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.
- Identify comparable companies
- Calculate various relative measures like ratio measures based on current market prices for both companies
- Apply the relative values to the target firm
- 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:
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.