Financial Modeling and Valuation: A Practical Guide to Investment Banking and Private Equity

CHAPTER 10

Precedent Transactons Analysis

As we discussed earlier, the precedent transactions analysis assesses relative value by looking at multiples of historical transactions. The value of our company is relative to the price others have paid for similar companies. So, if we look for other companies similar to ours, that have been acquired, we can compare their purchase multiples to assess approximate value.

Purchase multiples are similar to market multiples, except the numerator in a purchase multiple is based on the price paid for an entity as opposed to the current market value.

IDENTIFYING PRECEDENT TRANSACTIONS

The greatest difficulty in obtaining precedent transactions is identifying relevant transactions. It is important to consider transactions that are similar in industry to the company we are valuing. In other words, to use precedent transactions as a valuation methodology for Walmart, we would have to find acquisitions of other retail corporations similar to Walmart. We also need to consider transactions that are relatively similar financially. Now, this becomes the major problem when the target is Walmart, as the company is so large it is very unlikely that similar transactions exist. Finally, timing is an important factor. We need to consider recent transactions; transactions that have happened many years ago may have happened in a market environment that is no longer relevant to today.

There are several major sources that can provide historical transactions. Securities ...