What is Precedent transaction?
Precedent transactions analysis, or sometimes called “M&A Comps,” is an investment banking valuation methodology that uses multiples paid in mergers and acquisitions of similar businesses as a proxy to value a company. This is a very similar analysis to comparable company, but an important distinction between precedents and comps is the fact that precedent multiples reflect a control premium (i.e. the acquirer had to pay a premium to control the target in the acquisition). As a result of this “control premium,” precedent multiples tend to be much higher.
Recent M&A transactions are a more accurate reflection of the values buyers are currently willing to pay than acquisitions that happened in the distant past. This is because market fundamentals are constantly evolving and business cycles are changing.
When will you use Precedent Transaction?
- To value a business in a private market environment (vs. public comps)
- To determine the market demand for certain types of businesses (how many transactions and the prices paid)
- To provide insight into consolidation trends within a particular industry
- To identify potential bidders if a client is selling
- To identify potential competitors if a client is buying
- To provide concise stats on a particular transaction for discussion purposes
What are the Pro’s and Con’s of this analysis?
- Pros: Based on public information
- Pros: Realistic valuation since the past transactions were completed at defined multiples
- Pros: May show bidding trends
- Cons: Public data on transactions can be limited
- Cons: You will rarely find a “pure-play” direct comparable
- Cons: Values obtained often vary over a wide range and can be misleading
- Cons: Market conditions in the past could have influenced acquisitions
Check out our detailed Walk-through on Precedent Transaction Analysis
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