Module 25.3 LOS 25.j: Estimate the value of a target company using comparable company and comparable transaction analyses

In comparable company analysis, we calculate an estimate of firm value using relative valuation metrics, and then add a takeover premium to determine a fair price for purchase.

  1. Identify comparable companies
  2. Calculate various relative measures like ratio measures based on current market prices for both companies
  3. Apply the relative values to the target firm
  4. Estimate the takeover premium which is the excess price over target stock price that acquirer must pay to entice target shareholders to sell. This value is expressed as a ratio over the current target stock price:

where:

TP = takeover premium

DP = deal price per share

SP = target company’s stock price

  • Calculate the final estimate fair value by taking relative fair value from step 3 and adjusting with the takeover premium.

For comparable transaction analysis we perform similar steps, but do not need to adjust for a takeover premium as that is baked into previous transactions already.

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