Precedent Transaction Analysis: M&A Valuation Method

Introduction: Learning from Past Deals

“What have acquirers paid for similar companies in the past?”

Precedent Transaction Analysis (or “transaction comps”) values a company by examining prices paid in previous mergers and acquisitions. Unlike trading comps that use current market prices, precedent transactions show what buyers have actually paid to acquire similar businesses.

This method is especially relevant for M&A situations and establishing fair purchase prices.

Why Precedent Transactions Matter

The Logic

If acquirers paid certain multiples for similar companies in the past, those multiples indicate what buyers value and are willing to pay.

Key Advantages

1. Real deals: Not theoretical—actual prices paid
2. Control premium included: Reflects full acquisition value
3. Market reality: Shows what the market will bear
4. Precedent protection: Justifies price to boards and shareholders

When to Use

• M&A advisory
• Fairness opinions
• Strategic negotiations
• Board presentations

Step 1: Identify Comparable Transactions

Search Criteria

Primary Filters:

1. Industry: Same or adjacent sector
2. Time frame: Typically last 3-5 years
3. Deal size: Similar transaction value
4. Geography: Relevant market
5. Deal type: Strategic vs financial buyer

Secondary Filters:

• Business model similarity
• Growth profile
• Market conditions at deal time
• Strategic rationale

Finding Transactions

Data Sources:

• Bloomberg (MA function)
• Refinitiv (Mergers database)
• CapitalIQ
• MergerMarket
• PrimeDatabase (India-specific)
• News archives and company announcements

Transaction Information Needed

Example: FMCG Sector Transactions (India)

Number of Transactions

• Minimum: 3-5 transactions
• Ideal: 8-12 transactions
• Challenge: Finding enough relevant deals

Reality: Fewer relevant transactions exist than comparable companies, making selection more challenging.

Step 2: Gather Transaction Details

Transaction Value Components

Enterprise Value Paid: $$TEV = Equity\ Value + Net\ Debt\ Assumed$$

Components:

• Cash consideration
• Stock consideration
• Assumed debt
• Earnout (contingent payments)
• Less: Cash acquired

Financial Metrics (LTM or NTM)

Collect for Each Target:

• Revenue
• EBITDA
• EBIT
• Net Income
• Any industry-specific metrics

Premium Analysis

Control Premium: $$Premium = \frac{Offer\ Price - Undisturbed\ Price}{Undisturbed\ Price} \times 100$$

Undisturbed Price: Stock price before deal rumors (typically 1-4 weeks pre-announcement)

Step 3: Calculate Transaction Multiples

Common Multiples

Enterprise Value Based:

• TEV/Revenue
• TEV/EBITDA
• TEV/EBIT

Equity Value Based:

• Price/Earnings
• Price/Book

Example Calculation

Transaction: Target Ltd acquired by Acquirer Inc

Deal Terms:

• Offer Price: ₹200 per share
• Shares Outstanding: 10 crore
• Equity Value: ₹2,000 crore
• Target Debt: ₹400 crore
• Target Cash: ₹100 crore

TEV Calculation: $$TEV = 2,000 + 400 - 100 = ₹2,300\ crore$$

Target Financials (LTM):

• Revenue: ₹800 crore
• EBITDA: ₹160 crore

Multiples:

• TEV/Revenue = 2,300/800 = 2.9x
• TEV/EBITDA = 2,300/160 = 14.4x

Premium (Stock traded at ₹150 before): $$Premium = \frac{200-150}{150} = 33%$$

Step 4: Build the Precedent Transactions Table

Standard Format

Precedent Transaction Comparables:

Statistics to Present

1. Mean
2. Median
3. High
4. Low
5. 25th Percentile
6. 75th Percentile

Step 5: Apply to Target Company

Valuation Application

Target Company Metrics:

• Revenue: ₹500 crore
• EBITDA: ₹100 crore

Applying Median Multiples:

Implied Valuation Range

Using Multiple Range:

Adjustments and Considerations

Deal Timing

Market Conditions:

• Bull market deals: Higher multiples
• Bear market deals: Lower multiples
• Credit availability affects prices

Adjustment: Weight recent deals more heavily or exclude deals from very different market conditions.

Deal Type Differences

Strategic vs Financial Buyers:

Adjustment: Separate analysis or exclude one category based on your buyer.

Size Adjustments

Larger deals often command higher multiples due to:

• Scarcity premium
• Lower execution risk
• Better capital access

Adjustment: Note size correlation and adjust if target is significantly different.

Contested vs Negotiated Deals

Auction processes: Higher premiums Negotiated deals: Lower premiums Hostile bids: Highest premiums

Synergy Expectations

Some acquirers pay for expected synergies:

• Cost savings
• Revenue enhancement
• Tax benefits

Adjustment: If synergies are buyer-specific, may overstate standalone value.

Control Premium Analysis

What Is Control Premium?

The additional amount paid over market price to gain control of a company.

Why Control Premiums Exist

1. Strategic value: Synergies and improvements
2. Control rights: Ability to make decisions
3. Access to cash flows: Dividend policy
4. Minority discount reversal: Market price reflects minority discount

Typical Control Premiums

Premium by Deal Type

Premium Analysis in Our Example

From the table:

• Mean premium: 30%
• Median premium: 30%
• Range: 25%-35%

For Target Company:

• Current trading price: ₹80 per share
• Implied offer range: ₹100-108 per share (25-35% premium)

Precedent Transactions vs Trading Comps

Key Differences

When to Use Each

Precedent Transactions:

• M&A advisory
• Fairness opinions
• Strategic acquisitions
• Control transactions

Trading Comps:

• Public market valuation
• Minority stake transactions
• IPO pricing
• Ongoing company valuation

Converting Between Methods

From Trading Comps to Acquisition Value: $$Acquisition\ Value = Trading\ Value \times (1 + Control\ Premium)$$

From Precedent to Minority Value: $$Minority\ Value = \frac{Precedent\ Value}{(1 + Control\ Premium)}$$

Challenges and Limitations

Data Availability

Problems:

• Limited deal flow in some sectors
• Private transaction details not disclosed
• Historical financials hard to obtain

Solutions:

• Broaden search criteria
• Use press releases and filings
• Include international deals

Comparability Issues

Problems:

• Unique deals (size, timing, synergies)
• Different deal structures
• Market condition changes

Solutions:

• Adjust for known differences
• Weight similar deals more
• Present ranges

Timing Issues

Problems:

• Old deals may not reflect current conditions
• Market cycles affect prices
• Industry disruption changes values

Solutions:

• Focus on recent transactions
• Adjust for market conditions
• Note limitations

Case Study: Applying Precedent Transactions

Scenario

You’re advising on the sale of a mid-sized Indian pharmaceutical company.

Target Company:

• Revenue: ₹2,000 crore
• EBITDA: ₹400 crore (20% margin)
• Net Debt: ₹300 crore

Step 1: Identify Transactions

Search Criteria:

• Pharmaceutical sector
• Revenue ₹500-5,000 crore
• Last 5 years
• India-focused

Step 2: Collect Data

Transactions Found:

Step 3: Apply Multiples

Step 4: Calculate Equity Value

Step 5: Recommendation

Valuation Range: ₹4,000-4,750 crore

Factors for higher range:

• Strong margin profile
• Growth potential
• Strategic value

Factors for lower range:

• Market conditions
• Competitive dynamics
• Execution risk

Best Practices

Transaction Selection

1. Document criteria: Clear inclusion/exclusion logic
2. Quality over quantity: Better 5 relevant than 10 loose
3. Consider strategic rationale: Why did deals happen?

Presentation

1. Show full table: Let readers see the data
2. Explain outliers: Why some deals are high/low
3. Present ranges: Not single numbers
4. Compare to other methods: Triangulation

Analysis Quality

1. Verify data: Cross-check deal values
2. Understand each deal: Not just numbers
3. Note limitations: Data gaps, comparability
4. Update for recent deals: Markets change

Key Takeaways

1. Precedents = Real deal prices – What buyers actually paid
2. Control premium included – Unlike trading comps
3. Limited data – Fewer deals than public comps
4. Timing matters – Market conditions affect prices
5. Strategic vs Financial – Different buyer types, different prices
6. Adjust for differences – Size, synergies, deal terms
7. Triangulate – Use with DCF and trading comps

Disclaimer

This article is for educational purposes only. M&A valuation requires professional expertise and due diligence. Consult qualified professionals for actual transaction advice. This is not financial or investment advice.

Frequently Asked Questions

Q: How recent should transactions be? A: Typically 3-5 years. More recent is better, but don’t exclude relevant older deals if market conditions were similar.

Q: What if there aren’t enough comparable deals? A: Broaden criteria (adjacent sectors, larger size range), include international deals, or rely more on other methods. Document limitations.

Q: Should I include failed deals? A: Generally no—failed bids may not reflect achievable prices. However, they can indicate ceiling prices in some situations.

Q: How do I handle different deal structures? A: Calculate equivalent enterprise value for all deals. Note stock vs cash and earnout components separately.

Q: Strategic or financial buyer multiples? A: Depends on your likely buyer universe. If strategic, use strategic deals. If PE auction, use financial buyer deals. Present both if unclear.

Precedent transactions are like looking at what houses in your neighborhood actually sold for, versus what similar houses are listed at (trading comps). Sale prices include a buyer’s willingness to pay a premium to actually close the deal—that’s the control premium in action.