Page 51 - FINAL CFA II SLIDES JUNE 2019 DAY 8

LOS 33.i: Calculate the value of a private company
based on market approach methods and describe READING 33: PRIVATE COMPANYVALUATION
advantages and disadvantages of each method – 3
types! MODULE 33.3: MARKET-BASED VALUATION

Guideline Public Company Method (GPCM)
Uses price multiples from trade data for public companies, with adjustments to the multiples to account for differences between the subject
firm and the comparables.

When evaluating a controlling equity interest in a private firm, the control premium should be estimated, taking account of:

• Transaction type: Strategic or financial (nonstrategic)? A strategic buyer –larger premium, financial buyer, smaller premium!
• Industry conditions: M/A activity driving up acquisition prices? Share prices may already reflect some premium for control, and adding a
standard control premium may overstate the appropriate premium for control.
• Type of consideration: Share or cash offer? Estimates of the control premium when acquisitions are made with shares that are at higher
temporary or “bubble” values will be overstated.
• Reasonableness: The use of control premiums and price multiples can result in significant differences in valuations from historical pricing.

EXAMPLE: An analyst, Natalie Hoskins, is valuing a private firm, RAC, using the GPCM and MVIC to EBITDA multiples. Hoskins has
gathered data for comparable public firms; however they are larger in size than Rensselaer. Hoskins decided to deflate the average public
company multiple by 20% to account for the higher risk of Rensselaer. A premium of 30% was paid for a firm by an acquiring firm in the
same industry. The acquirer exchanged stock for the target.

1. Comment on the relevance of the
information above for the valuation of RAC.
2. Calculate the equity value of RAC using the
GPCM.