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Evaluating comparable company valuation

How to derive at the right multiple

Written by D. Mårtensson, S. Oljemark

Paper category

Bachelor Thesis

Subject

Business Administration>Finance

Year

2016

Abstract

Bachelor Thesis: The traditional valuation of comparable companies based on comparable multiples is performed by deriving multiples from peer groups that have similar value drivers and operate in the same or in some cases similar industries and countries. It means that they are facing similar macroeconomic conditions. The peer group is composed of listed companies (Meitner, 2006). The number of companies in the peer group depends on how many similar listed companies with suitable financial data can be found, but the number of companies often varies between 5 and 10 companies (Cooper & Cordeiro, 2008). The industry-specific multiples are obtained by using the average or median multiples of the peer group applicable to the basic indicators of the target company. Derived multiples are usually adjusted based on the analyst's personal experience and the personal risk of the target company compared with peers (Meitner, 2006). Create a chart containing derived multiple valuations to provide an overview of derived valuations. Specific values ​​or ranges are derived from graphs, sometimes using arithmetic averages, and sometimes adjusted based on the analyst’s recent experience. 3.2.2 Alternative comparable company valuation Alternative comparable multiple valuation is performed by deriving multiples from a group of peers that have similar value drivers and operate in the same or in some cases similar industries and countries, which means They face similar macro-economic conditions. The peer group is composed of listed companies (Meitner, 2006). The number of companies in the peer group depends on how many similar listed companies with suitable financial data can be found, but the number of companies varies between 5 and 10 companies (Cooper & Cordeiro, 2008). The industry-specific multiples from the peer group are plotted as the Y variable in the scatter chart. Compared with its main value driver, the X variable, the X variable is derived from the future annual growth of the compound estimate of the value driver. Draw a linear regression line to capture the relationship between multiples and their main value drivers. Then draw a vertical line from its x-axis to get the multiple of the target company; estimate future annual growth from the compound of its main value drivers until it intersects the linear regression line of the peer group. The other line is drawn horizontally on the y-axis; from the intersection of the linear regression lines of the same level group, the multiple associated with the target company’s compound estimated future annual growth rate from its value drivers is obtained. It is also possible to derive multiples by inserting the X variable into a simple linear regression equation. 3.3 Data All historical and forecast financial data come from Bloomberg Terminal. All data are entered and processed in Microsoft Excel by the author himself. All the companies used in the paper are listed on the Nasdaq Stockholm Stock Exchange. 3.4 Interviews Two interviews were conducted early in the project. Both interviews were recorded with a tape recorder and fully transcribed. Both interviews were semi-structured and consisted of several key questions to determine the areas to explore. These questions are designed in such a way that both the interviewee and the interviewer can diverge in order to pursue interesting answers or ideas in detail. This method was chosen because it allows people to elaborate on information that is important but previously considered irrelevant. The two authors of this bachelor's thesis were present in both interviews, and both authors asked questions. The first interview was conducted on April 24, 2016 with Farhad Tatar, an analyst at IK Investment Partners. He has approximately 2 years of experience in the financial industry. Most of the questions and answers are related to comparable company valuation methods and general company valuations. This interview lasted about an hour. The second interview was conducted on 11-05-2016, and the interviewee preferred to remain anonymous. This person has extensive experience in company valuation and has been in the financial industry since 2000. This interview focuses more on how to choose peer groups and how to get the correct multiple, and provides a clear explanation of the different methods of comparable company valuation, and also defines the difference between traditional and alternative comparable company valuation methods. difference. The interview lasted two hours. Semi-structured interviews are advantageous because they provide debt knowledge on how to implement comparable company valuations. The key questions and follow-up questions provide enough information and many insights to help answer the essay framework questions, as well as insights into how comparable company valuations are performed in practice. The answers provided by professionals also include useful insights in choosing academic literature, financial data, and choosing companies to use in case studies. The interview also gave us an insight into the mistakes most practitioners make. 3.5 Simple linear regression Interpretation of the data received from alternative estimation methods is quite simple, but people want to estimate the accuracy of the estimated value. The advantage of using simple linear regression is that it can be performed with very few observations (Simkiss et al., ud). In order to obtain a valuation, using alternative valuation methods, multiples must be derived from the composed peer group (Bernstrom, 2014). Read Less