4.3. Precedent Transactions Analysis

Precedent transactions analysis, sometimes called comparable transactions analysis, focuses on recent mergers and acquisitions. Unlike comparable companies analysis, precedent transactions analysis uses actual transaction prices—what acquirers have really paid for similar companies. An exception is transactions in which both the acquirer and target were private companies, in which case the transaction price may need to be estimated.

These amounts will include any control premium that the buyer paid. A control premium is the amount over market value that a company’s acquirer pays for the privilege of gaining control over the company. Because precedent transaction multiples reflect control premiums, the multiples typically yield higher valuations than those of other valuation methods. In other words, the valuation range won’t just represent the value of the company, but rather the value plus a control premium. For this reason, precedent transactions analysis is appropriate for mergers and acquisitions, but not for IPOs.

A precedent transactions analysis includes the following steps:

Step 1: Identify a group of relevant precedent transactions. Like a comparable companies analysis, a precedent transactions analysis should begin with collecting as much data on the target company as possible, in order to develop a thorough understanding of the company. Depending on whether you’re evaluating the fairness of an acquisition offer that has already been made, or estimating the cost of a hypothetical acquisition, you might or might not know what the control premium is for the target company. If not, you will wind up comparing the target company’s actual EV or equity value, with no control premium, to a range of implied EVs or equity values that do include control premiums. This comparison may give you a rough idea of what the control premium “should” be.

A precedent transactions analysis depends on choosing