What Is a Comparable Transaction?

The cost of a comparab🐻le transaction is one of the major factors in estimating the value of a company that is being conside🎃red as a merger and acquisition (M&A) target. The reasoning is the same as that of a prospective home buyer who checks out recent sales in a neighborhood.

🧸 This is commonly refer✨red to as a comp transaction.

Understanding the Comparable Transaction

Companies seek to acquire other companies in order to grow their businesses, gain access to valuable resources, expand their reac𝓀h, eliminate a competit🐭or, or some combination of all of these reasons.

In any case, overpaying for that acquisition could be disastrous. So, the company and its investment bankers look for comparable transactions—the more recent the better. They look at companies with a similar business model to the company being targeted. The more comparable transaction data that are available for analysis, the easier it iꦐs to derive a fair valuation.

Conversely, a company that has become a takeover target does the same typ꧃e of analysis in order to determine whether an offer that is on the table is a good one for its own shareholders.

In either case, the comparable transaction method of 澳洲幸运5官方开奖结果体彩网:valuation can help a company arrive at a price for the acquisition that shareholders are willing toꦕ accept.

The Valuation Metric

The specific valuation metric in widespread usage for comparable transaction analysis is the 澳洲幸运5官方开奖结果体彩网:EV-to-EBITDA multiple. EV is enterprise value and EBITDA 𝐆is earnings b𒅌efore interest, taxes, depreciation, and amortization. In this formula, a 12-month period is used for EBITDA.

The comparable transaction valuation is generally used in conjunction with other data including the company's discounted cash flow, price-to-earnings ratio, price-to-sales ratio, and price-to-cash-flow ratio. Others factors are relevant to particular industries.

All of the above numbers are readily available for public companies. If the acquisition target is notꦑ a publicly-traded company, the available data may be limited.

Real World Example of a Comparable Transaction

Becton, Dickinson and Company (BDX) filed a Form S-4 with the SEC in mid-2017 for its intended acquisition of C.R. Bard, Inc. Both companies are developers and manufacturers of m🌠🔴edical devices.

The Fairness Opinion

The filing disclosed that Bard retained Goldman Sachs as a financial adviser to render a 澳洲幸运5官方开奖结果体彩网:fairness opinion for the price offered by BD. Since the healthcare supply industry had undergone significant consolidation in recent years, Goldman Sachs had an array of comparable transaction data at its disposal.

Nine comparable transactions from 2011 to 2016 are listed in the filing. That allowed a robust analysis for Bard shareholders and the company's board of directors to consider for BD's takeover offer.

Bard's financial adviser calculated the range of EV-to-LTM EBITDA multiples of the past transactions as well as the median multiple. Comparable transaction analysis was one of several valuation techniques analyzed for this deal, the others including price-earnings and 澳洲幸运5官方开奖结果体彩网:price-earnings-growth multiples. But it also was the leading one, as is the standard practice for mergers and acquisitions.

The Usual Warning

Although it is standard practice, it is not considered the final word on valuing a targeted firm. In this example, Goldman Sachs issued a disclaimer that its comparable transaction analysis, along with the other valuation metric analyses, do not purport to be appraisals nor do they necessarily reflect the prices at which businesses or securities may be sold.

The deal was eventually approved at a price of $24 billion.