What Is 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.

Understanding 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 pays 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 × 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.