Editor’s Note: A growing number of M&A professionals are pursuing the Certified M&A Specialist, or CMAS™ credential. To support CMAS™ candidates preparing for the CMAS™ exam, we are pleased to commence a monthly feature column, CMAS Corner, by noted author and expert, Alexandra Reed Lajoux. Each month’s edition will include directly relevant content derived from the capstone Fifth Edition of Ms. Lajoux’s industry leading book series, The Art of M&A: A Merger, Acquisition, and Buyout Guide (McGraw Hill, 2019). Each month this column will cover one or more likely CMAS™ exam questions and help you accelerate completion of this important career credential.
Q: What should I be wary of when building a precedent transactions analysis?
Unfortunately, there are some limitations to using comparable transactions to estimate the value of a target. Here again, precedent transactions share several of these disadvantages with their comparable company brethren. Arguably, the biggest question to ask is whether the public data on past transactions are “clean” or whether they might be limited and/or misleading. Consider the following questions in any transaction comps that you might consider including in your M&A universe:
- What was the state of the financial markets at the time of the deal? Was the stock market particularly strong or weak? Could that have had an impact on the price paid?
- Where were we in the business cycle when the transaction closed? Were the target’s earnings near a peak, normal, or at a trough level? Did the target recently report any one-time gains or losses that might have skewed reported earnings? How might these factors have been accounted for in the takeout price?
- What was the sale process? Did the acquirer source the transaction through its proprietary deal flow, or was it a competitive auction run by an investment bank?
- How competitive was the M&A market for businesses like this at the time of the deal? Was there some scarcity value attributable to the asset? At the other end of the spectrum, was this a distressed sale or some other form of motivated seller?
- How strategic was the target to the acquirer? What cost savings and/or revenue synergies were discounted into the deal? Are these assumptions representative of most deals in the industry, or was this deal special?
- Were there unique structuring details to this transaction that we should consider? Was there future, contingent consideration that we should add back? Was there a unique tax angle, such as net operating loss carry forwards that represented hidden value?
- How much time has elapsed since the deal? Understandably, recent M&A transactions may more accurately reflect the values that buyers are currently willing to pay than would acquisitions that happened in the distant past. In addition to the fact that business cycles are always changing, industry fundamentals are similarly in constant evolution.
The key takeaway is that precedent transactions are rarely comparable. Nearly every deal represents a unique set of circumstances. It is the role of the M&A analyst, then, to tear into the details behind each deal and understand at least the high-level strategy behind each deal. This will help explain why the deal happened and, consequently, how representative the transaction might be as a clean-deal comp.
Lajoux, Alexandra Reed with Capital Expert Services. “The Art of M&A, Fifth Edition” A Merger, Acquisition, and Buyout Guide. United States of America: McGraw Hill, 2019. Pp. 146-147. Print.
You can learn more about the book at: https://www.artofma.global/ or for a complete list of references/notes within this article please call the M&A Leadership Council at 214-689-3800.