What Is Takeout Value?

Takeout value is a company's estimated value if it were to be taken private or acquired. Various financial metrics are applied to determine how much the company might go for, including cash flows, assets, earnings, and multiples used in similar takeovers.

The current mergers and acquisitions (M&A) environment can also affect the takeout value of a company.

Key Takeaways

  • A company's takeout value is its estimated value in the case that it is acquired or taken private.
  • Various financial metrics are examined to establish how much the subject might sell for, including cash flows, assets, earnings, and multiples used in similar takeovers.
  • The takeout value is employed to determine a range of possible price levels and estimate the return shareholders might receive if their shares are acquired. 

Understanding Takeout Value

Acquisitions are a common occurrence, offering companies one of the quickest ways to expand into new markets, obtain new technology, reduce costs, and secure a stranglehold over the competition. Taking control of another company requires a lot of due diligence, though. Aside from ascertaining whether a target company would represent a good fit, it is also pivotal to determine a fair price and not overpay.

A good starting point is to establish how much the target and its assets are worth by examining the cash it generates and is likely to churn out in the future—both under the current regime and in the event that it is acquired. This valuation can then be cross-referenced with the target’s market value: the price that investors are presently willing to pay for it.

With this information at hand, the prospective acquirer will then want to work out how much it will likely need to offer to get a deal over the line. The goal here is to pay as little as possible while also satisfying the demands of shareholders in the target company and making the acquisition worth their while.

The takeout value is used by financial analysts to determine a range of possible price levels for takeover bids and by shareholders to estimate the return they might receive if their shares are acquired.  Acquirers typically pay an acquisition premium to close a deal and ward off competition, although, depending on the circumstances, it is also possible in some cases to get a discount, acquiring the target for less than its fair market value (FMV).

Example of Takeout Value

Takeout valuation uses the metrics of the target company and compares them to multiples used in similar takeover transactions. Let's use hypothetical companies ABC and XYZ as an example. ABC initiated a takeover of company XYZ, which has earnings of $5 million, for an acquisition price of $22.5 million, The implied earnings multiple is therefore 4.5 ($22.5 million / $5 million).

A similar company, DEF, with earnings of $3 million is now being considered as a possible takeover target. The takeout value of the new company would be $13.5 million using the same multiple ($3 million × 4.5).

Of course, earnings aren’t the only metric taken into account. An investor or acquiring company may and probably will use a range of different acquisition valuation gauges to determine a bid.

Important

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

Special Considerations

If investors hear rumors that a company is exploring a sale, traders may bid up its share price. For instance, when word got out in 2016 that software firm Marketo Inc. was considering a sale, its share price rose nearly 25% in one day to $26.77.

After the market closed, investment bank Credit Suisse published 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.