Investment bankers use a range of methodologies when working on valuation models, this tutorial will help you understand what the different types of methods are and when to use them. Below we take a look at the following investment banking valuations: Comparable Company Analysis, Precedent Transaction Analysis, Discounted Cash Flow Analysis, Leveraged Buyout/Recap Analysis, and others.
Graphic taken from the Investment Banking Interview Guide:
- Also known as “Public Market Valuation”
- Value based on market trading multiples of comparable companies (i.e. similar companies like Pizza Hut and Domino’s)
- Applied using historical and prospective multiples
- Does NOT include a control premium (since the companies are publicly traded, they would have to be acquired to include this)
Precedent Transaction Analysis
- Also referred to as “Private Market Valuation”
- Value based on multiples paid for comparable companies in sale transactions
- Includes control premium (since the acquirer had to pay for controlling interest in the deal)
- “Intrinsic” value of business
- Present value of projected free cash flows (FCF)
- Incorporates both short-term and long-term expected performance
- Risk in cash flows and capital structure captured in discount rate
Leveraged Buyout/Recap Analysis
- Value to a financial LBO buyer
- Value based on debt repayment and return on equity investment
Other Valuation Methods
- Liquidation Analysis
- Break-up Analysis
- Expected IPO Valuation
- Dividend Discount Model
Financial Models Available:
Discounted Cash Flow Model
Merger Model
IPO Model
Private Equity Growth Capital Model
Private Equity Training LBO
As an enthusiast deeply immersed in investment banking methodologies, I've extensively delved into various valuation techniques and their practical applications. Let's dissect the concepts mentioned in the article.
1. Comparable Company Analysis (CCA) Comparable Company Analysis, also known as "Public Market Valuation," involves deriving a company's value based on market trading multiples of similar publicly traded companies. It utilizes historical and prospective multiples of comparable firms (e.g., comparing Pizza Hut with Domino’s). CCA does not consider a control premium as these are publicly traded companies and would need acquisition to include this premium.
2. Precedent Transaction Analysis (PTA) Precedent Transaction Analysis, or "Private Market Valuation," determines a company's value based on multiples paid for similar companies in sale transactions. PTA includes a control premium because the acquiring entity has paid for controlling interest in the deal.
3. Discounted Cash Flow Analysis (DCF) Discounted Cash Flow Analysis focuses on the intrinsic value of a business. It calculates the present value of projected free cash flows, considering both short-term and long-term expected performance. DCF incorporates the risk in cash flows and the capital structure, captured in the discount rate.
4. Leveraged Buyout/Recap Analysis (LBO) Leveraged Buyout/Recap Analysis assesses the value to a financial buyer in an LBO scenario. It determines value based on debt repayment and return on equity investment.
5. Other Valuation Methods
- Liquidation Analysis: Determines the value of a company's assets if it were to be sold or liquidated.
- Break-up Analysis: Assesses the potential value of a company by breaking it down into its constituent parts or segments.
- Expected IPO Valuation: Estimates the value of a company's shares before an initial public offering.
- Dividend Discount Model: Calculates the present value of expected future dividends.
Financial Models Available:
- Discounted Cash Flow Model: Utilized for DCF analysis.
- Merger Model: Helps in analyzing the financial implications of a merger or acquisition.
- IPO Model: Assists in predicting the valuation and performance of a company post-initial public offering.
- Private Equity Growth Capital Model: Evaluates the financials of investing in growth capital in private equity.
- Private Equity Training LBO: A model used for training purposes in understanding Leveraged Buyouts in private equity.
Each valuation method serves a specific purpose and caters to different scenarios within the investment banking landscape, allowing professionals to make informed decisions based on various factors and market conditions.
