What is Precedent Transaction Analysis
Precedent transaction analysis is a valuation method in which the price paid for similar companies in the past is considered an indicator of a company’s value. Precedent transaction analysis creates an estimate of what a share of stock would be worth in the case of an acquisition.
Also known as "M&A comps."
How Precedent Transaction Analysis Works
Precedent transaction analysis relies on publicly available information to create a reasonable estimate of multiples or premiums that others have paid for a publicly-traded company. The analysis looks at the type of investors that have purchased similar companies under similar circumstances in the past and examines whether the companies making the acquisitions are likely to make another acquisition soon.
Data sources for precedent transaction analysis include the Securities Data Corporation, which is a repository of mergers and acquisitions data. Trade publications, research reports, and the annual filings are also good sources of data.
Advantages and Disadvantages of Precedent Transaction Analysis
While this type of analysis benefits from using publicly available information, the amount and quality of the information relating to transactions can sometimes be limited. This can make drawing conclusions difficult. This difficulty can be compounded when trying to account for differences in the market conditions during previous transactions compared to the current market. For example, the number of competitors may have changed or the previous market could have been in a different part of the business cycle.
While every transaction is different, and thus makes direct comparisons difficult, precedent transaction analysis does help provide a general assessment of the market’s demand for a particular asset and an approximate valuation of the asset.