## DEFINITION of 'Takeout Value'

Takeout value is a company's estimated value if it's taken private or acquired. A firm's takeout value considers various metrics, including cash flows, assets, earnings and multiples used in similar takeovers. The current mergers and acquisitions environment can also affect the takeout value of a company.

There is not an exact formula for takeout valuation, since a variety of metrics, such as EBIDTA multiple, P/E ratio, and even firm-specific information can be taken into account.

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## BREAKING DOWN 'Takeout Value'

The takeout value is used by both financial analysts and shareholders. The analysts will use the valuation to determine a range of possible price levels for takeover bids, while shareholders can estimate the return they might receive if their shares are acquired. The difference between the estimated real value of a company and the actual price paid to obtain it is called the acquisition premium. The acquisition premium typically represents the increased cost of buying a target company during a merger and acquisition. There is no requirement that a company pay a premium for acquiring another company; depending on the situation, it may even get a discount.

## Example Calculation of Takeout Value

Takeout valuation uses the metrics of the target company and compares them to multiples used in similar takeover transactions. For example, a past takeover saw a firm with earnings of \$5 million get acquired for \$22.5 million. This implies an earnings multiple of 4.5 (\$22.5 million / \$5 million). A similar company with earnings of \$3 million is now being considered a takeover target. The takeout value of the new company would be \$13.5 million (\$3 million Ã— 4.5). An investor or acquiring company may use different acquisition valuation gauges to determine a bid. For example, the buyer may use enterprise value or share price to value a company.

If investors hear rumors that a company is exploring a sale, traders may bid up the company share price. For example, when word got out in 2016 that software firm Marketo was considering a sale, its share price rose nearly 25% for the day to \$26.77. After the market closed for the day, investment bank Credit Suisse released a note estimating a possible Marketo takeout value. Using the acquisitions of similar companies in the previous 12 months, Credit Suisse estimated a possible takeout price in the range of \$37.03 to \$51.67 per share.

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