Question #30
Reading: Reading 24 Private Company Valuation
PDF File: Reading 24 Private Company Valuation.pdf
Page: 17
Status: Incorrect
Correct Answer: A
Your Answer: B
Question
A private pharmaceutical firm is under consideration for acquisition where the financial buyer will pay with equity. Part of the payment to the sellers is based on FDA approval of the firm's drug. If the analyst uses a market approach and comparable data from public firms, which of the following would most likely result in a price-multiple that is too high? The comparable data is:
Answer Choices:
A. from transactions where the buyer used cash
B. for strategic buyers
C. for transactions where the consideration was non-contingent
Explanation
In market approaches, the analyst values the subject private firm using price multiples
from previous public and private transactions. A strategic buyer is one who will have
synergies with the target whereas a financial buyer does not. A financial transaction
typically has a smaller price premium. So in this case, the comparable price-multiple will
be too high.
If the acquisition involves the acquirer's stock, the acquirer may be using overvalued
shares to buy their target. Using comparables where cash is the consideration would
result in lower price multiples.
Contingent consideration is payment to the sellers based on the achievement of specific
goals such as FDA approval. Contingent consideration increases the risk to the seller and
ceteris paribus, they would demand a higher price. Using comparables where the
consideration was non-contingent would result in lower price multiples.