Reading 46: Private Company Valuation-LOS i 习题精选 2011, valuation, discuss, advantages, class

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Session 12: Equity Investments: Valuation Models
Reading 46: Private Company Valuation

LOS i: Demonstrate the market approaches to private company valuation (for example, guideline public company method, guideline transaction method, and prior transaction method), and discuss the advantages and disadvantages of each.

 

 

A private pharmaceutical firm is under consideration for acquisition where the financial buyer will pay with equity. Part of the payment to the sellers is based on FDA approval of the firm’s drug. If the analyst uses a market approach and comparable data from public firms, which of the following would most likely result in a price-multiple that is too high? The comparable data is:

A) from transactions where the buyer used cash.

B) for strategic buyers.

C) for transactions where the consideration was non-contingent.

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In market approaches, the analyst values the subject private firm using price multiples from previous public and private transactions. A strategic buyer is one who will have synergies with the target whereas a financial buyer does not. A financial transaction typically has a smaller price premium. So in this case, the comparable price-multiple will be too high.

If the acquisition involves the acquirer’s stock, the acquirer may be using overvalued shares to buy their target. Using comparables where cash is the consideration would result in lower price multiples.

Contingent consideration is payment to the sellers based on the achievement of specific goals such as FDA approval. Contingent consideration increases the risk to the seller and ceteris paribus, they would demand a higher price. Using comparables where the consideration was non-contingent would result in lower price multiples.

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An analyst is valuing a private firm on the behalf of a strategic buyer and deflates the average public company multiple by 15% to account for the higher risk of the private firm. Given the following figures, calculate the value of firm equity using the guideline public company method (GPCM).

Market value of debt	$4,100,000
Normalized EBITDA	$42,800,000
Average MVIC/EBITDA multiple	8.5
Control premium from past transaction	25%

The value of the firm’s equity is closest to:

A) $304,060,000.

B) $382,438,000.

C) $385,200,000.

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The adjustment to the MVIC/EBITDA multiple for the higher risk of the private firm is: 8.5 × (1 ? 0.15) = 7.225. Given that the buyer is a strategic buyer, a control premium adjustment should be made: 7.225 × (1 + 0.25) = 9.031.

The adjusted multiple is applied against the normalized EBITDA: 9.031 × $42,800,000 = $386,537,500.

Subtracting out the debt results in the equity value: $386,537,500 ? $4,100,000 = $382,437,500.

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A minority equity interest in a private firm is being valued where a discount for lack of control will be applied. The analyst will use a market approach and comparable data from other firms. Which of the following is the valuation method the analyst is using?

A) The guideline transactions method.

B) The prior transaction method.

C) The guideline public company method.

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In the guideline transactions method (GTM), the comparable price multiple data is for the sale of entire firms where control is acquired. Because the subject transaction is for a minority (noncontrolling) equity interest, a discount for lack of control (DLOC) is applied.

In the guideline public company method (GPCM), the comparable price multiple data is from noncontrolling interests, so no control adjustment would be made to this data if this was the method used.

In the prior transaction method (PTM), transactions are from the stock of the actual subject company, i.e. the data are not from other firms.