Relative valuation
Precedent transactions
Value a company from the prices paid for whole companies in past deals — and explain why they sit above trading multiples.
Learning objectives
- Calculate a transaction enterprise value and its EV/LTM EBITDA multiple
- Calculate a control premium from the offer and unaffected share prices
- Apply precedent multiples to derive an implied value range per share
- Explain why precedent multiples usually exceed trading multiples
Trading comparables tell you what the market pays for a small, non-controlling stake in a listed company today. Precedent transactions tell you what buyers have paid for the whole company — control of its cash flows, strategy and balance sheet — in past acquisitions of similar businesses.
Bankers use precedents in sell-side advice and fairness opinions, and buyers use them to judge what a target's owners will expect. They answer a different question from comps: not "what is a share worth?" but "what would an acquirer have to pay?"
A buyer paying for control usually pays more than the undisturbed share price, for three reasons: it can change how the business is run, it expects synergies (cost savings or extra revenue from combining), and it must persuade every shareholder to sell. The excess over the undisturbed price is the control premium.
Precedent multiples are conventionally measured on the target's last twelve months (LTM) EBITDA at announcement, because that is the figure both sides could see when the price was agreed.
Included with a Formula Quest membership
The rest of this lesson is for members. Members get the full lesson, including its 3 graded exercises, and every other Finance Quest lesson.