Transaction multiples

The Transaction multiples methodology is based on a comparison to prices paid in historical acquisitions of companies with similar characteristics (seen from an investor’s perspective).

The EV price paid is compared to the latest reported earnings (EBITDA and EBIT) of such acquired companies, hence the multiple. The Transaction multiples methodology is based on actual figures, hence historical figures.

Historical perspective

You might look at a shares historical performance (levels) before you determine whether or not you think the current level is high or low. The same historical analysis is often completed with regards to trading multiples. As the graph on the right illustrates, trading multiples changes significantly over time. Apparently both EBITDA and EBIT currently trade close the 10y average levels. The graph illustrates the development in NTM multiples.

Which metrics and how

With regards to precedent transaction valuation, all the common valuation multiples are applied. Outliers (abnormal multiple due to "strange" metric value) are normally excluded. The median of all the precedent transactions comprises the benchmark transaction multiple. The median is normally preferred to the average.

Identifying the precedent transactions

• Transaction date - More recent transactions are more comparable, i.e. acquisition Enterprise Value to a large extent depends on the current financial environment (availability of leverage etc.)
• Transaction size - Transaction that are approx. of the same size are more vs. larger and smaller transactions
• Target's industry - It is important that the industries of the precedent transactions are comparable as valuation multiples differ significantly between different sectors and industries
• Transaction circumstances - It is best if the precedent transactions had the same type of buyers (e.g.: strategic vs. financial buyer), if the transactions have the same geographical scope (e.g.: domestic vs. cross-border), if the transactions have the same type of selling process (e.g.: auction vs. exclusive deal).
• Target's outlook - Potentially the most important part of identifying the most comparable precedent transactions is to find transactions where the target company had comparable financials/outlooks/forecasts

Data sources

There are a number of different data providers that focus on Mergers and Acquisition statistics - to mention a few:

• FactSet MergerStat - as of January 2010, over 347,000 deals. U.S. and U.S. cross-border since 1992; European major markets since 2000; Global since 2003. Access comprehensive precedent transaction information with links to source documents. Screen for comparable deals on the basis of multiples, deal terms, advisors, fees, industry analytics, and more. Build league tables and volume totals
• MergerMarket - Provider of M&A intelligence integrated with a comprehensive deals database. Very common among Investment Banks - particularly in Europe
• Thomson Reuters (Thomson SDC) - The world's foremost financial transactions database, covering new issues, M&A, syndicated loans, private equity, project finance, poison pills, and more.
• Amadeus Zephyr - Contains information on M&A, IPO, private equity and venture capital deals and rumours. The coverage on Zephyr increases daily - in June 2010 the coverage was around 800,000 deals.

Important terms related to precedent transactions

There are a numerous different fields that are common in precedent transaction output - to mention a few:

• Announcement date - the date the transaction was announced, this date after the rumour date and before the completed date. This date is the preferred choice of transaction date when performing precedent transaction analysis.
• Status - this indicates weather the transaction is pending, completed or terminated.
• Target company - this is the full leagal name of the target acquired.
• Target industry - this is the description of the target company's industry.
• Target country - this is the country where the target company is incorporated
• Target owner - If the target company is a subsidiary, this is the full legal name of the ultimate owner.
• Buyer - This is the legal name of the ultimate acquirer
• Equity value (deal size) - this is the equity value corresponding to 100% of the target company's fully diluted common equity
• Enterprise value - this is the equity value plus net interest bearing debt
• Transaction multiple - this is the core of the analysis - the transaction multiple. There are numerous transaction multiples, to mention a few:
• EV/SALES
• EV/EBITDA
• EV/EBIT
• P/E