By Victor Paquet (Mergersight Operations) and Carlo Lepoardi, Tommaso Arona, Matthew Gurevich (Boston University partners)
The Football Field Valuation Chart summarises and compares various valuation methodologies used to value a company. Each valuation methodology that we have reviewed in previous M&A technicals have had their shortcomings. Whether it is using multiples or making forecasting assumptions, there is a level of inaccuracy or uncertainty embedded in each model.
Therefore, when investment bankers seek to find an appropriate valuation range for a company, they will utilise and compare various valuation methodologies side-by-side to pinpoint a price, as each method yields a different valuation. This chart can be used to price companies during their IPO process or find the enterprise value of an M&A target.
A simple football field valuation matrix will include a company valued based on a DCF Valuation (see 2023.09.19 technical), LBO Analysis (see 2023.10.13 technical), Comparable Companies Analysis (see 2023.09.27 technical), Precedent Transactions (see 2023.09.29 technical), and a 52-week trading high/low. The goal of the Football Field Valuation Chart is to sanity-check various methodologies against one another.
By comparing these different methodologies with where the stock has been trading at in the past 52 weeks, we can determine whether a company is under/overvalued.
Comparing Valuation - Precedent Transactions
Typically, the methodology that will yield one of the highest valuations is Precedent Transactions. This is because Precedent Transactions utilises already done deals to arrive at a relative valuation.
However, this relative valuation method has a purchase premium embedded that is added on top of the original valuation. Something that is unique to this methodology as it is the only valuation methodology looking at companies post-transaction. Thus, the yielded valuation from Precedent Transactions will typically be higher compared to other methodologies as it includes a purchasing premium.
Comparing Valuation - Discounted Cash Flow Analysis (DCF)
The Discounted Cash Flow model is volatile in valuation. This is because it is based off key assumptions made by bankers in terms of revenue growth and EBITDA margins.
As investment bankers are involved in the sell-side process of a company, the assumptions made will tend to yield a higher valuation as it is in both the interest of the bankers and current owners of the existing company to have a higher valuation.
Comparing Valuation - Comparable Companies
The comparable companies analysis is subject to the equity markets of the respective industry. This is because the future expectations for the market at the moment of valuation is determinant of what multiple is applied. Currently, companies in fast growing sectors like Tech and AI may be overvalued using a comparable companies analysis because they are being benchmarks against companies like NVIDIA who currently trade at a > 100 P/E multiple.
However, if that peer company becomes incomparable, you will exclude it from your peer group, bringing the valuation back down again. Therefore, it is hard for a comparable company analysis to yield the highest valuation unless the peer group does not match the target company.
Comparing Valuation - Leverage Buyout Model (LBO)
An LBO will typically yield a lower valuation. This is because the model is based off the IRR rather than strategic value added.
Additionally, the cost of equity (see 2023.09.22 technical) which projections will be discounted by are typically higher than the cost of equity in public markets, due to the illiquidity of their investments.
Ultimately, private equity firms are also interested in purchasing companies at a cheaper price with the hopes of then selling it at a higher price in the future, as they are return-driven.
Additionally, a Football Field Valuation Chart can be expanded by including various different inputs/outlooks used in each valuation methodology. For example, as the Comparable Companies Analysis is based on multiples, the chart might include the valuation outcome based on various different multiples used. A lower multiple for a pessimistic or more conservative valuation, and a higher multiple for a more optimistic view, and a base case for a more steady outlook. Ultimately, you are aiming to reduce the impact of uncertainty or assumptions when finding a valuation range. Other examples include using a different WACC range, comparing valuation methods before and after the implementation of synergies (pre vs. post-transaction) , or using types of multiples (EV/EBIDTA vs. EV/Revenue or LTM vs. Forecast).
Understanding the shortcomings of each model and being able to compare and contrast the implications of each model is crucial. Something that will definitely appear on an investment banking interview in some shape or form.