Precedent transactions analysis, deal by deal

1. 1. The deals

   Six acquisitions of industrial equipment makers since 2022

   Larchmont Controls (2025): $1,150 million ÷ $100 million = 11.5x. Sutter Valve (2024): $780 million ÷ $65 million = 12.0x. Ridgeway Pumps (2025): $2,600 million ÷ $200 million = 13.0x. Tamsin Instruments (2023): $1,890 million ÷ $180 million = 10.5x. Ovid Hydraulics (2022): $990 million ÷ $90 million = 11.0x. Pell Automation (2026): $1,400 million ÷ $112 million = 12.5x.

2. 2. Summarize

   Median 11.75x

   Sorted: 10.5x, 11.0x, 11.5x, 12.0x, 12.5x, 13.0x. The middle two are 11.5x and 12.0x, so the median is 11.75x. The 25th to 75th percentile, Excel's QUARTILE.INC, is our convention: 11.125x to 12.375x.

3. 3. Enterprise value

   $890 million to $990 million

   Apply the range to the target's $80 million of LTM EBITDA: 11.125x × 80 = $890 million and 12.375x × 80 = $990 million. At the median, $940 million.

4. 4. Per share

   $18.25 to $20.75

   Less $160 million of net debt, divided by 40 million shares: $18.25 to $20.75, $19.50 at the median.

5. 5. Read it

   22% above the comps median

   $19.50 against $16.00 from trading comps. A gap in this direction is what you'd expect, since deal prices include control. Say both numbers, and that a buyer would anchor on the lower one and a seller on the higher.

A buyer agrees to pay $40.00 cash a share for Larchmont Controls, whose stock closed at $32.00 before the deal news. Larchmont's last filing shows 25 million basic shares, 2.5 million options with a $24.00 strike, 0.5 million restricted stock units that vest when the company is sold, $180 million of debt the buyer repays at closing and $90 million of cash. Its year ends in December and the deal is announced after its third quarter. EBITDA was $94 million last year, $78 million for the first nine months of this year and $72 million for the same nine months last year. No preferred stock, no noncontrolling interest.

1. 1. Premium

   25%

   $40.00 ÷ $32.00 − 1 = 25%. Measure it against the price before the news, since the stock jumps once a deal leaks.

2. 2. Diluted shares at the offer

   26.5 million

   Use the offer price, not the old share price, in the treasury stock method. The options bring in 2.5 × $24.00 = $60 million, which buys back 1.5 million shares at $40.00, so 1 million net new shares. Add the 0.5 million RSUs: 25 + 1 + 0.5 = 26.5 million.

3. 3. Equity purchase price

   $1,060 million

   26.5 million × $40.00 = $1,060 million. That is the figure a press release often headlines.

4. 4. Transaction value

   $1,150 million

   Add the $180 million of debt and take off the $90 million of cash: $1,060 million + 180 − 90 = $1,150 million.

5. 5. LTM at announcement

   94 + 78 − 72 = 100

   Last year, plus this year's nine months, less last year's nine months: $100 million. The multiple is $1,150 million ÷ $100 million = 11.5x, Larchmont's row in example 1.

Two deals in the set aren't what their headline says. Sutter Valve's buyer paid $715 million at closing plus up to $100 million more if Sutter hits a profit goal, an earnout the buyer valued at $65 million when the deal closed. Sutter's LTM EBITDA was $65 million. Ridgeway Pumps was sold by a larger group for $2,600 million with a section 338(h)(10) election. Ridgeway's LTM EBITDA was $200 million and its assets had a tax basis of $500 million. For the tax math we assume, as our simplification, a 25% tax rate, that the whole step-up is goodwill and other intangibles deducted evenly over 15 years from year 1, that the buyer has the profits to use every deduction, and a 10% discount rate.

1. A1. Three ways to count

   11.00x, 12.00x or 12.54x

   Upfront only: $715 million ÷ $65 million = 11.00x. Upfront plus the earnout at its value at closing: $780 million ÷ $65 million = 12.00x. Upfront plus the maximum: $815 million ÷ $65 million = 12.54x.

2. A2. Pick one and say why

   Fair value at closing, our convention

   US accounting asks the buyer to record contingent consideration at its fair value on the acquisition date, so that figure is in the buyer's filings and is the closest thing to what was really paid. The maximum overstates the price. Upfront alone understates it. Whatever you pick, use it for every deal in the set and footnote it.

3. B1. What the election does

   A $2,100 million step-up

   With a 338 election, a stock purchase is treated for tax as a sale of the target's assets, so the buyer's tax basis in them rises from $500 million to, in our simplified version, the price paid, $2,600 million. That $2,100 million step-up is deducted at $140 million a year for 15 years.

4. B2. What the deductions are worth

   $266.2 million

   $140 million × 25% = $35 million of tax saved a year. Fifteen years of that at 10% is $35 million × 7.606 = $266.2 million today. Part of the price paid for that tax asset, not for Ridgeway's earnings.

5. B3. Net it out

   13.00x becomes 11.67x

   ($2,600 million − $266.2 million) ÷ $200 million = 11.67x. Netting it out is our convention, so the multiple compares with deals that had no step-up. Some bankers keep the headline and footnote it instead.

6. C. What it changes

   Range 11.13x to 11.92x

   With Ridgeway at 11.67x, the median falls from 11.75x to 11.58x and the 75th percentile from 12.38x to 11.92x. The target's range becomes $18.25 to $19.83 a share, $19.17 at the median.

1. 1

   Walk me through a precedent transactions analysis.

   Show follow-ups

   Short answer. Pick acquisitions of similar companies, usually from recent years. For each, build the transaction value from the offer and the target's LTM EBITDA or revenue at announcement. Compute the multiples, take the median and middle range, and apply them to the company you are valuing.

   Says how it differs from comps in one line: past control prices, not today's minority trading. Practice it, see a model answer

   • “How far back would you go?”
   • “What if there are only three deals?”
2. 2

   How do you get from a per-share offer price to a transaction value?

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   Short answer. Multiply the offer by diluted shares counted at the offer price, which gives the equity purchase price. Then add the debt the buyer takes on or repays, preferred stock and noncontrolling interest, and take off cash.

   Uses the offer price in the treasury stock method, as in example 2.

3. 3

   How old can a precedent deal be?

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   Short answer. There is no fixed rule. In our experience bankers look at the last three to five years and go further back only when there are few deals, noting where markets were different.

   Names one reason a deal from an unusual market would mislead.

4. 4

   Why use LTM EBITDA at announcement rather than today?

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   Short answer. Because the buyer priced the deal on what it knew then. Using a later number changes the multiple the buyer actually paid.

   Shows the stub-period math: last year, plus this year's year to date, less last year's.

1. 5

   What is a control premium, and how big is it usually?

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   Short answer. It is the amount a buyer pays above the target's undisturbed share price to own the whole company. It varies widely by deal and market, so measure it from the price before any news.

   Gives a range only as what you have seen in your own set, not as a rule. Practice it, see a model answer

2. 6

   Which valuation method usually gives the highest value?

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   Short answer. Usually precedent transactions, because the prices include control premiums and sometimes synergies. A DCF can come out higher or lower depending on its assumptions.

   Uses usually, and names a case where comps beat precedents. Practice it, see a model answer

3. 7

   Why can a strategic buyer usually pay more than a private equity firm?

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   Short answer. A strategic buyer can count on synergies, such as cutting shared costs or selling more through its own channels. A sponsor's price is capped by the debt the company can carry and the return its fund needs.

   Explains how that shows up in a precedent set that mixes both kinds of buyer. Practice it, see a model answer

4. 8

   Tell me about a recent deal you've followed.

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   Short answer. Name the buyer, the target, the price and the multiple, then why the buyer did it and whether the price made sense.

   Has the transaction value and multiple ready, built the way this page builds them. Practice it, see a model answer

1. 9

   What is an earnout, and how does it affect the multiple?

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   Short answer. Part of the price is paid later if the business hits a goal. Count it consistently: we use its fair value at closing, which the buyer records, rather than the maximum.

   Works the three versions of one deal, as in example 3. Practice it, see a model answer

2. 10

   What's the difference between an asset deal, a stock deal and a 338(h)(10) election?

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   Short answer. In an asset deal the buyer gets a new, higher tax basis in the assets. In a stock deal the target's assets normally keep their old tax basis, and the buyer gets a new basis only in the shares it bought. A 338(h)(10) election lets a stock purchase be treated as an asset sale for tax, so the buyer gets the step-up.

   Says why a buyer might pay more for a deal with a step-up. Practice it, see a model answer

3. 11

   Would a buyer rather pay with cash, debt or stock?

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   Short answer. It depends on what each costs the buyer: interest after tax for debt, lost interest on cash, and the earnings yield of its own shares for stock. Stock also shares the risk with the seller.

   Links the form of payment to how the deal shows up in the precedent set. Practice it, see a model answer

4. 12

   How would you show precedents next to comps and a DCF?

   Show follow-ups

   Short answer. As one bar on a football field chart, the range of implied values per share, with the current price or offer drawn across it.

   Says which bar you would trust most for this company. Practice it, see a model answer

• Equity price as the deal value

  Larchmont's headline is $1,060 million, but the buyer also took on $180 million of debt and got $90 million of cash. The multiple needs $1,150 million.

• Today's share price in the dilution math

  Options are counted at the offer price, which is what holders receive.

• Today's EBITDA

  The multiple uses the target's LTM EBITDA when the deal was announced.

• The earnout at its maximum

  That figure may never be paid. Use one rule for every deal and say which.

• Ignoring tax structure

  Ridgeway's 13.0x includes about $266.2 million paid for tax savings in our example.

• Premium measured from a leaked price

  Use the price before rumors or news, or the premium looks smaller than it was.