The premise behind comparable transaction analysis is that a controlling interest in companies within the same industry or companies exhibiting similar underlying business fundamentals (e.g., growth, proﬁtability, risk, volatility, etc.) should be acquired (in a change of control transaction) on the same relative basis as a multiple of ﬁnancial and operating metrics.
Companies within an industry or peer group that were acquired in a change of control transaction are selected (sometimes dating back many years if there has not been much M&A activity in a sector). Financial multiples are calculated for each of the transactions in the comp set based on the sale price of each company in the peer group.
The types of multiples used in comparable company and comparable transaction analysis are the same — the difference is that comparable company analysis is based on the stock price in the public market and represents a non-controlling share whereas comparable transaction analysis is based on the price an acquiror paid for control of a company and includes a control premium. Examples of multiples include price to earnings (P/E), enterprise value to EBITDA (EV/EBITDA) and price to book (P/B).
Multiples from the transaction comp set are then applied to the data of the company being valued in order to determine an implied valuation range.
Premiums paid analysis is often performed in conjunction with comparable transaction analysis. In premiums paid analysis, premiums paid per share of stock in comparable change of control transactions are applied to the stock price of the company being valued. For example, assume that in the telecom sector, the average premium paid during the last two years in M&A transactions was 25 percent. Assume you are valuing TelecomWest which is currently trading at $30 per share. You could apply the average 25 percent premium to a share of TelecomWest stock to estimate the implied M&A value per share of TelecomWest.
$30 per share x (1 + 0.25 average premium) = $37.50 M&A value per share
Comparable transaction analysis is also referred to as precedent transaction analysis.