Precedent Transactions Analysis

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Precedent Transactions Analysis Steps

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

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Overview of 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

 Broad range of applications

– Most notably to help determine potential sale price range for company in M&A or restructuring transaction

 Selection of appropriate universe of comparable acquisitions is foundation for performing precedent transactions
– Best comparable acquisitions involve companies similar to target on fundamental level
– Most recent transactions are most relevant as they likely took place under similar market conditions to
contemplated transaction

 Under normal market conditions, transaction comps tend to provide a higher multiple range than trading comps for
two principal reasons
– Buyers pay “control premium” when purchasing another company
– Strategic buyers often have opportunity to realize synergies

 Potential buyers and sellers look closely at multiples that have been paid for comparable acquisitions

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Precedent Transactions Analysis Output

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Step I

Select the Universe of Comparable Acquisitions

Step I: Select the Universe of Comparable Acquisitions
Screen for Comparable Acquisitions

 Initial goal when screening for comparable acquisitions is to locate as many potential transactions as possible for
a relevant, recent time period and then refine the universe

Sources for Creating an Initial List of Comparable Acquisitions

Review equity and fixed

Search M&A databases
income research reports

Examine target’s Search merger proxies for

M&A history comparable acquisitions

Revisit target’s universe

of comparable companies

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Step I: Select the Universe of Comparable Acquisitions
Examine Other Considerations

 Important to gain better understanding of specific circumstances and context for each transaction
– Generally does not change list of comparable acquisitions to be examined
– Helps interpret the multiple paid, as well as its relevance to the target being valued

Market Conditions

 Refers to business and economic environment, as well as prevailing state of capital markets, at time of given
transaction
– Conditions directly affect availability and cost of acquisition financing and influence price an acquirer is willing,
or able, to pay
– Affect buyer and seller confidence with respect to undertaking transaction

 Must be viewed within context of specific sectors and cycles (e.g., housing, steel, and technology)

Height of technology bubble in Record low-rate debt financing

late 1990s and early 2000s environment of mid 2000s

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Step I: Select the Universe of Comparable Acquisitions
Examine Other Considerations

Deal Dynamics

1) Was the acquirer a strategic buyer or a financial sponsor?

– Strategic buyers traditionally can pay higher purchase prices than financial sponsors due to potential ability to
realize synergies

2) What were the buyer’s and seller’s motivations for the transaction?
– Strategic buyer may pay higher price for asset if substantial synergies and/or asset is critical to strategic plan
(“scarcity value”)
– Sponsor may be more aggressive on price if synergies can be realized by combining target with an existing
portfolio company
– Corporation in need of cash that is selling non-core business may prioritize speed of execution, certainty of
completion, etc.

3) Was target sold through auction process or negotiated sale? Was the nature of the deal friendly or hostile?
– Auctions are designed to maximize competitive dynamics with goal of producing best offer at highest possible
price
– Hostile situations may also produce higher purchase prices
– Merger of equals transactions usually forego premium

4) What was the purchase consideration (i.e., mix of cash and stock)?
– Stock tends to result in lower valuation than all-cash transaction as target shareholders retain equity interest in
combined entity
– Target shareholders require more upfront compensation in all-cash transaction as they are unable to participate
in value creation opportunities that result from combining the two companies 7
Step II

Locate the Necessary Deal-Related and Financial Information

Step II: Locate the Necessary Deal-Related and Financial
Information

 Invariably easier for transactions involving public targets due to SEC disclosure requirements
– Private companies with publicly registered debt securities

 Availability of information for M&A transactions involving private targets typically depends whether public securities
were used as acquisition financing
– Challenging and sometimes impossible to obtain complete (or any) financial information necessary to
determine transaction multiples

 Public acquirers may safeguard information for competitive reasons and only disclose information that is required
by law or regulation

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Step II: Locate the Necessary Deal-Related and Financial
Information
Public Targets
Sources for Public Target Information:

 Proxy Statement for One-Step Merger Transaction: document that public company sends to shareholders prior to
shareholder meeting containing material information regarding potential transaction that shareholders are
expected to vote on

 Schedule TO/Schedule 14D-9: Acquirer must file TO when they offer to buy shares directly from target’s
shareholders and target must file Schedule 14D-9 within ten business days with recommendation to shareholders

 Registration Statement/Prospectus (S-4, 424B): required when public acquirer issues shares as part of purchase
consideration for target in order for shares to be freely tradeable by target’s shareholders

 Schedule 13E-3: schedule that must be filed by publicly-traded company when they become "private“

 8-K: acquisition is required to be reported in 8-K if assets, income, or value of target comprise 10% or greater of
acquirer’s

 10-K and 10-Q: primary sources for locating information necessary to calculate relevant LTM financial statistics,
including adjustments for non-recurring items and significant recent events

 Equity and Fixed Income Research: provide helpful deal insight, including information on pro forma adjustments
and expected synergies

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Step II: Locate the Necessary Deal-Related and Financial
Information
Private Targets
Sources for Private Target Information:

 Private target (i.e., a non-public filer) is not required to publicly file documentation in M&A transaction
– Sourcing of relevant information on private targets depends on type of acquirer and/or acquisition financing

 When public acquirer buys private target it may be required to file certain disclosure documents
– Registration Statement/Prospectus if using public securities as part of purchase consideration
– Proxy Statement if issuing shares in excess of 20% of pre-deal shares
– 8K upon announcement and completion of material transaction

 Availability of information for LBOs of private targets depends whether public debt securities (e.g. high yield
bonds) are issued
– S-4 contains relevant data on purchase price and target financials to spread the precedent transaction

 Private acquirer/private target transactions (including LBOs) involving nonpublic financing

– Most difficult transactions for which to obtain information because there are no SEC disclosure requirements
– Rely on less formal sources for deal information, such as company website, press releases, news articles and
trade journals

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Step III

Spread Key Statistics, Ratios, and Transaction Multiples

Step III: Spread Key Statistics, Ratios, and Transaction Multiples

Input Sheet Output Sheets

 Enter key transaction data relating to  Summary of key financial data for the
purchase price, form of consideration, transaction multiples
and target financial statistics into input
page  Data is presented in clear and succinct
format for easy comparison
 Feeds into summary output sheets used
to benchmark the transaction multiples  Serves as basis for identifying, analyzing
and comparing transaction multiples
 Designed to assist in calculating the key
financial statistics, ratios, and multiples
for the precedent transactions universe

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Step III: Spread Key Statistics, Ratios, and Transaction Multiples

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Step III: Spread Key Statistics, Ratios, and Transaction Multiples
Calculation of Key Financial Statistics and Ratios

 Process for spreading the key financial statistics and ratios for precedent transactions is similar to that outlined in
Chapter 1 for comparable companies

 Certain nuances for calculating equity value and enterprise value in precedent transactions including under
different purchase consideration scenarios

 Analysis of premiums paid and synergies

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Step III: Spread Key Statistics, Ratios, and Transaction Multiples
Calculation of Key Financial Statistics and Ratios

 Equity Value (“equity purchase price” or “offer value”)

– Offer price per share is multiplied by the target’s fully diluted shares outstanding at the given offer price
– Calculated in a similar manner as that for comparable companies
– Based on the announced offer price per share as opposed to the closing share price on a given day
– All outstanding in-the-money options and warrants are converted at their weighted average strike prices
regardless of whether they are exercisable or not
– Out-of-the money options and warrants are not assumed to be converted

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Step III: Spread Key Statistics, Ratios, and Transaction Multiples
Purchase Consideration

 Refers to the mix of cash, stock, and/or other securities that the acquirer offers to the target’s shareholders

 Form of consideration can affect the target shareholders’ perception of the value embedded in the offer
– Some shareholders may prefer cash over stock as payment due to its guaranteed value, some shareholders
may prefer stock compensation in order to participate in the upside potential of the combined companies, etc.
– Tax consequences and other issues may also play a decisive role in guiding shareholder preferences

Purchase Consideration: All-Cash Transaction

 All-Cash Transaction
– Acquirer makes an offer to purchase all or a portion of the target’s shares outstanding for cash
– Makes for a simple equity value calculation by multiplying the cash offer price per share by the number of fully
diluted shares outstanding
– Represents the cleanest form of currency and certainty of value for all shareholders
– Triggers a taxable event as opposed to the exchange or receipt of shares of stock

CLEVELAND, Ohio – June 15, Press

2012 – AcquirerCo
Release Excerptand
for TargetCo
All-Cash Transaction
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 $1 billion, or $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.

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Step III: Spread Key Statistics, Ratios, and Transaction Multiples
Purchase Consideration: Stock-for-Stock Transaction

 Fixed Exchange Ratio – defines the number of shares of the acquirer’s stock to be exchanged for each share of
the target’s stock

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.

– Offer price per share is calculated by multiplying the exchange ratio by the share price of the acquirer, typically
one day prior to announcement

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Step III: Spread Key Statistics, Ratios, and Transaction Multiples
Purchase Consideration: Stock-for-Stock Transaction

 Offer price per share (value to target) moves in line with the underlying share price of the acquirer
– Amount of the acquirer’s shares received is constant
– Shares received by the target and the respective ownership percentages for the acquirer and target remain
fixed
– Fixed regardless of share price movement between execution of the definitive agreement (“signing”) and
transaction close

Fixed Exchange Ratio – Value to Target and Shares Received

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Step III: Spread Key Statistics, Ratios, and Transaction Multiples
Purchase Consideration: Stock-for-Stock Transaction

 Floating Exchange Ratio – represents the set dollar amount per share that the acquirer has agreed to pay for each
share of the target’s stock in the form of shares of the acquirer’s stock

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.

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Step III: Spread Key Statistics, Ratios, and Transaction Multiples
Purchase Consideration: Stock-for-Stock Transaction

 Dollar offer price per share (value to target) is set and the number of shares exchanged fluctuates in accordance
with the movement of the acquirer’s share price

 Number of shares to be exchanged based on average of acquirer’s share price for specified time period prior to
transaction close

 Structure presents target shareholders with greater certainty in terms of value received
– Acquirer assumes the full risk of a decline in its share price (assuming no structural protections for the acquirer)

Floating Exchange Ratio – Value to Target and Shares Received

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Step III: Spread Key Statistics, Ratios, and Transaction Multiples
Purchase Consideration: Cash and Stock Transaction

 Cash and Stock Transaction – acquirer offers a combination of cash and stock as purchase consideration

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.

– Cash portion of the offer represents a fixed value per share for target shareholders
– Stock portion of the offer can be set according to either a fixed or floating exchange ratio

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Step III: Spread Key Statistics, Ratios, and Transaction Multiples
Calculation of Key Financial Statistics and Ratios

 Enterprise Value (“transaction value”)

– Total value offered by the acquirer for the target’s equity interests plus assumption or refinancing of the target’s
net debt
– Calculated for precedent transactions in the same manner as for comparable companies – sum of equity, net
debt, preferred stock, and noncontrolling interest

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Step III: Spread Key Statistics, Ratios, and Transaction Multiples
Calculation of Key Transaction Multiples

 Key transaction multiples used in transaction comps mirror those used for trading comps

 Equity value used as multiple of net income (or offer price per share as a multiple of diluted EPS)

 Enterprise value (or transaction value) is used as multiple of EBITDA, EBIT, and to a lesser extent sales

 Multiples in precedent transactions are typically higher than those in trading comps
– Premium paid for control
– Synergies

 Multiples for precedent transactions typically calculated on basis of actual LTM financial statistics available at the
time of announcement
– Full projections that an acquirer uses to frame its purchase price decision are generally not public and subject
to a confidentiality agreement
– Buyers are often hesitant to give sellers full credit for projected financial performance as they assume the risk
for realization.

 Source the information necessary to calculate the target’s LTM financials directly from SEC filings
– Data needs to be adjusted for non-recurring items and recent events in order to calculate clean multiples that
reflect the target’s normalized performance

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Step III: Spread Key Statistics, Ratios, and Transaction Multiples
Equity Value Multiples

 Offer Price per Share-to-LTM EPS / Equity Value-to-LTM Net Income

– Most broadly used equity value multiple is the P/E ratio
– Offer price per share divided by LTM diluted earnings per share (or equity value divided by LTM net income)

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Step III: Spread Key Statistics, Ratios, and Transaction Multiples
Enterprise Value Multiples

 Enterprise Value-to-LTM EBITDA, EBIT, and Sales

– Enterprise value is used in the numerator when calculating multiples for financial statistics that apply to both
debt and equity holders
– EV/LTM EBITDA being the most prevalent
– Certain sectors may rely on additional or other metrics to drive valuation

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Step III: Spread Key Statistics, Ratios, and Transaction Multiples
Premium Paid

 Incremental dollar amount per share that the acquirer offers relative to the target’s unaffected share price

 Important to use the target’s unaffected share price so as to isolate the true effect of the purchase offer
– Closing share price on day prior to the official transaction announcement typically serves as good proxy for the
unaffected share price
– Examine offer price per share relative to target’s share price at multiple time intervals prior to transaction
announcement (e.g., one trading day, seven calendar days, and 30 calendar days or more)
– Isolate the effects of market gyrations and potential share price “creep” due to rumors or information leakage
regarding the deal

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Step III: Spread Key Statistics, Ratios, and Transaction Multiples
Synergies

 Expected cost savings, growth opportunities, and other financial benefits that occur as a result of the combination
of two businesses

 Assessment of synergies is most relevant for transactions where strategic buyer is purchasing target in related
business

 Represent tangible value to the acquirer in the form of future cash flow and earnings above and beyond what can
be achieved by the target on a standalone basis
– Size and degree of likelihood for realizing potential synergies play an important role for the acquirer in framing
the purchase price for a particular target
– Amount of announced synergies provides important perspective on the purchase price and multiple paid

 Public acquirers often provide guidance on the nature and amount of expected synergies upon announcement of a
material acquisition

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Step III: Spread Key Statistics, Ratios, and Transaction Multiples
Synergies

 Helpful to note the announced expected synergies for each transaction where such information is available
– Transaction multiples typically shown on basis of the target’s reported LTM financial information (i.e., without
adjusting for synergies)

 May calculate adjusted multiples that reflect expected synergies

– Typically involves adding the full effect of expected annual run-rate cost savings synergies (excluding costs to
achieve) to an earnings metric in the denominator (e.g., EBITDA)

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Step IV

Benchmark the Comparable Acquisitions

Step IV: Benchmark the Comparable Acquisitions

 In-depth study of the selected comparable acquisitions so as to determine those most relevant for valuing the
target

 Re-examine the business profile and benchmark the key financial statistics and ratios for each of the acquired
companies, with an eye toward identifying those most comparable to the target

 Each comparable acquisition is closely examined as part of the final refining of the universe, with the best
comparable transactions identified and obvious outliers eliminated

 Recently consummated deal involving a direct competitor with a similar financial profile is typically more relevant
than an older transaction from a different point in the business or credit cycle, or for a marginal player in the sector

 Thoughtful analysis weighs other considerations such as market conditions and deal dynamics in conjunction with
the target’s business and financial profile

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Step IV: Benchmark the Comparable Acquisitions

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Step V

Determine Valuation
Step V: Determine Valuation

 Multiples of the selected comparable acquisitions universe are used to derive an implied valuation range for the
target

 Key multiples driving valuation in precedent transactions tend to be enterprise value-to-LTM EBITDA and equity
value-to-net income (or offer price per share-to-LTM diluted EPS, if public)

 Necessary to analyze the output and test conclusions

($ in millions)

Comparable Companies
7.0x – 8.0x LTM EBITDA
6.75x – 7.75x 2012E EBITDA
6.5x – 7.5x 2013E EBITDA

Precedent Transactions
7.5x – 8.5x LTM EBITDA

$4,750 $5,000 $5,250 $5,500 $5,750 $6,000 $6,250

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Key Pros and Cons

Pros

√ Market-based – analysis is based on actual acquisition multiples and premiums paid for similar companies

√ Current – recent transactions tend to reflect prevailing M&A, capital markets, and general economic conditions

√ Relativity – multiples approach provides straightforward reference points across sectors and time periods

√ Simplicity – key multiples for a few selected transactions can anchor valuation

√ Objectivity – precedent-based and, therefore, avoids making assumptions about company’s future performance

Cons
× Market-based – multiples may be skewed depending on capital markets and/or economic environment at the
time of the transaction
× Time lag – precedent transactions, by definition, have occurred in the past and, therefore, may not be truly
reflective of prevailing market conditions (e.g., the LBO boom in the mid-2000s vs. the ensuing credit crunch)
× Existence of comparable acquisitions – in some cases it may be difficult to find a robust universe of precedent
transactions
× Availability of information – information may be insufficient to determine transaction multiples for many
comparable acquisitions
× Acquirer’s basis for valuation – multiple paid by the buyer may be based on expectations governing the target’s
future financial performance (which is typically not publicly disclosed) rather than on reported LTM financial
information

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