Comparable Companies Analysis Lecture Notes

Introduction

• Discusses Comparable Companies Analysis (CCA)
• Comprehensive overview from selection to analysis
• Reference: Investment Banking Valuation textbook by Joshua Rosenbaum and Joshua Pearl

What is Comparable Companies Analysis?

• Primary methodology for valuing a target company
• Provides market benchmark for valuation
• Commonly used in:
  • Mergers and acquisitions
  • Initial public offerings
  • Restructuring
  • Investment decisions

Key Characteristics of Comparable Companies Analysis

• Similar companies provide relevant reference points for valuation
• Focus on current market conditions
• More relevant than discounted cash flow analysis in some cases
• Considered one of several tools for valuing companies

Five Steps in Comparable Companies Analysis

1. Select a Universe of Comparable Companies
   • Foundation of CCA
   • Simplicity varies by sector
2. Locate Financial Information
   • Required to analyze selected companies
3. Spread Key Statistics, Ratios, and Trading Multiples
   • Calculate market valuation measures
4. Benchmark Comparable Companies
   • Examine financial characteristics and performance drivers
5. Determine Relevant Valuation
   • Use trading multiples to derive valuation range

Step 1: Selection of Comparable Companies

• Conduct thorough due diligence on target company
• Consider business and financial profiles:
  • Subsector, products/services, customers, end markets, distribution channels, geography
• Challenges may arise with companies lacking clear comparables

Step 2: Locating Financial Information

• Sources include:
  • 10-K (annual report)
  • 10-Q (quarterly report)
  • Proxy statements
  • Equity research reports
  • Financial services like Bloomberg

Step 3: Spreading Key Statistics and Multiples

• Enter data into an input page for calculations
• Key financial statistics:
  • Equity value and Enterprise Value
  • Income statement items (e.g., EBITDA, net income)

Step 4: Benchmarking Comparable Companies

• Analyze financial strength relative to target
• Compare trading multiples and financial metrics

Step 5: Determining Valuation

• Use trading multiples to derive a valuation range
• Means and medians of relevant multiples guide valuation

Key Financial Metrics to Analyze

• Equity Value: Fully diluted shares outstanding x current share price
• Enterprise Value: Equity Value + total debt + preferred stock + non-controlling interest - cash
• Profitability Ratios: EBITDA, EBIT, growth rates
• Credit Ratios: Debt levels, ability to meet interest payments

Adjustments and Considerations

• Adjust for non-recurring items to reflect normalized performance
• Compare similar financial periods (calendarizing)
• Adjust for capital structure differences

Advantages of Comparable Companies Analysis

• Market-based information
• Quick and convenient
• Reflects current market data

Disadvantages of Comparable Companies Analysis

• Market expectations may be biased
• Absence of true comparables
• Disconnect from cash flow
• Company-specific issues may distort valuations

Conclusion

• Importance of conducting a thorough, detailed analysis
• CCA as a tool alongside other valuation methodologies
• Encouragement to engage with investment banking content further

Final Thoughts

• Reminder to like, subscribe, and comment for questions
• Further exploration of investment banking topics in future videos.