AuthorTopic: techical question for the ibankers on this forum
@2019-06-02 13:44:01
Hey guys,

I was just reviewing my technicals for the upcoming recruiting season and came across 3 issues I'd appreciate some clarification on:

1) For the precedent/comparable transactions valuation method, this guide I'm reading says "If you figure out what the key valuation parameter was, you can examine at what multiples of those parameters the comparable companies were valued". My question is, by dividing the valuation(market cap) of these past transactions by certain multiples (ie: sales, ebit, earning) one can get many possibilities. By using this valuation method how would I determine which multiple parameter was used to perform the original valuation?

2) Can anyone give me a quick overview of the concept of purchase vs pooling for m&a deals and the pros and cons of each (including goodwill and tax implications)?. I also hear that pooling is no longer legal by GAAP, is this true?

3) Why are the pros/cons of using EV/EBITDA vs P/E multiples when performing valuations and which multiples methods are generally the most prevalent in Ibanking and why?

Thanks for your time and knowledge guys.
@2019-06-20 07:50:51
Vault guide sucks and is riddled with errors. When doing comps and precedents you will examine several different valuation metrics of comparable co's to try and see which one is important. The common ones are: P/Book, P/CF, P/E, EV/EBITDA, EV/EBIT, EV/Sales as well as industry specific metrics like EV/Subscriber (Telecom) or EV/Tonne (steel). After examining these, some will be "tighter" than others. ie if the range of valuation on a P/E basis may be 18-20x earnings, where EV/Sales could range from 0.5x - 8x Sales. Generally, this would mean that P/E multiples are more important in the industry, and so that would be the more relevant metric. Then you would take your average P/E ratio for the industry and multiply your company's earnings by it to get the implied valuation.
Do this for several key metrics and get a valuation range.

Don't worry about this. You cannot use pooling anymore. You used to be able to do it and that was an advantage because then you would not have to amortize goodwill, but now that has changed.

EV is a total firm value. P/E is based on P*outstanding shares = Market Cap. Looking at market cap is just like looking at the tip of a honking iceberg. You cannot "value" the iceberg without getting an idea of what's going on below the surface (ie debt, minority interest etc)

Hope that helps...
@2019-07-08 10:19:11
1) As stated in the previous post, you look for whichever metric is grouped for the industry. I'd say the most common at this point is EV/EBITDA.

2) As stated above, this is a dated, and now worthless question.

3) P/E is utterly worthless when valuing a company. It isn't SO bad when valuing a stock. But for firm value, you're going to use EV/EBITDA or EV/FCFF or other operating cash flow metric.

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Edward Liu

Edward Liu