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Assessing fair price

M&A Case
Neue Antwort am 1. Sept. 2020
6 Antworten
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Anonym A fragte am 1. März 2020

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?

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Sidi
Experte
bearbeitete eine Antwort am 2. März 2020
McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 350+ candidates secure MBB offers

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

(editiert)

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Anonym antwortete am 1. Sept. 2020

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

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Clara
Experte
Content Creator
antwortete am 2. März 2020
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

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

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Francesco
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Content Creator
antwortete am 2. März 2020
#1 Coach for Sessions (4.000+) | 1.500+ 5-Star Reviews | Proven Success (➡ InterviewOffers.com) | Ex BCG | 10Y+ Coaching

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

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Luca
Experte
Content Creator
antwortete am 2. März 2020
BCG |NASA | SDA Bocconi & Cattolica partner | GMAT expert 780/800 score | 200+ students coached

Hello,

There are 4 basic methods to evaluate a company:

  1. Discounted cash flow
  2. Multiples
  3. Market value for publicly listed company
  4. Benchmark with similar acquisition

Best,
Luca

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Anonym B antwortete am 1. März 2020

Benchmark to other peers/ transactions?

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