Investment Banking, 3rd Edition

CHAPTER 2Precedent Transactions Analysis

Precedent transactions analysis (“precedent transactions” or “precedents”), like comps, employs a multiples-based approach to derive an implied valuation range for a given company, division, business, or collection of assets (“target”). It is premised on multiples paid for comparable companies in prior M&A transactions. Precedent transactions has a broad range of applications, most notably to help determine a potential sale price range for a company, or part thereof, in an M&A, capital markets, or restructuring transaction.

The selection of an appropriate universe of comparable acquisitions is the foundation for performing precedent transactions. This process incorporates a similar approach to that for determining a universe of comparable companies. The best comparable acquisitions typically involve companies similar to the target on a fundamental level (i.e., sharing key business and financial characteristics such as those outlined in Chapter 1, see Exhibit 1.3).

As with trading comps, it is often challenging to obtain a robust universe of truly comparable acquisitions. This exercise may demand some creativity and perseverance on the part of the banker. For example, it is not uncommon to consider transactions involving companies in different, but related, sectors that may share similar end markets, distribution channels, or financial profiles. As a general rule, the most recent transactions (i.e., those that have occurred within the ...