selecting comparable companies (selecting comps).

  2. Spreading the comparable companies (spreading comps).

  3. Normalizing the comparable companies (normalizing comps).

  4. Calculating valuation multiples.

  5. Analyzing and applying appropriate multiples to the company being valued.

  You are not likely to be asked in an interview what the five steps you go through when performing a comparable company analysis are. Others may categorize or aggregate them into fewer or more steps. However, you should be able to walk an interviewer through the general process.

  Step 1: Selecting Comps

  The first step in performing the comparable company methodology is to select a number of companies that are similar, or comparable, to the company being valued. The company being valued is often referred to as the subject company. This process is often referred to as picking comps, with “comps” being short for “comparable.” The set of comparable companies selected are often referred to as the comp universe.

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  eBook - ePub

  Business Valuation

  Theory and Practice

  • Marco Fazzini(Author)
  • 2018(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  volatile performances. In such cases the correlation between EV and performance measure may be weak. The experience of speculative bubbles suggests that market euphoria can lead to the overestimation of comparable companies and, consequently, of the target company.

  The choice of the multiple also depends also on the reference time frame . Valuers can choose from among different types of multiples: current, trailing, forward.

  Current multiples are obtained by comparing stock prices and the last available balance sheet.

  Trailing multiples are obtained by comparing stock prices and the results of the last 12 months before the date chosen to calculate the index. Results on the previous 12 months are taken by the four-quarterly report or the last biyearly report provided by the companies.

  Forward multiples are obtained by comparing stock prices and the expected results of the following year or those of the next ones. Estimations are usually taken by the consensus forecast, published by financial analysts’ associations.

  In very volatile markets, using multiples based on historical data (current and trailing) is preferable.

  Finally, in an equity-side valuation it is necessary to select comparables that have the same tax rate . For example, earnings taxed at 15%, 25%, or 35%, respectively, lead to significantly different P/E values. To prevent non-homogeneous comparisons, it is advisable to compare companies that are subject to equivalent tax systems.

  5.5.2 Selection of Peer Group in the Comparable Transaction Method

  In the comparable transaction method, the choice of the sample requires analyzing several parameters, both quantitative and qualitative. More specifically—as mentioned—one has to consider that this method can be based on prices that reflect premiums linked to transaction-related synergies or specific competitive advantages, which cannot be extended to the target company. The following parameters must be taken into consideration:

  1. 1. industry;  
  2. 2. geographical scope;  
  3. 3. dimension and performance;  
  4. 4. reference time period;  
  5. 5. type of transaction;  
  6. 6. target of the transaction;  
  7. 7. suspensive conditions of the contract.  

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  Measuring Business Interruption Losses and Other Commercial Damages

  An Economic Approach

  • Patrick A. Gaughan(Author)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  12 The expert can search these databases, get several transactions, and then research the target companies more carefully to determine if they really are comparable. Sometimes some of the companies are eliminated from consideration due to certain differences between them. Perhaps one of the potential comparable companies is much larger than the company in question. Another possible reason for a rejection is if the company is in more than one line of business, and these other areas are significantly different from the business that is being valued. Still another reason could be that the comparable value for one of the deals was so different from the others that it is considered an outlier or an anomaly. In this step of the valuation process, the expert makes a judgment call to eliminate certain companies.

  Several possible multiples can be used to value businesses. Two of the most frequently cited are earnings before interest, taxes, depreciation, and amortization (EBITDA) and price/earnings (P/E) multiples. Data of such multiples are readily available. EBITDA multiples are often used in valuing acquisition targets.

  Other multiples, such as revenues multiples, may be more relevant for certain types of businesses, such as some closely held companies. Revenues, as opposed to earnings‐oriented multiples, are used when there are concerns about the quality of the earnings data.

  Users of this method may have to make additional adjustments after a value is determined by applying the multiple. Since the comparable multiples method is an earnings‐oriented approach to business valuation, the expert may possibly choose to add in the value of nonoperating assets, as they were not necessary to the generation of the earnings base to which the multiple was applied. Whether adjustments such as these are done depends on the particular circumstances of the valuation.

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  Investment Banking Workbook

  500+ Problem Solving Exercises & Multiple Choice Questions

  • Joshua Rosenbaum, Joshua Pearl, Joseph Gasparro(Authors)
  • 2021(Publication Date)
  • Wiley

    (Publisher)

  This tiering requires a sufficient number of comparable companies to justify categorization. 61) See below 10-K Annual report 10-Q Quarterly report 8-K Current report DEF14A Proxy statement 62) See below Enterprise value/reserves Metals & mining Enterprise value/EBITDAR Retail Enterprise value/subscriber Media Price/Book Financial institutions Comparable Companies Analysis 53 63) Benefits of using comparable companies: ■ Market-based – information used to derive valuation for the target is based on actual public market data, thereby reflecting the market’s growth and risk expectations, as well as overall sentiment ■ Relativity – easily measurable and comparable versus other companies ■ Quick and convenient – valuation can be determined on the basis of a few easy-to-calculate inputs ■ Current – valuation is based on prevailing market data, which can be updated on a daily (or intraday) basis 64) Considerations when using comparable companies: ■ Market-based – valuation that is completely market-based can be skewed during periods of irrational exuberance or bearishness ■ Absence of relevant comparables – “pure play” comparables may be difficult to identify or even non-existent, especially if the target operates in a niche sector, in which case the valuation implied by trading comps may be less meaningful ■ Potential disconnect from cash flow – valuation based on prevailing market conditions or expectations may have significant disconnect from the valuation implied by a company’s projected cash flow generation (e.g., DCF analysis) ■ Company-specific issues – valuation of the target is based on the valuation of other companies, which may fail to capture target-specific strengths, weaknesses, opportunities, and risks

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