What Is a Comparable Transaction?
The cost of a comparable transaction is one of the major factors in estimating the value of a company that is being considered 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 referred to as a comp transaction.
- Comparable transactions are used in assessing a fair value for a corporate takeover target.
- The ideal comparable transaction is for a company in the same industry with a similar business model.
- The fair value of the takeover target is based on its recent earnings.
Understanding the Comparable Transaction
Companies seek to acquire other companies in order to grow their businesses, gain access to valuable resources, expand their reach, eliminate a competitor, 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 is to derive a fair valuation.
Conversely, a company that has become a takeover target does the same type 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 valuation can help a company arrive at a price for the acquisition that shareholders are willing to accept.
The Valuation Metric
The specific valuation metric in widespread usage for comparable transaction analysis is the EV-to-EBITDA multiple. EV is enterprise value and EBITDA is earnings before 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 not 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 medical devices.
The Fairness Opinion
The filing disclosed that Bard retained Goldman Sachs as a financial adviser to render a 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.
Comparables are analyzed by the takeover target as well as the prospective acquirer.
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 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.