Do they use usual valuation models like discounted cash flow, comparable companies analysis, and precedent transaction analysis??? (This is what I said in an interview, and I am worried if what I said is wrong?)
Didn’t we just have a thread on this topic? I always just use DCF, even if you have some alternative methods to show using industry comparables or whatever, you still need a serious DCF model. But multiple data points are good, if you can make them work. So yes, you answered right.
A well done DCF is the gold standard, but a lot of private equity folks just look at EBITDA multiples of recent transactions in industry comparables and leave it at that. Part of the reason is that they’re looking for price landmarks to inform their negotiations, and most will use negotiating power to control the deal rather than some abstract calculation on what then correct price is.
Yup, we’ve used “landmark deals” when no sensible DCF model can reproduce an absurd price. The strategy is “see the market agreed to this absurd valuation last year, and the market is efficient or whatever, so we should get that absurd valuation too”. It works, sometimes.
A sum of the parts analysis is also good if possible. For real estate, another method is replacement cost (i.e. what it would cost to actually buy the land and construct the project vs. acquire an existing asset).
Thank you very much for your replies. Unfortunately, I did not get an offer. But I guess I learned!
For an IPO, you figure out what the price should be based on talking to management, talking to potential investors, and getting a feel for the relative excitement in the market about the new issue. No models are involved up to this point. After you come up with a price range, you use all available models on earth, including the ones you’ve highlighted, to support it in case somebody asks how did you come up with this. So I think your answer was mostly accurate in terms of overall content, but probably off from a process standpoint.
Mgmt usually calls me, asks me to tell them what they should think, based on my model.
out of curiosity, what type of role/organization was the interview for?
My guess is they were looking for you to say use public companies but not transactions, because transactions include control.
Plus, mention all the nuances involved in adjusting accounts of the private co.