Comparable Companies Analysis Lecture Notes

Introduction

• Topic: Comparable Companies Analysis
• Comprehensive coverage of analysis steps and company selection.
• Based on Chapter 1 of Investment Banking Valuation: Leveraged Buyouts and Mergers & Acquisitions by Joshua Rosenbaum and Joshua Pearl.
• Recommended textbook for learning investment banking and technical skills.

Overview of Comparable Companies Analysis

• One of the primary methodologies for valuing a company.
• Provides a market benchmark for valuation.
• Frequently used for M&A, IPOs, restructurings, and investment decisions.
• Foundations based on similar companies sharing key business and financial characteristics.
• Important to combine with other analyses (precedent transactions, discounted cash flow).

Steps in Comparable Companies Analysis

1. Selecting the Universe of Comparable Companies
   • Foundation for trading comps.
   • Can be straightforward or complex depending on sector.
2. Locating Financial Information
   • Gather necessary data for analysis.
3. Spreading Key Statistics, Ratios, and Trading Multiples
   • Calculate market valuation measures (e.g., Enterprise Value, Equity Value).
4. Benchmarking Comparable Companies
   • Analyze relative strengths and weaknesses.
5. Determining Relevant Valuation
   • Use trading multiples to derive valuation range.

Detailed Steps Explained

Step 1: Selecting Comparable Companies

• Analyze target company’s business and financial profile.
• Consider sub-sector, products/services, customer base, distribution channels, geography.
• Understand differences within sectors to identify true comparables.

Step 2: Locating Financial Information

• Sources include:
  • 10-K and 10-Q Reports
  • Proxy Statements
  • Equity Research Reports
  • Bloomberg and Thomson Reuters

Step 3: Spreading Key Statistics

• Calculate metrics like:
  • Equity Value
  • Enterprise Value
  • EBITDA, Net Income, etc.
• Focus on understanding metrics for interviews and discussions.

Step 4: Benchmarking

• Detailed examination of comparable companies to understand targets relative ranking.
• Analyze similarities and discrepancies in size, growth rates, margins, leverage.

Step 5: Determining Valuation

• Use means and medians of trading multiples to establish valuation range.
• High and low multiples provide additional guidance for valuation.

Key Financial Metrics and Ratios

• Equity Value: Fully diluted shares outstanding x current share price.
• Enterprise Value: Equity Value + Total Debt + Preferred Stock + Non-controlling interest - Cash.
• Profitability Measures: Gross Profit, EBITDA, EBIT, Net Income.
• Growth Profile: Historical and estimated growth rates.
• Leverage Ratios: Debt to EBITDA, Debt to Total Capitalization, Interest Coverage Ratio.

Adjusting Financials

• Normalize financials for nonrecurring items to accurately assess performance.
• Distinguish between pre-tax and after-tax adjustments.

Valuation Multiples

• Equity Value Multiples: Price to Earnings Ratio (P/E).
• Enterprise Value Multiples: EV/EBITDA, EV/EBIT, EV/Sales.
• Sector-specific multiples can provide additional context.

Advantages and Disadvantages of Comparable Companies Analysis

Advantages:

• Market-based information reflecting current expectations.
• Quick, easy, and convenient to perform.
• Based on prevailing market data.

Disadvantages:

• Market data may be biased due to cycles.
• Absence of true comparable companies can lead to poor assumptions.
• Company-specific issues can distort valuations.

Conclusion

• Comparable companies analysis is a vital tool in the investment banking toolkit.
• Essential for deriving a defensible valuation range for clients.
• Encouragement to subscribe and engage with future content.