M&A: A Practical Guide to Doing the Deal, 2nd Edition

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 ...