Main Terms

Some of the commonly used terminology related to transaction comps is as follows:

Announcement date: Date on which news of the deal becomes public and the acquirer makes a formal offer for the target company.

Purchase consideration: This is the amount paid to shareholders of the target company and can be funded through cash, stock or a mix of both.

Offer price: This is the price per share offered by the acquirer to shareholders of the target. The offer price is usually higher than the target’s current share price.

Control premium: The difference between the offer price and target’s clean share price is the control premium. Shareholders of the target company need an incentive to sell and control premium offers that incentive. In exchange, the acquirer receives the right to control the target's business and underlying cash flows.

Deal financing: Having made an offer, the acquirer has to come up with the most optimum way to finance the deal through cash, stock or a mix of both.

When it comes to cash, an acquirer can use existing cash on its balance sheet. The deal can be funded by raising debt as well. In doing so, consideration must be paid to any potential downgrades by the credit rating agencies and overall ability to service debt. If stock is used, existing shareholders of the acquirer will be diluted.

Deal rationale: Any transaction has to make strategic sense and all buyers must seek approval of their shareholders. Acquirers usually justify the deal to their shareholders and investors using the following commonly used strategic rationales:

  • Diversification
  • Size, Economies of scale,
  • Synergies
  • Access to technology

Synergies: Synergies are benefits that are expected to occur as a result of the transaction. These typically include revenue synergies, opex synergies, capex synergies and tax benefits.

Deal multiples: Multiples can be either historical, last twelve months (LTM) or forward looking depending on availability of information. These multiples are then compared or benchmarked with other similar deals in the industry to determine if the acquirer over paid or under paid.

Deal advisors: Both the acquirer and target have their own respective advisors who execute the transaction and take the deal to the finish line. It is useful to know which advisors are involved with a particular transaction.