Screen for Comparable Acquisitions

The initial goal when screening for comparable acquisitions is to locate as many potential transactions as possible for a relevant, recent time period and then further refine the universe. Below are several suggestions for creating an initial list of comparable acquisitions.

• Search M&A databases using a financial information service such as Bloomberg (see Appendix 2.1), which allows for the screening of M&A transactions through multiple search criteria, including industry, transaction size, form of consideration, time period, and geography, among others
• Examine the target's M&A history and determine the multiples it has paid and received for the purchase and sale, respectively, of its businesses (see Appendix 2.2)
• Revisit the target's universe of comparable companies (as determined in Chapter 1) and examine the M&A history of each comparable company
• Search merger proxies for comparable acquisitions, as they typically contain excerpts from fairness opinion(s) that cite a list of selected transactions analyzed by the financial advisor(s)
• Review equity and fixed income research reports for the target (if public), its comparable companies, and sector as they may provide lists of comparable acquisitions, including relevant financial data (for reference purposes only)

Examine Other Considerations

Once an initial set of comparable acquisitions is selected, it is important for the banker to gain a better understanding of the specific circumstances and context for each transaction. Although these factors generally do not change the list of comparable acquisitions to be examined, understanding the “story” behind each transaction helps the banker better interpret the multiple paid, as well as its relevance to the target being valued. This next level of analysis involves examining factors such as market conditions and deal dynamics.

Public Targets

Proxy Statement

In a one-step merger transaction,¹ the target obtains approval from its shareholders through a vote at a shareholder meeting. Prior to the vote, the target provides appropriate disclosure to the shareholders via a proxy statement. The proxy statement contains a summary of the background and terms of the transaction, a description of the financial analysis underlying the fairness opinion(s) of the financial advisor(s), a copy of the definitive purchase/sale agreement (“definitive agreement”), and summary and pro forma financial data (if applicable, depending on the form of consideration). As such, it is a primary source for locating key information used to spread a precedent transaction. The proxy statement is filed with the SEC under the codes PREM14A (preliminary) and DEFM14A (definitive).

In the event that a public acquirer is issuing new shares in excess of 20% of its pre-deal shares outstanding to fund the purchase consideration,² it will also need to file a proxy statement for its shareholders to vote on the proposed transaction. In addition, a registration statement to register the offer and sale of shares must be filed with the SEC if no exemption from the registration requirements is available.³

Schedule TO/Schedule 14D-9

In a tender offer, the acquirer offers to buy shares directly from the target's shareholders.⁴ As part of this process, the acquirer mails an Offer to Purchase to the target's shareholders and files a Schedule TO. In response to the tender offer, the target files a Schedule 14D-9 within ten business days of commencement. The Schedule 14D-9 contains a recommendation from the target's board of directors to the target's shareholders on how to respond to the tender offer, typically including a fairness opinion. The Schedule TO and the Schedule 14D-9 include the same type of information with respect to the terms of the transaction as set forth in a proxy statement.

Registration Statement/Prospectus (S-4, 424B)

When a public acquirer issues shares as part of the purchase consideration for a public target, the acquirer is typically required to file a registration statement/prospectus in order for those shares to be freely tradeable by the target's shareholders. Similarly, if the acquirer is issuing public debt securities (or debt securities intended to be registered)⁵ to fund the purchase, it must also file a registration statement/prospectus. The registration statement/prospectus contains the terms of the issuance, material terms of the transaction, and purchase price detail. It may also contain acquirer and target financial information, including on a pro forma basis to reflect the consummation of the transaction (if applicable, depending on the materiality of the transaction).⁶

Schedule 13E-3

Depending on the nature of the transaction, a “going private”⁷ deal may require enhanced disclosure. For example, in an LBO of a public company where an “affiliate” (such as a senior company executive or significant shareholder) is part of the buyout group, the SEC requires broader disclosure of information used in the decision-making process on a Schedule 13E-3. Disclosure items on Schedule 13E-3 include materials such as presentations to the target's board of directors by its financial advisor(s) in support of the actual fairness opinion(s).

8-K

In addition to the SEC filings mentioned above, key deal information can be obtained from the 8-K that is filed upon announcement of the transaction. Generally, a public target is required to file an 8-K within four business days of the transaction announcement. In the event a public company is selling a subsidiary or division that is significant in size, the parent company typically files an 8-K upon announcement of the transaction. Public acquirers are also required to file an 8-K upon announcement of material transactions.⁸ A private acquirer does not need to file an 8-K as it is not subject to the SEC's disclosure requirements. When filed in the context of an M&A transaction, the 8-K contains a brief description of the transaction, as well as the corresponding press release and definitive agreement as exhibits.

The press release filed upon announcement typically contains a summary of the deal terms, transaction rationale, and a description of the target and acquirer. In the event there are substantial changes to the terms of the transaction following the original announcement, the banker uses the 8-K for the final announced deal (and enclosed press release) as the basis for calculating the deal's transaction multiples. This is a relatively common occurrence in competitive situations where two or more parties enter into a bidding war for a target.

10-K and 10-Q

The target's 10-K and 10-Q are the primary sources for locating the information necessary to calculate its relevant LTM financial statistics, including adjustments for non-recurring items and significant recent events. The most recent 10-K and 10-Q for the period ending prior to the announcement date typically serve as the source for the necessary information to calculate the target's LTM financial statistics and balance sheet data. In some cases, the banker may use a filing after announcement if the financial information is deemed more relevant. The 10-K and 10-Q are also relied upon to provide information on the target's shares outstanding and options/warrants.⁹

Equity and Fixed Income Research

Equity and fixed income research reports often provide helpful deal insight, including information on pro forma adjustments and expected synergies. Furthermore, research reports typically provide color on deal dynamics and other circumstances.

Private Targets

A private target (i.e., a non-public filer) is not required to publicly file documentation in an M&A transaction as long as it is not subject to SEC disclosure requirements. Therefore, the sourcing of relevant information on private targets depends on the type of acquirer and/or acquisition financing.

When a public acquirer buys a private target (or a division/subsidiary of a public company), it may be required to file certain disclosure documents. For example, in the event the acquirer is using public securities as part of the purchase consideration for a private target, it is required to file a registration statement/prospectus. Furthermore, if the acquirer is issuing shares in excess of 20% of its pre-deal shares, a proxy statement is filed with the SEC and mailed to its shareholders so they can evaluate the proposed transaction and vote. As previously discussed, regardless of the type of financing, the acquirer files an 8-K upon announcement and completion of material transactions.

For LBOs of private targets, the availability of necessary information depends on whether public debt securities (typically high yield bonds) are issued as part of the financing. In this case, the S-4 contains the relevant data on purchase price and target financials to spread the precedent transaction.

Private acquirer/private target transactions (including LBOs) involving nonpublic financing are the most difficult transactions for which to obtain information because there are no SEC disclosure requirements. In these situations, the banker must rely on less formal sources for deal information, such as press releases and news articles. These news pieces can be found by searching a company's corporate website as well as through information services such as Bloomberg. The banker should also search relevant sector-specific trade journals for potential disclosures. Any information provided on these all-private transactions, however, relies on discretionary disclosure by the parties involved. As a result, in many cases it is impossible to obtain even basic deal information that can be relied upon, thus precluding these transactions from being used to derive valuation.

Summary of Primary SEC Filings in M&A Transactions

Exhibit 2.3 provides a list of key SEC filings that can be used to source relevant deal-related data and target financial information for performing precedent transactions. In general, if applicable, the definitive proxy statement or tender offer document should serve as the primary source for deal-related data.

Exhibit 2.4 provides an overview of the sources for transaction information in public and private company transactions.

Calculation of Key Financial Statistics and Ratios

The process for spreading the key financial statistics and ratios for precedent transactions is similar to that outlined in Chapter 1 for comparable companies (see Exhibits 1.53 and 1.54). Our focus for this section, therefore, is on certain nuances for calculating equity value and enterprise value in precedent transactions, including under different purchase consideration scenarios. We also discuss the analysis of premiums paid and synergies.

Equity Value

Equity value (“equity purchase price” or “offer value”) for public targets in precedent transactions is calculated in a similar manner as that for comparable companies. However, it is based on the announced offer price per share as opposed to the closing share price on a given day. To calculate equity value for public M&A targets, the offer price per share is multiplied by the target's fully diluted shares outstanding at the given offer price. For example, if the acquirer offers the target's shareholders $20.00 per share and the target has 50 million fully diluted shares outstanding (based on the treasury stock method at that price), the equity purchase price would be $1,000 million ($20.00 × 50 million). In those cases where the acquirer purchases less than 100% of the target's outstanding shares, equity value must be grossed up to calculate the implied equity value for the entire company.

In calculating fully diluted shares for precedent transactions, all outstanding in-the-money options and warrants are converted at their weighted average strike prices regardless of whether they are exercisable or not.¹⁰ As with the calculation of fully diluted shares outstanding for comparable companies, out-of-the money options and warrants are not assumed to be converted. For convertible and equity-linked securities, the banker must determine whether they are in-the-money and perform conversion in accordance with the terms and change of control provisions as detailed in the registration statement/prospectus.

For M&A transactions in which the target is private, equity value is simply enterprise value less any assumed/refinanced net debt.

Purchase Consideration

Purchase consideration refers to the mix of cash, stock, and/or other securities that the acquirer offers to the target's shareholders. In some cases, the form of consideration can affect the target shareholders' perception of the value embedded in the offer. For example, some shareholders may prefer cash over stock as payment due to its guaranteed value. On the other hand, some shareholders may prefer stock compensation in order to participate in the upside potential of the combined companies. Tax consequences and other issues may also play a decisive role in guiding shareholder preferences.

The three primary types of consideration for a target's equity are all-cash, stock-for-stock, and cash/stock mix.

All-Cash Transaction

As the term implies, in an all-cash transaction, the acquirer makes an offer to purchase all or a portion of the target's shares outstanding for cash (see Exhibit 2.6). This makes for a simple equity value calculation by multiplying the cash offer price per share by the number of fully diluted shares outstanding. Cash represents the cleanest form of currency and certainty of value for all shareholders. However, receipt of such consideration typically triggers a taxable event as opposed to the exchange or receipt of shares of stock, which, if structured properly, is not taxable until the shares are eventually sold.

Stock-for-Stock Transaction

In a stock-for-stock transaction, the calculation of equity value is based on either a fixed exchange ratio or a floating exchange ratio (“fixed price”). The exchange ratio is calculated as offer price per share divided by the acquirer's share price. A fixed exchange ratio, which is more common than a fixed price structure, is a ratio of how many shares of the acquirer's stock are exchanged for each share of the target's stock. In a floating exchange ratio, the number of acquirer shares exchanged for target shares fluctuates so as to ensure a fixed value for the target's shareholders.

Fixed Exchange Ratio

A fixed exchange ratio defines the number of shares of the acquirer's stock to be exchanged for each share of the target's stock. As per Exhibit 2.7, if AcquirerCo agrees to exchange one half share of its stock for every one share of TargetCo stock, the exchange ratio is 0.5.

For precedent transactions, offer price per share is calculated by multiplying the exchange ratio by the share price of the acquirer, typically one day prior to announcement (see Exhibit 2.8).

In a fixed exchange ratio structure, the offer price per share (value to target) moves in line with the underlying share price of the acquirer. The amount of the acquirer's shares received, however, is constant (see Exhibit 2.9). For example, assuming TargetCo has 50 million fully diluted shares outstanding, it will receive 25 million shares of AcquirerCo stock. The shares received by the target and the respective ownership percentages for the acquirer and target remain fixed regardless of share price movement between execution of the definitive agreement (“signing”) and transaction close (assuming no structural protections for either the acquirer or target, such as a collar).¹¹

Following a deal's announcement, the market immediately starts to assimilate the publicly disclosed information. In response, the target's and acquirer's share prices begin to trade in line with the market's perception of the transaction.¹² Therefore, the target assumes the risk of a decline in the acquirer's share price, but preserves the potential to share in the upside, both immediately and over time. The fixed exchange ratio is more commonly used than the floating exchange ratio as it “links” both parties' share prices, thereby enabling them to share the risk (or opportunity) from movements post-announcement.

Floating Exchange Ratio

A floating exchange ratio represents the set dollar amount per share that the acquirer has agreed to pay for each share of the target's stock in the form of shares of the acquirer's stock. As per Exhibit 2.10, TargetCo shareholders will receive $20.00 worth of AcquirerCo shares for each share of TargetCo stock they own.

In a floating exchange ratio structure, as opposed to a fixed exchange ratio, the dollar offer price per share (value to target) is set, and the number of shares exchanged fluctuates in accordance with the movement of the acquirer's share price (see Exhibit 2.11).

The number of shares to be exchanged is typically based on an average of the acquirer's share price for a specified time period prior to transaction close. This structure presents target shareholders with greater certainty in terms of value received as the acquirer assumes the full risk of a decline in its share price (assuming no structural protections for the acquirer). In general, a floating exchange ratio is used when the acquirer is significantly larger than the target. It is justified in these cases on the basis that while a significant decline in the target's business does not materially impact the value of the acquirer, the reciprocal is not true.

Cash and Stock Transaction

In a cash and stock transaction, the acquirer offers a combination of cash and stock as purchase consideration (see Exhibit 2.12).

The cash portion of the offer represents a fixed value per share for target shareholders. The stock portion of the offer can be set according to either a fixed or floating exchange ratio. The calculation of offer price per share and equity value in a cash and stock transaction (assuming a fixed exchange ratio) is shown in Exhibit 2.13.

Enterprise Value

Enterprise value (“transaction value”) is the total value offered by the acquirer for the target's equity interests, as well as the assumption or refinancing of the target's net debt. It is calculated for precedent transactions in the same manner as for comparable companies, comprising the sum of equity, net debt, preferred stock, and noncontrolling interest. Exhibit 2.14 illustrates the calculation of enterprise value, with equity value calculated as offer price per share (the sum of the target's “unaffected” share price and premium paid, see “Premiums Paid”) multiplied by the target's fully diluted shares outstanding.

Equity Value Multiples

Offer Price per Share-to-LTM EPS / Equity Value-to-LTM Net Income

The most broadly used equity value multiple is the P/E ratio, namely offer price per share divided by LTM diluted earnings per share (or equity value divided by LTM net income, see Exhibit 2.15).

Enterprise Value Multiples

Enterprise Value-to-LTM EBITDA, EBIT, and Sales

As in trading comps, enterprise value is used in the numerator when calculating multiples for financial statistics that apply to both debt and equity holders. The most common enterprise value multiples are shown in Exhibit 2.16, with EV/LTM EBITDA being the most prevalent. As discussed in Chapter 1, however, certain sectors may rely on additional or other metrics to drive valuation (see Exhibit 1.33).

Premiums Paid

The premium paidrefers to the incremental dollar amount per share that the acquirer offers relative to the target's unaffected share price, expressed as a percentage. As such, it is only relevant for public target companies. In calculating the premium paid relative to a given date, it is important to use the target's unaffected share price so as to isolate the true effect of the purchase offer.

The closing share price on the day prior to the official transaction announcement typically serves as a good proxy for the unaffected share price. However, to isolate for the effects of market gyrations and potential share price “creep” due to rumors or information leakage regarding the deal, the banker examines the offer price per share relative to the target's share price at multiple time intervals prior to transaction announcement (e.g., one trading day, seven calendar days, and 30 calendar days or more).¹⁴

In the event the seller has publicly announced its intention to pursue “strategic alternatives” or there is a major leak prior to announcement, the target's share price may increase in anticipation of a potential takeover. In this case, the target's share price on the day(s) prior to the official transaction announcement is not truly unaffected. Therefore, it is appropriate to examine the premiums paid relative to the target's share price at various intervals prior to such an announcement or leak in addition to the actual transaction announcement.

The formula for calculating the percentage premium paid, as well as an illustrative example, is shown in Exhibit 2.17. In this example, we calculate a 35% premium assuming that the target's shareholders are being offered $67.50 per share for a stock that was trading at an unaffected share price of $50.00.

Synergies

Synergies refer to the expected cost savings, growth opportunities, and other financial benefits that occur as a result of the combination of two businesses. Consequently, the assessment of synergies is most relevant for transactions where a strategic buyer is purchasing a target in a related business.

Synergies represent tangible value to the acquirer in the form of future cash flow and earnings above and beyond what can be achieved by the target on a stand-alone basis. Therefore, the size and degree of likelihood for realizing potential synergies play an important role for the acquirer in framing the purchase price for a particular target. Theoretically, higher synergies translate into a higher potential price that the acquirer can pay. In analyzing a given comparable acquisition, the amount of announced synergies provides important perspective on the purchase price and multiple paid.

Upon announcement of a material acquisition, public acquirers often provide guidance on the nature and amount of expected synergies. This information is typically communicated via the press release announcing the transaction (see illustrative press release excerpt in Exhibit 2.18) and potentially an investor presentation.

Equity research reports also may provide helpful commentary on the value of expected synergies, including the likelihood of realization. Depending on the situation, investors afford varying degrees of credit for announced synergies, as reflected in the acquirer's post-announcement share price. In precedent transactions, it is helpful to note the announced expected synergies for each transaction where such information is available. However, the transaction multiples are typically shown on the basis of the target's reported LTM financial information (i.e., without adjusting for synergies). For a deeper understanding of a particular multiple paid, the banker may calculate adjusted multiples that reflect expected synergies. This typically involves adding the full effect of expected annual run-rate cost savings synergies (excluding costs to achieve) to an earnings metric in the denominator (e.g., EBITDA and EPS).

Exhibit 2.19 shows the calculation of an EV/LTM EBITDA transaction multiple before and after the consideration of expected synergies, assuming a purchase price of $1,200 million, LTM EBITDA of $150 million, and synergies of $25 million.

Pros

• Market-based – analysis is based on actual acquisition multiples and premiums paid for similar companies
• Current – recent transactions tend to reflect prevailing M&A, capital markets, and general economic conditions
• Relativity – multiples approach provides straightforward reference points across sectors and time periods
• Simplicity – key multiples for a few selected transactions can anchor valuation
• Objectivity – precedent-based and, therefore, avoids making assumptions about a company's future performance

Cons

• Market-based – multiples may be skewed depending on capital markets and/or economic environment at the time of the transaction
• Time lag – precedent transactions, by definition, have occurred in the past and, therefore, may not be truly reflective of prevailing market conditions (e.g., the LBO boom in the mid-2000s vs. the ensuing credit crunch)
• Existence of comparable acquisitions – in some cases it may be difficult to find a robust universe of precedent transactions
• Availability of information – information may be insufficient to determine transaction multiples for many comparable acquisitions
• Acquirer's basis for valuation – multiple paid by the buyer may be based on expectations governing the target's future financial performance (which is typically not publicly disclosed) rather than on reported LTM financial information

Screen for Comparable Acquisitions

Our screen for comparable acquisitions began by searching M&A databases for past transactions involving companies similar to ValueCo in terms of sector and size. Our initial screen focused on transactions that occurred over the past three years with enterprise value between approximately $1 billion and $15 billion. At the same time, we examined the acquisition history of ValueCo's comparable companies (as determined in Chapter 1) for relevant transactions.

The comparable companies' public filings (including merger proxies) were helpful for identifying and analyzing past acquisitions and sales of relevant businesses. Research reports for individual companies as well as sector reports also provided valuable information. In total, these resources produced a sizeable list of potential precedent transactions. Upon further scrutiny, we eliminated several transactions where the target's size or business model differed significantly from that of ValueCo.

Examine Other Considerations

For each of the selected transactions, we examined the specific deal circumstances, including market conditions and deal dynamics. For example, we discerned whether the acquisition took place during a cyclical high or low in the target's sector as well as the prevailing capital markets conditions. We also determined whether the acquirer was a strategic buyer or a financial sponsor and noted whether the target was sold through an auction process or a negotiated/friendly transaction, and if it was contested. The form of consideration (i.e., cash vs. stock) was also analyzed as part of this exercise. While these deal considerations did not change the list of comparable acquisitions, the context helped us better interpret and compare the acquisition multiples and premiums paid.

By the end of Step I, we established a solid initial list of comparable acquisitions to be further analyzed. Exhibit 2.20 displays basic data about the selected transactions and target companies for easy comparison.

Step II. Locate the Necessary Deal-Related and Financial Information

In Step II, we set out to locate the relevant deal-related and financial information necessary to spread each comparable acquisition. To illustrate this task, we highlighted Pearl Corp.'s (“Pearl”) acquisition of Rosenbaum Industries (“Rosenbaum”), the most recent transaction on our list.¹⁵ As this transaction involved a public acquirer and a public target, the necessary information was readily accessible via the relevant SEC filings.

8-K/Press Release

Our search for relevant deal information began by locating the 8-K filed upon announcement of the transaction. The 8-K contained the press release announcing the transaction as well as a copy of the definitive agreement as an exhibit. The press release provided an overview of the basic terms of the deal, including the

offer price per share, enterprise value, and purchase consideration, as well as a description of both the acquirer and target and a brief description of the transaction rationale (see Exhibit 2.21). The definitive agreement contained the detailed terms and conditions of the transaction.

We also checked to see whether the original transaction changed for any new announced terms. As previously discussed, this is a relatively common occurrence in competitive situations where two or more parties enter into a bidding war for a given target.

Proxy Statement (DEFM14A)

As Rosenbaum is a public company, its board of directors sought approval for the transaction from Rosenbaum's shareholders via a proxy statement. The proxy statement contained Rosenbaum's most recent basic share count, a detailed background of the merger, discussion of the premium paid, and an excerpt from the fairness opinion, among other items. The background described key events leading up to the transaction announcement and provided us with helpful insight into other deal considerations useful for interpreting purchase price, including buyer/seller dynamics (see excerpt in Exhibit 2.22).

This background highlights the competitive dynamics involved in the process, which helped explain why the multiple paid for Rosenbaum is above the mean of the selected comparable acquisitions (see Exhibit 2.35).

Rosenbaum's 10-K and 10-Q

Rosenbaum's 10-K and 10-Q for the period prior to the transaction announcement provided us with the financial data necessary to calculate its LTM financial statistics as well as equity value and enterprise value (based on the offer price per share). We also read through the MD&A and notes to the financials for further insight into Rosenbaum's financial performance as well as for information on potential non-recurring items and recent events. These public filings provided us with the remaining information necessary to calculate the transaction multiples.

Research Reports

We also read through equity research reports for Pearl and Rosenbaum following the transaction announcement for further color on the circumstances of the deal, including Pearl's strategic rationale and expected synergies.

Investor Presentation

In addition, Pearl posted an investor presentation to its corporate website under an “Investor Relations” link, which confirmed the financial information and multiples calculated in Exhibit 2.23.

Financial Information Service

We used Bloomberg to source key historical share price information for Rosenbaum. These data points included the share price on the day prior to the actual transaction announcement, the unaffected share price (i.e., on the day prior to Rosenbaum's announcement of the exploration of strategic alternatives), and the share price at various intervals prior to the unaffected share price. This share price information served as the basis for the premiums paid calculations in Exhibit 2.33.

Step III. Spread Key Statistics, Ratios, and Transaction Multiples

After locating the necessary deal-related and financial information for the selected comparable acquisitions, we created input pages for each transaction, as shown in Exhibit 2.23 for the Pearl/Rosenbaum transaction.

Below, we walk through each section of the input sheet in Exhibit 2.23.

General Information

In the “General Information” section of the input page, we entered basic company and transaction information, such as the target's and acquirer's names and fiscal year ends, as well as the transaction announcement and closing dates, transaction type, and purchase consideration. As shown in Exhibit 2.24, Rosenbaum Industries (NYSE:JNR) was acquired by Pearl Corp. (NYSE:PRL) in an all-cash transaction. Both companies have a fiscal year ending December 31. The transaction was announced on November 2, 2012.

Calculation of Equity and Enterprise Value

Under “Calculation of Equity and Enterprise Value,” we first entered Pearl's offer price per share of $20.00 in cash to Rosenbaum's shareholders, as disclosed in the 8-K and accompanying press release announcing the transaction (see Exhibit 2.25).

Calculation of Fully Diluted Shares Outstanding

As sourced from the most recent proxy statement, Rosenbaum had basic shares outstanding of 123 million. Rosenbaum also had three “tranches” of options, as detailed in its most recent 10-K (see “Options/Warrants” heading in Exhibit 2.26). At the $20.00 offer price, the three tranches of options are all in-the-money. In calculating fully diluted shares outstanding for precedent transactions, all outstanding in-the-money options and warrants are converted at their weighted average strike prices regardless of whether they are exercisable or not. These three tranches represent 3.75 million shares, which generate total proceeds of $35 million at their respective exercise prices. In accordance with the TSM, these proceeds are assumed to repurchase 1.75 million shares at the $20.00 offer price ($35 million/$20.00), thereby providing net new shares of 2 million. These incremental shares are added to Rosenbaum's basic shares to calculate fully diluted shares outstanding of 125 million.

Equity Value

The 125 million fully diluted shares outstanding feeds into the “Calculation of Equity and Enterprise Value” section. It is then multiplied by the $20.00 offer price per share to produce an equity value of $2,500 million (see Exhibit 2.27).

Enterprise Value

Rosenbaum's enterprise value was determined by adding net debt to the calculated equity value. We calculated net debt of $1,325 million by subtracting cash and cash equivalents of $50 million from total debt of $1,375 million, as sourced from Rosenbaum's 10-Q for the period ending September 30, 2012. The $1,325 million was then added to the calculated equity value of $2,500 million to derive an enterprise value of $3,825 million (see Exhibit 2.28).

Reported Income Statement

Next, we entered Rosenbaum's income statement information for the prior full year 2011 and YTD 2011 and 2012 periods directly from its most recent 10-K and 10-Q, respectively (see Exhibit 2.29). We also made adjustments for non-recurring items, as appropriate (see Exhibit 2.30).

Adjusted Income Statement

A review of Rosenbaum's financial statements and MD&A revealed that it made a $25 million pre-tax payment regarding a litigation settlement in Q4 2011, which we construed as non-recurring. Therefore, we added this charge back to Rosenbaum's reported financials, resulting in adjusted EBITDA, EBIT, and EPS of $450 million, $343 million and $1.21, respectively. These adjusted financials served as the basis for calculating Rosenbaum's transaction multiples in Exhibit 2.32.

Cash Flow Statement Data

Rosenbaum's D&A and capex information was sourced directly from its cash flow statement, as it appeared in the 10-K and 10-Q (see Exhibit 2.31).

LTM Transaction Multiples

For the calculation of Rosenbaum's transaction multiples, we applied enterprise value and offer price per share to the corresponding adjusted LTM financial data (see Exhibit 2.32). These multiples were then linked to the precedent transactions output sheet (see Exhibit 2.35) where the multiples for the entire universe are displayed.

Adjusted for $100 million of expected synergies, the LTM EV/EBITDA multiple would be approximately 7.0x ($3,825 million / $550 million).

Enterprise Value-to-LTM EBITDA

For EV/LTM EBITDA, we divided Rosenbaum's enterprise value of $3,825 million by its LTM 9/30/2012 adjusted EBITDA of $450 million to provide a multiple of 8.5x. We used the same approach to calculate the LTM EV/sales and EV/EBIT multiples.

Offer Price per Share-to-LTM Diluted Earnings per Share

For P/E, we divided the offer price per share of $20.00 by Rosenbaum's LTM diluted EPS of $1.21 to provide a multiple of 16.6x.

Premiums Paid

The premiums paid analysis for precedent transactions does not apply when valuing private companies such as ValueCo. However, as Rosenbaum was a public company, we performed this analysis for illustrative purposes (see Exhibit 2.33).

The $20.00 offer price per share served as the basis for performing the premiums paid analysis, representing a 15% premium to Rosenbaum's share price of $17.39 on the day prior to transaction announcement. However, as shown in Exhibit 2.34, Rosenbaum's share price was directly affected by the announcement that it was exploring strategic alternatives on August 15, 2012 (even though the actual deal wasn't announced until November 2, 2012). Therefore, we also analyzed the unaffected premiums paid on the basis of Rosenbaum's closing share prices of $14.81, $15.04, and $14.60, for the one-, seven-, and 30-calendar-day periods prior to August 15, 2012. This provided us with premiums paid of 35%, 33%, and 37%, respectively, which are more in line with traditional public M&A premiums.

Step IV. Benchmark the Comparable Acquisitions

In Step IV, we linked the key financial statistics and ratios for the target companies (calculated in Step III) to output sheets used for benchmarking purposes (see Chapter 1, Exhibits 1.53 and 1.54, for general templates). The benchmarking sheets helped us determine those targets most comparable to ValueCo from a financial perspective, namely Rosenbaum Industries, Schneider & Co., and Rughwani International. At the same time, our analysis in Step I provided us with sufficient information to confirm that these companies were highly comparable to ValueCo from a business perspective.

The relevant transaction multiples and deal information for each of the individual comparable acquisitions were also linked to an output sheet. As shown in Exhibit 2.35, ValueCo's sector experienced robust M&A activity during the 2010 to 2012 period, which provided us with sufficient relevant data points for our analysis. Consideration of the market conditions and other deal dynamics for each of these transactions further supported our selection of Pearl Corp./Rosenbaum Industries, Goodson Corp./Schneider & Co., and Eu-Han Capital/Rughwani International as the best comparable acquisitions. These multiples formed the primary basis for our selection of the appropriate multiple range for ValueCo.

Step V. Determine Valuation

In ValueCo's sector, companies are typically valued on the basis of EV/EBITDA multiples. Therefore, we employed an LTM EV/EBITDA multiple approach in valuing ValueCo using precedent transactions. We placed particular emphasis on those transactions deemed most comparable, namely the acquisitions of Rosenbaum Industries, Schneider & Co., and Rughwani International to frame the range (as discussed in Step IV).

This approach led us to establish a multiple range of 7.5x to 8.5x LTM EBITDA. We then multiplied the endpoints of this range by ValueCo's LTM 9/30/2012 EBITDA of $700 million to calculate an implied enterprise value range of approximately $5,250 million to $5,950 million (see Exhibit 2.36).

As a final step, we analyzed the valuation range derived from precedent transactions versus that derived from comparable companies. As shown in the football field in Exhibit 2.37, the valuation range derived from precedent transactions is relatively consistent with that derived from comparable companies. The slight premium to comparable companies can be attributed to the premiums paid in M&A transactions.

Bloomberg Appendix