CHAPTER 16 Valuing an M&A Target by Considering Comparable Deals and Leveraged Buyouts

In the two previous chapters we covered the “discounted cash flow” and “comparable public company” approaches to valuing an acquisition target. In this chapter, we will discuss the two remaining principal methodologies: “comparable acquisitions” and “leveraged buyout.” Of the four approaches, comparable acquisitions receives the most emphasis in actual M&A negotiations. Simply put, the prospective buyer looks at the valuation multiples of similar deals to establish a target valuation range. As noted in Chapter 13, this approach is far from foolproof, usually owing the lack of similar transactions, the information missing from private sales, and the deal comparables being outdated.

The comparable acquisition approach follows a process that closely resembles the “comparable public company” methodology set forth in Chapter 15. Instead of tracking publicly traded firms that relate to the target, the practitioner identifies recent acquisitions that bear similarities. He then analyzes the deals, computes their value ratios, and applies appropriate multiples to the target’s results, given its unique attributes. Set forth below are the six steps for using the comparable acquisition approach.

Steps in Comparable Acquisition Valuation Approach

  1. Select the comparable acquisitions
  2. Make the necessary accounting adjustments to establish true earnings power
  3. Calculate the value multiples for the comparable ...

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