Note on Precedent Transactions

Definition:

Precedent transactions, often referred to as "comparable transactions" or "comps," are a valuation

methodology used in finance and investment banking to determine the value of a company or asset by
comparing it to the prices paid for similar companies or assets in previous transactions. This
methodology is particularly common in mergers and acquisitions (M&A) and is used to assess the
potential value of a target company based on the prices paid for similar companies in the past.

Methodology:

The process of conducting a precedent transactions analysis involves the following steps:

Identifying Comparable Transactions: Analysts first identify and gather information on recent M&A
transactions within the same industry or sector that are comparable to the company being valued.
These transactions should be similar in terms of industry, size, geographic location, and other relevant
characteristics.

Gathering Transaction Data: Detailed data about the comparable transactions are collected, including
transaction values, deal terms, financial metrics, and any relevant qualitative information.

Adjusting for Differences: Companies involved in different transactions may have varying financial
conditions, growth prospects, and other factors. To make the comparisons meaningful, analysts adjust
the financial metrics of the comparable transactions to reflect the target company's attributes. Common
adjustments include normalizing earnings, adjusting for size, growth rates, and other relevant factors.

Calculating Valuation Multiples: Key valuation multiples such as Price-to-Earnings (P/E), Price-to-Sales
(P/S), Enterprise Value-to-EBITDA (EV/EBITDA), and others are calculated based on the adjusted
transaction data.

Applying Multiples to Target Company: Once the relevant valuation multiples are calculated, they are
applied to the target company's financial metrics to estimate its potential value. This provides a range of
potential values based on the precedent transactions.
Sensitivity Analysis: Analysts often perform sensitivity analysis by applying different multiples to assess
the impact on the valuation, considering a range of possible outcomes.

Limitations:

While precedent transactions analysis can provide valuable insights, it has certain limitations:

Limited Availability of Comparable Data: Finding truly comparable transactions can be challenging,
especially if the industry is niche or if recent relevant transactions are limited.

Lack of Timeliness: The valuation may not accurately reflect current market conditions, as it relies on
historical transactions that may have occurred months or even years ago.

Influence of Market Sentiment: If past transactions were influenced by market conditions or investor
sentiment at the time, these factors might not be relevant to the present valuation.

Assumption-based Adjustments: The accuracy of the analysis heavily depends on the quality of
adjustments made for differences between the comparable transactions and the target company.

Conclusion:

Precedent transactions analysis is a widely used valuation method that provides insights into how the
market has priced similar companies or assets in the past. While it is an important tool in the valuation
toolkit, it should be used in conjunction with other valuation methods and with careful consideration of
its limitations to arrive at a well-rounded and informed valuation conclusion.