Page 56 - FINAL CFA II SLIDES JUNE 2019 DAY 6

EXAMPLE: Valuing a merger target using comparable
transaction analysis: Ken Lloyd, an investment banker, READING 25: MERGERS AND ACQUISITIONS
has been retained by the Gase Equipment Company to
estimate a fair price for the proposed acquisition of the MODULE 25.3: TARGET COMPANY VALUATION
Peerless Saw Company. Lloyd decides to use comparable
transaction analysis to value Peerless and has gathered
information concerning recent M&A transactions in the
industrial equipment industry, which is shown in the
following figure. Calculate the appropriate valuation
metrics and using the mean of those metrics, and estimate
the price that Gase Equipment should pay for the Peerless
Saw Company.

The next figure applies those mean values to the statistics for Peerless Saw. Since the four
relative value metrics all produce estimates that are relatively close, it is appropriate to use
an average of the four estimates as the estimated value for Peerless Saw.

Answer: Step 1: Identify a set of recent takeover transactions.
Step 2: Calculate various relative value measures based on completed
deal prices for the companies in the sample.

Step 3: Calculate descriptive statistics for the relative value metrics
and apply those measures to the target firm.
The estimated target value of $76.02 is considered a fair price to pay for control of Peerless
Saw. Note that since we used deal prices from actual M&A transactions as the basis for our
analysis, there is no need to calculate a separate transaction premium because it is already
incorporated into the price.