FactSet Mergerstat/BVR Control Premium Study Frequently Asked Questions (FAQs)
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Q:What is the legend for FactSet Mergerstat/BVR Control Premium Study data?
Note: All share price and other currency values are now reported in USD.
|Premium 2 Months||Premium computed by comparing the price ultimately paid to the common stock price two months prior to the announcement date. [ = (Purchase Price Per Share / 2 Month Price) - 1]|
|Premium 1 Month||Premium computed by comparing the price ultimately paid to the common stock price one month prior to the announcement date. [ = (Purchase Price Per Share / 1 Month Price) - 1]|
|Premium 1 Week||Premium computed by comparing the price ultimately paid to the common stock price one week prior to the announcement date. [ = (Purchase Price Per Share / 1 Week Price) - 1]|
|Premium 1 Day||Premium computed by comparing the price ultimately paid to the common stock price one day prior to the announcement date. [ = (Purchase Price Per Share / 1 Day Price) - 1]|
|Mergerstat® Control Premium||Premium computed by comparing the price ultimately paid to the unaffected stock price. [ = (Purchase Price Per Share / Unaffected Price) - 1] (also known as the Mergerstat Unaffected Control Premium in the book version)|
|Implied Minority Discount||An implied discount computed from the Mergerstat® Unaffected Control Premium. [ = 1 - [1/(1 + control premium)]|
|Mergerstat® Unaffected Price||Target company's common stock price per share unaffected by the acquisition announcement. Selected by Mergerstat® after analyzing each transaction|
|1 Day Price||Target company's common stock price per share one day prior to the acquisition announcement date.|
|1 Week Price||Target company's common stock price per share one week prior to the acquisition announcement date.|
|1 Month Price||Target company's common stock price per share one month prior to the acquisition announcement date.|
|2-Month Price||Target company's common stock price per share two months prior to the acquisition announcement date.|
|LTM Net Sales||Target company's sales based on the latest reported 12-month period (LTM) prior to the transaction's announcement date. Sales are reported in millions and rounded.|
|LTM EBITDA||Target company's earnings before interest, taxes, depreciation and amortization (EBITDA based on the latest reported 12-month period (LTM) prior to the transaction's announcement date. EBITDA is reported in millions and rounded.|
|LTM EBIT||Target company's earnings before interest and taxes (EBIT) based on the latest reported 12-month period (LTM) prior to the transaction's announcement date. EBIT is reported in millions and rounded.|
|LTM Net Income||Target company's net income (loss), excluding extraordinary items, based on the latest reported 12-month period (LTM) prior to the transaction's announcement date. Income is reported in millions and rounded.|
|BV Target Common Equity||Target company's book value (BV), sometimes referred to as shareholder's equity or net tangible assets, is based on the latest reported period prior to the transaction's announcement date. Book value is reported in millions and rounded.|
|Target Invested Capital||Target company's implied total invested capital (TIC) based on the sum of implied market value of equity plus the face value of total interest bearing debt and the book value of preferred stock outstanding prior to the announcement date. (Reported in millions)|
|Book Value per Share||The target company's BV Target Common Equity divided by the target company's Common Shares Outstanding.|
|Common Shares Outstanding||Target company's number of common shares outstanding shown in millions and rounded.|
|Operating Profit Margin||LTM EBIT / LTM Net Sales|
|Net Profit Margin||LTM Net Income / LTM Net Sales|
|Implied MVE||Target market value of equity (MVE) based on the purchase price per share times total shares outstanding reported in the period prior to the transaction's announcement date. Market value of equity is reported in millions and rounded.|
|Price/Sales||Purchase price-to-sales ratio for the target company based on the implied market value of equity divided by the latest reported 12-month net sales prior to the announcement date.|
|Price/Income||Purchase price-to-net income ratio for the target company based on the implied market value of equity divided by the latest reported 12-month net income prior to the announcement date.|
|Price/Book Value||Purchase price-to-book value ratio for the target company based on the implied market value of equity divided by book value of the target company.|
|Target Invested Capital/EBIT||Target TIC-to-EBIT ratio based on the target TIC divided by the latest reported 12-month earnings before interest and taxes prior to the announcement date.|
|Target Invested Capital/EBITDA||Target TIC-to-EBITDA ratio based on the target TIC divided by the latest reported 12-month earnings before interest, taxes, depreciation and amortization prior to the announcement date.|
|Date Announced||Date that the acquisition was announced.|
|Date Effective||Date that the acquisition became effective.|
|Deal Value||The aggregate purchase price given to shareholders of the target company's common stock by the acquiring company. Shown in millions and rounded.|
|Deal Currency||The target company's local currency.|
|% of Shares Acquired||Percent of the target company's common shares purchased by the acquirer in the acquisition.|
|% of Shares Held at Date Announced||Percent of the target company's common shares held by the acquiring company on the date announced.|
|% of Shares Held after Acquisition||Percent of the target company's common shares held by the acquiring company following the transaction.|
|Purchase Price Per Share||The total consideration paid per share for the target company's shares.|
|Common Shares Acquired||Number of target company's common shares acquired by the acquiring company in the acquisition, shown in millions and rounded.|
|Deal Exchange Rate||Previously, this was the Deal Exchange Rate used to convert the financial data of international deals. All financial data is now displayed in USD and this value is now displayed as 1.00.|
|Purchase Price/Share||The total consideration paid per share for the target company's shares.|
|Consideration||Consideration denotes the method of payment provided to the target company. The single character codes are C = Cash, D = Debt, L = Liabilities, S = Stock, X = Other (warrants, contingent payments, etc.)|
|Attitude||These are only applied to tender offers. The types of attitude are: Friendly, Neutral and Hostile.|
|Form||The form of the acquisition can take one of the following types:|
|Transaction Purpose||The two types of Transaction Purpose are Strategic and Financial. These are defined as follows:|
Q: What is the source of the information in the Control Premium Study?
A: The sources of the information used include SEC/government/regulatory filings and public announcements for mergers & acquisition transactions. Transactions included are only for when a public target is being acquired. An analyst will conduct further research into supporting press releases and SEC filings to find the unaffected price.
Q: Does the Control Premium Study include transactions of privately held companies?
A: No, the Control Premium Study only includes transactions where the target was a publicly traded company.
Q: I noticed that the Control Premium Study includes SIC codes that aren't part of the master OSHA list. Why is this and what are these codes?
A: In order to better classify the industries of certain acquirers and targets in the Control Premium Study, Mergerstat created additional SIC codes. These codes are not part of the master OSHA list, but are used in the Control Premium Study. These additional codes are:
- 2837 - Generic Drugs
- 3445 - Cables
- 6189 - Asset-Backed/Mortgage-Backed Securities
- 6197 - Finance Companies
- 6199 - Finance Services
- 6771 - Venture Capital/Private Equity
- 6781 - Special Purpose Vehicles
- 8747 - Project Management Services
- 9011 - Local Agencies
- 9141 - Sovereign Government
- 9151 - Province/State Government
- 9161 - Municipal Government
- 9171 - National Agencies
- 9181 - State Agencies
Q: Are bankruptcy deal types included the Mergerstat Control Premium?
A: No. Bankruptcy deal types are excluded from the database.
Q: What are the guidelines for calculating the Mergerstat Control Premium?
- Determination of the unaffected stock price
- Determination of the final price that the acquirer offers, per share, to purchase the target company's common stock, per terms of a tender offer
- Computation of the control premium using the following equation:(Purchase Price - Mergerstat Unaffected Price) / Mergerstat Unaffected Price
Q: How does Mergerstat determine an unaffected stock price?
A: Mergerstat looks at the trading volume and stock price fluctuations for the year prior to the date of announcement. If they discover there is a significant change in stock trading activity, they conduct research to determine the reason for such changes. If the reason is due to potential M&A activity (i.e. the target company has hired a financial advisor to seek buy-out opportunity, or the target company is in talks with potential buyers), then the earliest date before such announcements will be selected as the unaffected date, since this date is representative of normal pricing activity. If no talks or rumors were disclosed prior to the announcement, one day prior to announcement will be selected as the unaffected date. The Mergerstat unaffected stock price is the stock price on the unaffected date.
Q: How does Mergerstat determine which financial statements to use for the target acquired?
A: Mergerstat uses the latest financial statements that were available prior to the announce date. For example, if the announce date was February 25, 2011 (bidder agreed to buy target and announcement was made), Mergerstat would use the latest financial statements of December 31, 2010. If this deal closed on April 20, 2011, Mergerstat would not use the financial statements of March 31, 2010 - the latest financial statements available prior to the announce date would be used, which would be the financial statements of December 31, 2010.
Q: Can you give an example calculating the Mergerstat Control Premium?
A: As an example, let's use "Optical Coating Laboratory Inc."; SIC code is 3827.
- Unaffected price is $119.25 per share
- Purchase price per share is $400.55
- Control Premium is 2.36 (or 236%)
Q: Why do negative premiums exist in the FactSet Mergerstat/BVR Control Premium Study?
A: A number of factors can contribute to this. If the buyer is public and paying with its own stock, its stock price may have decreased between the announcement and the time the deal closes. An example of this is when Bank of America’s price dropped from $33.74 to $14.08. Another factor may be that the selling company could be struggling and on the verge of failure, as with Bear Stearns in 2008.
This paper available here provides research and insight into why negative premiums occur.
Q: What is "attitude" and how does Mergerstat determine the "attitude" for each transaction?
A: Attitude indicates the way the target's board of directors viewed the acquirer's proposal to enter into a transaction with the target - hostile, friendly, neutral. This data item is only populated if the transaction is a tender offer.
- Hostile: the target's board of directors viewed the acquirer's proposal unsatisfactory and recommended that shareholders reject the offer. Once a transaction is hostile, it will remain hostile even if it is subsequently recommended by the target's board.
- Friendly: the target's board of directors viewed the acquirer's proposal as satisfactory and recommended that their shareholders accept the offer.
- Neutral:the target's board has not yet made a determination of whether to reject or accept the unsolicited offer OR the offer is a legally required, mandatory tender offer for additional shares in which the target's board has no discretion.
Q: Describe the proper use of the Mergerstat Control Premium - how should it be selected for a given engagement?
A: The most likely case for the use of the Control Premium study would be for a publicly traded company whose quoted market price could serve as a fair value estimate.
Lower valuations are used by the acquirer to evaluate internal synergies, with higher valuations justified by the expected value of external synergies such as goodwill.
The CPS can also be used for valuations of private companies when determining multiples such as the price to book, price to revenue, and EBITDA multiples being used for companies of similar size
Q: I noticed that the FactSet Mergerstat/BVR Control Premium Study calculates a minority discount; what is the formula that the database uses to calculate this discount?
A: The database uses the following calculation: Implied Discount = 1 - [1/(1 + control premium)]
An alternate equation that can also be used to determine the Implied Median Minority Discount (where CP is the Control Premium) is:
ImpliedMinority Discount = CP / (1 + CP)
Q: Is there any theoretical research that affirms that the inverse of a control premium is an implied minority discount - or is this simply accepted in the business valuation profession?
A: The minority discount is widely perceived of as the inverse of the control premium, where as an acquirer would assumingly pay a higher price for control in a company and pay a lesser amount for a minority stake.
An alternative theory used by appraisers and other professionals, was that the control premiums that were observed in the public markets tended to be paid by strategic buyers, or buyers that had the ability to derive synergies from combinations or had other, specific, strategic intent.
There is another large category of acquirers of companies, the financial buyer. Financial buyers may not have the ability to derive synergies from an acquisition, but they can seek financial returns from their investments.
Q: How does a practitioner know when to apply a control premium or a minority discount?
A: This document is an excerpt from the PowerPoint for BVR's March 2008 webinar, Getting the Most from the FactSet Mergerstat/BVR Control Premium Study, and is helpful in thinking about this question.
Q: Does the FactSet Mergerstat/BVR Control Premium Study exclude any outliers or valuation multiples deemed to be outliers?
A: Because the CPS is the result of an analysis of the data by Mergerstat research analysts who review each controlling acquisition for its relevancy for inclusion in the Study, the CPS does not include transactions deemed to be outliers.
The CPS also does not include the valuation multiples for transactions where the valuation multiples fall outside the following ranges (the transactions are included, though):
- Price/Sales: 0-10X;
- Price/Income: 0-40X;
- Price/Book Value: 0-10X;
- TIC/EBIT: 0-35X
- TIC/EBITDA: 0- 25X
These values were established as acceptable ranges when the Study was first put together in the early 1990s. The ranges were developed and verified through Mergerstat's relationships with investment banking firms (specifically HLHZ). While it is true that excluding multiples from the ranges could introduce bias, FactSet's experience has been that the vast majority of transactions fall within these ranges (for at least one category). Please note the valuation multiples are excluded but the transactions are not.
Q: In the FactSet Mergerstat/BVR Control Premium Study, I notice none of the companies in the SIC code 6000 and 7000 series contains a calculation for the TIC/EBIT and TIC/EBITDA multiples. The information to calculate these multiples is often included in the underlying data, but a valuation multiple is not displayed. Why is this?
A: These valuation multiples are normally not meaningful when pricing financial companies, therefore, the FactSet Mergerstat/BVR Control Premium Study has never calculated the TIC/EBIT and TIC/EBITDA multiples for the companies that fall in the SIC code 6000 and 7000 series. This relates to all companies in the finance, insurance, and real estate industries.
Q: How does FactSet Mergerstat/BVR Control Premium Study calculate LTM sales figures for banks?
A: LTM revenues for banks are calculated from interest income and non-interest income such as commissions, foreign exchange income, etc.
Q: In the FactSet Mergerstat/BVR Control Premium Study, what is the amount of shares that the acquirer needs to purchase from the target for the transaction to be included in the study?
A: The study includes all deals in which the buyer has both a controlling stake in the target (50.1% or above) after the transaction and had a minority stake (or 0% stake) in the target prior to the purchase. So, if a company owned 40% and purchased 11%, the purchase of 11% would be included. But if a company had a 54% stake and bought 11%, the purchase of 11% would not be included. As of July 2016, 73% of all the transactions in the FactSet/Mergerstat BVR Control Premium Study were a 100% interest.
Q: How does Mergerstat determine the two transaction types (financial and strategic)?
A: By definition, they are as follows:
- Financial acquisition: Indicates the acquirer in the transaction is making the acquisition for investment purposes and is not making the acquisition for strategic business purposes. Financial buyers frequently include private equity firms, buyout funds, or any other finance related company whose principle line of business is not directly related to that of the target company. Financial buyers are generally concerned about their return on investment, the strength of the management team and the size of the market. They prefer to maintain current management and provide the tools and assistance for growth. They frequently make acquisitions with the intent of exiting at some point in the future when they can maximize their return.
- Strategic acquisition/merger: Indicates the acquirer in the transaction operates in the same business or industry as the target company in the transaction. Unlike financial buyers, strategic buyers are often looking to find synergies with the target company and generally want to acquire the target and hold on to it, whereas a financial buyer generally want to make an acquisition and exit their investment in the target company within a relatively short time frame. Strategic acquisitions can be horizontal (e.g., acquiring companies in same market sector to expand product/service offerings, etc.) or vertical (e.g., acquiring suppliers or other members of the distribution channel to improve efficiency and reduce costs, etc.).
Q: What is the main difference between the FactSet Mergerstat/BVR Control Premium Study database and the Mergerstat Review publication?
A: When calculating the premium offered, the Mergerstat Review uses the stock price on the acquisition five-days prior to the announcement date, while the FactSet Mergerstat/BVR Control Premium Study uses the unaffected price, which may be the stock price one day prior to the announcement or another day where the price was determined to be unaffected by rumors, negotiations, or announcement of the acquisition. Furthermore, the FactSet Mergerstat/BVR Control Premium Study includes only controlling purchases while the Mergerstat Review includes transactions when a 5% minimum stake is acquired.
The FactSet Mergerstat/BVR Control Premium Study provides the actual transactions, their multiples, control premium, and implied minority discount and builds from there to deliver the range, mean and median premium/discount, and other statistics selected by the user. The Control Premium Study database provides the ability to develop figures and statistics over a longer time period than the Mergerstat Review, and also only provides information on transactions of public companies, and only closed deals. The Control Premium Study database is updated quarterly, and your purchase includes a Control Premium Study Quarterly report in PDF format.
The Mergerstat Review provides individual transaction details in the Transaction Roster; Termination Fee Roster, Cancellation Roster, and List of Transactions by SIC Codes, (with details being customized for the specific needs of each roster). It should be noted that the individual transaction details in the Mergerstat Review are not as comprehensive as those in the Control Premium Study database. The Mergerstat Review also processes the individual transactions into aggregate results – used for overall M&A market analysis, industry analysis, geographical analysis. The Mergerstat Review provides information on transactions of both private and public companies, and for cancelled, closed and announced deals. Aggregate calculations only include announced and closed deals. The Mergerstat Review essentially does a lot of the heavy lifting for the user, by providing statistics, summaries, charts, and graphs. The Mergerstat Review publication is updated annually, but your purchase also includes the monthly emailed FactSet Mergerstat Monthly Review in PDF format.
Information in the Mergerstat Review is only limited to transactions involving where one party (either the acquirer or the seller) is a domestic company, and will contain public targets, private targets, and divestitures. The Control Premium Study is an in-depth extension of the public portion of the Mergerstat Review.
For a more detailed comparison, please see our Control Premium Study database vs. Mergerstat Review publication Comparison Chart.
There are advantages for any firm to owning both publications because there is little overlap. The Mergerstat Review covers a much broader spectrum of M&A deals and provides useful and insightful summaries. The Mergerstat/BVR Control Premium Study provides greater detail on individual transactions and focuses on control premiums and implied minority discounts.
Q: Are all transactions in the FactSet Mergerstat/BVR Control Premium Study stock purchases, or are some asset purchases?
A: The vast majority of transactions in the CPS are stock purchases. Generally, asset purchases get weeded out in FactSet's screening process for a variety of reasons. The price paid is for assets only, there was no per share amount reported for shareholders, the sale went through bankruptcy courts, there were no financials available for only the assets purchased, etc.
Q: I see that you show the harmonic mean in the transaction summary table results for the valuation multiples. What is the harmonic mean?
A: In the transaction summary of the subscriber search results we present medians, averages, coefficients of variation and harmonic means, depending on the data. Many practitioners and academics believe the harmonic mean is a better measure of central tendency for valuation multiples than the mean (the arithmetic average) or median (the middle value in a series). Quoting Wikipedia:
The harmonic mean is the preferable method for averaging multiples, such as the price/earnings ratio, in which price is in the numerator. If these ratios are averaged using an arithmetic mean (a common error), high data points are given greater weights than low data points. The harmonic mean, on the other hand, gives equal weight to each data point.
Shannon P. Pratt writes on page 140 of his second edition of The Market Approach to Valuing Businesses:
Although the harmonic mean is not used frequently, probably because it is unfamiliar to most readers of valuation reports, it is conceptually a very attractive alternative measure to central tendency.
In addition, Gilbert Matthews of Sutter Securities Inc. wrote an article in the June 2006 Business Valuation Update issue that explains what the harmonic mean is and provides a detailed example. Mark G. Filler of Filler & Associates P.A. replied to Mr. Matthews in the August 2006 Business Valuation Update. In addition, Mr. Matthews was quoted in the July 2001 Business Valuation Update as follows:
The harmonic mean is preferable in any ratio in which price is the numerator. For yields, when the price is in the denominator, an arithmetic mean is correct. An example is the “earnings yield” (EPS/P) rather than PE used by the British. If price is the numerator, the result is an inverted ratio for which the harmonic mean is statistically a more appropriate measure of central value. The harmonic mean gives an equal weight to an equal investment in each company, while the arithmetic mean gives three times the weight to a multiple of 30x compared to a multiple of 10x. For most other uses in valuation, the arithmetic mean is appropriate. For a fuller discussion, see “Fairness Opinions”1 by Mark M. Lee and Gilbert E. Matthews and page 139 and 140 of the Second Edition of The Market Approach to Valuing Businesses by Shannon Pratt.
1“Fairness Opinions” (Gilbert E. Matthews and M. Mark Lee), in The Handbook of Advanced Business Valuation, R. Reilly and R. Schweihs, eds. (McGraw Hill, 2000).
Lastly, here is an example that is provided by Toby Tatum and is representative for the business valuation profession.
When calculating the average selling price (SP) to earnings ratios for businesses within a defined industry let’s assume the known selling price to seller’s discretionary earnings (SDE) for one comparable company is 3.0 times earnings and for another it is 2.0 times earnings. The object of the exercise is to determine, on average in a defined industry, what a business is worth based on a given level of earnings. The arithmetic average of these two is 2.50 times earnings. This suggests that if a business has an SDE of $100,000 it is worth $250,000.
Now, do the math for each business purchase separately. Assume the first buyer paid $300,000 for a business with an SDE of $100,000 (i.e., 3.0 times SDE). Assume another buyer paid $300,000 for a business with annual SDE of $150,000 (i.e., 2.0 times SDE). The total price paid for both businesses is $600,000 and the total SDE purchased is $250,000. This yields an average SP/SDE ratio of $600,000 divided by $250,000 or 2.40 x SDE. 2.40 is the harmonic mean value of the Selling Price to Seller’s Discretionary Earnings in this industry. Thus we can conclude that, on average in this industry, if a business has an SDE of $100,000, it is worth $240,000, or for every $1.00 in SDE, the seller gets $2.40 (and not $2.50 as computed via the arithmetic mean above). Therefore, if one is to assume that the fair market value of a subject company is equal to the “average” selling price to earnings ratio for the comparable transactions selected to represent that industry, then the multiple to apply against the known earnings of the subject company must be the harmonic mean value of the comparables, and not the arithmetic mean.
Q: Would you please explain the "coefficient of variation" and how we should utilize and interpret each calculation?
A: The coefficient of variation = standard deviation/mean (the mean is also known as the average).
The coefficient of variation is a measure of dispersion around the mean (average).
The theory is that the valuation multiples with the lowest coefficient of variation are those with the least dispersion around their respective means and may be the better indicators of value. The value derived using these valuation multiples may be weighted more heavily than those with larger coefficient of variations.
Q: Can I use public company data to value a private company?
A: Yes, sale details on publicly traded companies (valuation multiples for publicly traded companies can be found in the Public Stats database and the FactSet Mergerstat/BVR Control Premium Study) can be used to value a private company. The indicated value utilizing the sale of an entire public company will result in a control value. It normally would not be appropriate to add a control premium. One or more discounts may be appropriate, depending on the valuation assignment. For more details, see The Market Approach to Valuing Businesses by Shannon Pratt (New York: John Wiley & Sons, 2001. p. 39).
Q: Why don't I see my SIC or NAICS code of interest in the search engine's list of SIC or NAICS codes?
A: The website's search engines use the underlying data to create the list of SIC and NAICS codes. If your SIC or NAICS code is not listed in the search engine, this means there are no transactions with that SIC or NAICS code in the database. You may want to search the other databases to see if they have any helpful data or expand your search criteria to include similar SIC or NAICS codes.
Q: Can I print more than one transaction at a time?
A: To print a group of transactions (the current group size is 25); on the search results page in the list of transactions, utilize the icon that looks like a red piece of paper – it is labeled “Print Detail Report Package”. When printing more than a couple of detailed transaction reports, this will save you time.
Q: I want the transaction reports to fit onto one page, instead of two. What can I do to make this possible?
A: The best solution is to maximize your print margins. When you print transaction reports, reduce the print margins to 0.25 inches and most will fit on a single page. Also, you should remove any header/footer information that your browser includes in web page printouts.
Q: Can I search by more than one SIC code or more than one NAICS code?
A: By pressing and holding down the left mouse button, you can drag your mouse cursor over a series of SIC codes.
By holding down the control button on the keyboard and clicking with the left mouse button on the codes you wish to search by, you can highlight a noncontiguous group of codes.
By selecting a code, holding the shift button, and selecting another code, you can highlight a contiguous group of codes.
Q: Each time after I alter my search of the database and I ask for a printable format, the results of my very first search continues to show in the printable format window. Is there something different that I can do so that I can print the results of the most current search?
A: If you are using Microsoft Internet Explorer, please do the following:
- In Internet Explorer, go to the Tools/Internet Options menu
- On the General tab, in the Temporary Internet Files section, click "Delete Files"
- On the General tab, in the Temporary Internet Files section, click "Settings"
- If it is not already clicked, click the "Every visit to the page" radio button, then click "OK"