Assessing fair price

M&A Case
New answer on Sep 01, 2020
6 Answers
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Anonymous A asked on Mar 01, 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
Expert
updated an answer on Mar 02, 2020
McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 300+ 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

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Emily
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Content Creator
replied on Sep 01, 2020
BCG Project Leader | 3+ years interview experience for BCG SEA recruiting | Kellogg MBA, NTU, Peking University

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
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replied on Mar 02, 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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replied on Mar 02, 2020
#1 Expert for Coaching Sessions (3.700+) | 1.300+ Reviews with 100% Recommendation Rate | Ex BCG | 8+ Years of 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
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replied on Mar 02, 2020
BCG |NASA |20+ interviews with 100% success rate| 120+ students coached |GMAT expert 780/800 score

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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Anonymous B replied on Mar 01, 2020

Benchmark to other peers/ transactions?

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Sidi gave the best answer

Sidi

McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 300+ candidates secure MBB offers
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