Assessing fair price

Question

In M&A case, it is important to assess the fair price (usually by DCF or comparables) of the target company, to see whether the offering price makes sense. But how about private equity cases? In PE cases, I often get information such as the PE firm will acquire the target company at 5 times earnings. How should I assess whether this price makes sense?

Answer 1

Hi!

In PE cases, the current price is only of secondary importance! The only thing that really matters is whether you believe that you can resell the company after a couple of years at a price that exceeds the current asking price by the minimum ROI percentage. For example, if the asking price is 100MM USD and the PE fund has a minimum ROI requirement of 35% and wants to hold the company no longer than 4 years, then the only thing that matters is whether you believe that this company can be sold for more than 135MM USD in 4 years! So you have to understand how valuation works in this industry. If, e.g., there is a pertinent industry multiple (say 10), then this mens that if you believe you can get the target company to annuay profit of more that 13.5MM USD, then this will make sense financially.

Cheers, Sidi

Answer 2

Benchmark to other peers/ transactions?

Answer 3

Hello,

There are 4 basic methods to evaluate a company:

Discounted cash flow
Multiples
Market value for publicly listed company
Benchmark with similar acquisition

Best,
Luca

Answer 4

Hi Anonymous,

in a PE case, the valuation of a company can be conducted in the same way as for a standard company, that is with:

Discount Cash Flow. Discount the future cash flow of the company, normally using a perpetuity method.
Multiples. Consider the average multiple used in equivalent transactions (eg P/E ratio). Then apply the multiple to the relevant variable of the target (eg Net Earnings of the target).
Computation from asset value – identify the equity value as the fair value of total assets minus net debt.

Obviously, If the company is listed in the stock exchange, the market value is known by definition.

Since in the case you mentioned you have information related to a multiple of the earnings, it is likely you will have to use the second method.

Best,

Francesco

Answer 5

Hello!

For you particular question, "How should I assess whether this price makes sense?", the best way is to ask wheter they have a benchmark of comparable situations.

However, M&A cases won´t normally go in that direction, but in the synergy calculations one.

Hope it helps!

Cheers,

Clara

Answer 6

Hi there,

A very common way in PE is to compare the multiples with similar deals / transactions happening recently or around the same time.

Best,

Emily