Comparable Transaction

A comparable transaction (comp transaction) is a basis for a method of valuing a company that is being targeted in a mergers and acquisitions (M&A) deal. Acquirers, with their investment bankers, look for comparable transactions - the more recent the better - that have involved companies with a similar business model with the company being valued. Also, the more comp transaction data, the better in order to derive a fair valuation. This method of valuation can help approximate the market-clearing price of the target that shareholders would be willing to accept.

The specific valuation metric in widespread usage for comparable transaction analysis is the EV-to-EBITDA multiple. EV is enterprise value and EBITDA is earnings before interest, taxes, depreciation and amortization. EBITDA is usually measured on an LTM (last twelve months) basis. A comparable transaction approach is generally used in conjunction with other valuation techniques including the discounted cash flow, price-to-earnings, price-to-sales, price-to-cash flow ratios and others the may be relevant to a particular industry. Data that is publicly available makes it possible to estimate the valuation of a target, but if many of the past transactions being used as comps are among private companies, there would likely be limited data to serve as guidance.

On May 23, 2017, Becton, Dickinson and Company (BD) filed a Form S-4 with the SEC for its intended acquisition of C.R. Bard, Inc. (Bard). The filing disclosed that Bard retained Goldman Sachs as a financial adviser to render a fairness opinion for the price that BD offered. On page 74 of the filing, nine comparable transactions from 2011 to 2016 were listed. Since the healthcare supply industry has undergone much consolidation in recent years, Goldman Sachs had much comp transaction data at its disposal, yielding a robust analysis for Bard shareholders and the company's board of directors to consider for BD's takeover offer.  

Bard's financial adviser calculated the range of EV-to-LTM EBITDA multiples of past transaction as well as the median multiple. Comparable transaction analysis was one of the valuation techniques for this deal (the others being price-earnings and price-to-earnings-growth multiples), but it was the leading one, as it is considered the standard for an investment bank's M&A practice. Although it is a standard technique, it is not considered the last word on valuing a targeted firm. In this example, Goldman Sachs makes a disclaimer that its comparable transaction analysis, along with the other valuation metric analyses, "do not purport to be appraisals nor do they necessarily reflect the prices at which businesses or securities may be sold."