Chapters 1 and 2
Learn as much as possible about the target and
then complete the following steps:
1. Select the universe of comparable firms
2. Locate the necessary financial information
3. Calculate key statistics, ratios, and trading
multiples
4. Benchmark the comparable firms
5. Determine valuation
MV = Stock Price * Fully Diluted Shares Outstanding
 FD Shares Outstanding =
Basic Shares Outstanding + In-the-Money Options and
Warrants + In-the-Money Convertible Securities
 options and warrants – Treasury Stock Method
current share price = $35
basic shares outstanding = 500
in-the-money options = 15
weighted average strike = $25
 assumptions for convertible:
amount outstanding = $300
conversion price = $20
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need relevant trading multiples for
comparables universe
◦ measure of market valuation in the numerator
◦ measure of financial performance in the
denominator
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EV/EBITDA – independent of capital structure
and taxes
◦ also free from problems that come from differences
in D&A
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Pros:
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market-based
relativity
quick and convenient
current
Cons:
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market-based
absence of relevant comparables
potential disconnect from cash flow
company-specific issues
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employs a multiples based approach to derive an
implied valuation range for a given firm
transaction comps may provide higher multiple
range than trading comps
◦ Why?
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considerations when selecting comparable
transactions
◦ Was acquirer a strategic buyer or a financial sponsor?
◦ What were the buyer’s and seller’s motivations for the
transaction?
◦ Was the target sold through an auction process or a
negotiated sale? Was the nature of the deal friendly or
hostile?
◦ What was the purchase consideration (mix of cash and
stocks) ?
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form of payment and financing practices vary
with economic cycle
form of payment matters
choice of form of payment is influenced by
factors outside the firm
links exist between form of payment,
financing, and price
financing choice decisions benefit from
viewing from perspective of investor, creditor,
and competitor

returns to target shareholders
◦ payment in cash – target returns significantly higher
◦ payment in stock – target returns significantly
positive but lower than ones in cash deals

returns to buyer shareholders
◦ payment in cash – returns are zero to positive
◦ payment in stock – returns are significantly negative

tender offers amplify cash versus stock effect
◦ with tender offers paid in cash, returns to buyers
are even higher and returns from offers paid in
stock are even lower
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some shareholders prefer cash over stock
because of “guaranteed” value while others
prefer the opposite to participate in upside
potential of combined firms
primary types of consideration
◦ all cash
◦ stock-for-stock
 fixed exchange ratio
 floating exchange ratio
◦ cash and stock
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Pros:
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market-based
current
relativity
simplicity
objectivity
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market-based
time lag
existence of comparable acquisitions
availability of information
acquirer’s basis for valuation
Cons: