Topic: Business

Last updated: January 16, 2020

Precedent Transactions analysis is carried out in the same way as comparable company analysis—unless instead of using comparable company’s current valuation multiples, historical multiples paid for comparable companies in past M;A transactions are used. Here, the pricing of past transactions is compared to the target’s financial performance and market value. Transactions that are selected under this technique should be very similar to the business acquired, it should be in the same country as the target’s and so on.

It is based on the concept that the value of a firm can be determined by the price paid by acquirers of similar companies under similar circumstances. This analysis helps us understand the multiples a premium paid in a industry and how other firm determine private market value. The purpose of both Comparable Company Analysis and the Precedent Transaction Analysis is the same, except the examining of prior acquisitions give a sense of premium paid to control the target firm. Both these methods are a form of relative valuation, however, comps use current multiples used in the public market, while precedents include a takeover premium and transaction that took place in the past. The process of selecting the appropriate universe of comparable transactions is the basis for performing precedent transactions which is similar to determining a universe of comparable companies. The best way to find comparable acquisitions is to find companies that are similar on a fundamental level.

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Under Precedent Transaction Analysis, determination of the value of a target company depends in the consideration paid to acquire an entity through acquisition, just as Comparable Company Analysis, the purchase price is viewed as a multiple and the value is determined by applying them to the metrics of the target company. The two main difference between these methodologies are as follows:1. Control PremiumIn M;A transactions, a premium is paid by buyers to gain control the target company and not just as a part of the equity. It is the unrecorded value like brand recognition, technical ability that lead to an increase in earning.

2. SynergiesIt means that the cash flow discounted by bidders is higher than the cash flow discounted by the market which sets a limit to how much a bidder can pay. Hence if the acquisition is going to be profitable to the bidder then the amount paid is less than the maximum amount. This gives an opportunity to the bidder to recognize cost saving and growth opportunities in order to combine the two businesses.Therefore, considering these above two major difference and other factors like Timing (precedents quickly become old, comps are current), Available information (difficult to find for precedents, readily available for comps), the process of selecting the comparable companies despite being similar to the one used by comparable company analysis, is different since the above factors need to be considered to find the ideal transaction that are affected by the same external factors like the target company.


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