Valuation Resources
Sources of M&A Data For Business Valuations: Print or Electronic?
Jan Davis Tudor and Karin Mohtadi
Abstract
Mergers and Acquisitions (M&A) analysis is one of the most effective methods of estimating a control value for a privately-held company. With strong comparable M&A transaction data, the value of the company can be estimated with reasonable confidence. M&A data is available to information professionals in a variety of print sources as well as specialized databases. M&A searches using print sources tend to be time-consuming, while a comparable database search is quick yet expensive. Can an electronic database search replace the traditional print M&A search? Does a trade-off exist?
In business valuation and accounting firms, librarians, information specialists and analysts frequently perform "M&A searches." These searches for information regarding the mergers and acquisitions of companies are an important element of many business valuation reports. A thorough M&A search using print sources involves checking several publications from a variety of publishers. Information professionals and business appraisers routinely check Mergers and Acquisitions, the Corporate Growth Report, the Merger Yearbook, the Merger and Acquisition Sourcebook, as well as Securities Data Company's (SDC) Worldwide Acquisitions and Mergers Database. Depending on the time frame and scope of the search, the research can take as long as 45 minutes to 1 ½ hours. However, an SDC search can take as little as 10 to 15 minutes.
Can a researcher get the exact same information from an SDC database search as he/she could from several print sources? Because researchers may perform several M&A searches in one day, we set out to determine whether we could rely on a database search for M&A data rather than checking several print publications. If so, we could streamline the M&A search process and save valuable time. But, before we share with you the results of our comparison study, we want to provide some background about M&A searches and business valuation.
Why do we do M&A searches?
Business valuation requires estimating a value for a privately-held business. Because publicly-held companies are required to file disclosure documents with the Securities and Exchange Commission (SEC), their financial information, including stock prices, is easily obtainable. Thus, appraisers can use this financial data to calculate market values for publicly-held companies by multiplying the number of outstanding shares by the share price quote. Conversely, privately-held businesses are not required to file disclosure documents and do not have price per share information available to the public. Thus, their value is not defined in the marketplace. The M&A search is one method to estimate the value of privately-held companies.
An appraiser must take into consideration the size of the interest to be valued, as well as whether or not it is a controlling or a minority interest. For example, Jane Smith owns 100% of a software development company, EZ Software, Inc. Larger software companies have approached Ms. Smith in efforts to acquire her company. Since Ms. Smith is considering retirement, she is ready to sell the business to one of these firms. Because she is unsure of an appropriate price for her business, she hires Willamette Management Associates (WMA) to estimate the fair market value of the company. Since Ms. Smith owns 100% of the business and plans to sell her entire interest, WMA will value the company on a controlling basis.
One tool used for estimating a privately-held business's value, which in most cases is used for a controlling value, is the mergers and acquisitions method. In a control appraisal, an appraiser needs information regarding the mergers and acquisitions (M&A) of target companies which are similar to the business being valued. For example, in the case of EZ Software, the appraiser will look for target companies that are in similar lines of business, such as prepackaged computer software. The appraiser may also look for targets that are affected by similar economic events to the subject company.
What is involved in an M&A search?
The researcher begins an M&A search with the Standard Industrial Classification (SIC) Code that best describes the subject company, and a valuation date (the point in time the company is valued). Starting with the valuation date and working three years backwards, the researcher uses the SIC code to identify deals where the target's primary SIC code is the same. Certain basic criteria are used for selecting transactions. The price paid for the transaction must be disclosed, the deal must represent a majority interest (the acquirer obtains at least 51% of the target), the acquirer must be a U.S. company, and in most cases the deal must be completed. Appraisers also need to know the date the transaction was announced.
The target's business description is important, because the more illuminating the description, the better able the appraiser is to select suitable transactions. For example, EZ Software, Inc., produces specialty software used in the healthcare industry. The analyst may not select a transaction where the target company produces software used in the vinyl record industry, because a company that produces a product for a declining industry is affected by different market forces than a company that produces a product for a growing industry.
Where do we find M&A Data?
Hundreds of M&A transactions occur yearly, and reporting mechanisms exist for distributing information about these transactions to the public. News stories, press releases from the participating companies, and communications with the financial advisors provide details about the deals. Several publishers package this information in various value-added formats, to sell to the public via databases, newsletters and magazines. For example, Eugenia Shepard of Mergerstat and Rob Carroll of Securities Data Company both state that their analysts have a continuous feed of information throughout the day from business wires, as well as phone calls to and from the financial advisors involved in the transactions. This data is then put through a series of checks before it is organized, published and sold to the public.
Unfortunately, two data elements of importance to appraisers, the transaction price and the target's financials, are not always available. Generally the transaction price and the target's financials are available if the acquirer is public. When a publicly-held company purchases a privately-held or publicly-held target, and the target company's revenues are at least ten percent of the acquiring company's revenues, the acquirer must file an 8-K with the SEC. The 8-K is a report of unscheduled material events or corporate changes deemed of importance to the shareholders or to the SEC. The 8-K must be filed electronically with the Securities and Exchange Commission within fifteen days of the event. The 8-K generally contains an item "2," which is a description of the acquisition or disposition of assets, an item "5," which describes other events, and an item "7" which provides the financial information of the target company. Once in a while, the transaction will be described in an S-4 rather than an 8-K. The S-4 is a registration of securities in transactions involving a merger or consolidation.
On the other hand, a privately-held acquirer does not need to disclose to the public or the SEC any financial details about itself or the transaction. These deals which involve privately-held companies pose the most problems for researchers and analysts because the financial information is difficult, if not possible, to obtain. Without financial data on the target company, the analyst cannot calculate valuation multiples. Multiples are ratios derived from the target's financial information which are multiplied by an earnings measure in order to estimate the value of the subject company.
How we compared sources of M&A data
Our goal was simple: we wanted to determine if all the deals found in the print sources were found in Securities Data Company (SDC) Worldwide M&A Database, thus eliminating the need to use the print sources. If certain transactions were found in a print source and not the electronic, why?
We compared the results of five M&A searches that contained data from Mergers and Acquisitions, the Corporate Growth Report, the Merger Yearbook, the Merger and Acquisition Sourcebook and SDC's Worldwide M&A Database. Each search contained an average of 22 transactions. We used the important data elements; the transaction price, the status and type of the transaction, the target's financials, and a description of the target's line of business, as criteria for comparing the electronic with the print sources. Publications of M&A data fall into two camps: those that only covers deals valued at over $1 million, and those that cover deals under $ 1 million. Because the large majority of our M&A searches are for transactions over $1 million, the scope of this article is limited to those publications that concentrate on deals of $1 million or more.
The initial results of our comparison showed that several transactions were found in the print sources and not in SDC, and vice versa. After double-checking these transactions in each source, we found that every single transactions was available in the SDC database. Yet differences in assigned SIC codes and business descriptions prevented the transactions from displaying in our original search. While we can now say that SDC is a complete source of M&A data, can we rely on it exclusively?
Oh, those SIC codes!
As mentioned earlier, we begin our M&A searches with the appropriate primary SIC code[s] for the subject company. All of the publications we consult we arrange the transactions by SIC code. When one deal did not appear in one source, such as SDC, it was because the target had a different SIC code than what was published in the print source. For example, Kentucky Medical Insurance Co.'s SIC code was listed as 6321 in the Corporate Growth Report, and 6311 in SDC. Therefore, the deal did not show up in our SDC search. This disparity with SIC codes is problematic when using SDC. Like most, if not all, databases, the computer will retrieve only the data that matches the criteria input by the researcher. In other words, a search limited to targets with SIC code 6321 will not retrieve targets with SIC code 6311. Although SDC allows the user to search by more than one SIC code, the search results can be large and therefore expensive to retrieve.
The problem with dissimilar SIC codes is not new. Information specialists and researchers frequently find varying SIC codes in the data provided from familiar publishers such as Disclosure, Moody's and Standard and Poor's. The publishers of M&A transaction data obtain and assign SIC codes from a variety of sources. Nancy Rothlein, of the Corporate Growth Report and the Merger and Acquisition Sourcebook, stated that the company consults both the subject companies and the Standard Industrial Classification Manual when preparing their transaction data. Bob Delaney of Mergerstat Review says that the research staff consults Standard and Poor's and Disclosure, among other sources. Although SDC has created enhanced codes for high tech industries which allow for more precise searching, the remaining industries are still limited to the four digit SIC Codes. Transactions listed in Mergerstat Review are organized by large two-digit industry groupings. Although at times this arrangement provides a lot of deals to examine, it also allows researchers to review deals closely related to the intended SIC code.
Just what does that target do?
A logical solution to the SIC code dilemma is to search for words in the target's business description. For an SDC search, we could search a range of SIC codes and limit the search to particular words in the business description. In the case of our example EZ Software, we would use the SIC code 7372, then try to limit the search with words such as "health," "medical," etc. Unfortunately, the solution is not that easy. Although the print and the electronic sources provide one-line business descriptions, the level of detail varies. For example, the business description for Syntro Corp. in the Mergers and Acquisitions Sourcebook is "a biotechnology company that makes vaccines." In the SDC database, the description reads "provides commercial physical research services." In Mergers and Acquisitions, the description is simply "diagnostics."
It gets even more complicated
For the M&A data found in these sources to be useful to the analyst, it is imperative that the transaction price and status be stated in the search results. We found that the transaction price about the same in all of the publications, give or take a few dollars. However, we do have instances where the transaction price is disclosed in one source and not the other. This is also true with finding a deal marked "pending" in one source and "completed" in another. Clearly, since SDC updates their M&A database when a deal is completed or a price is announced, it is perhaps a more complete source of this information. However, before we get too confident, we have found transaction prices on our own that were not disclosed in any of the sources. For example, one analyst learned of a particular transaction from an 8-K from EDGAR, but the SDC database claimed that the "terms were not disclosed." Because we limit our search results to those transactions that have a disclosed deal value, we would not have found this deal. Most, of not all, of the publishers rely heavily on news releases for pricing information, until they are able to check the company's 8-K. Eugenia Shepard of Mergerstat Review mentioned that nine months may elapse before an acquirer or target will announce the price of a deal.
Naturally, publishers will miss transaction information from time to time, as well as make data entry errors. The bottom line is that the analyst never relies solely on the data provided from an M&A search. A carefully structured M&A search will provide the analyst with transactions, target names and perhaps some financial information. He/she will then order SEC documents for as-reported financial information.
Where do we go from here?
The results from this survey of sources presents us with some questions. It appears that the SDC Worldwide M&A Database can provide us with a thorough M&A search. However, if we rely solely on SDC we must understand how the database is structured and know its limitations. In addition, the analyst must often times be willing to pay a considerable fee for the data. Information professionals and analysts must consider the difference between spending more money for the data and less time on the actual search itself. Since researching the differences between the sources, we believe that a two-step SDC search can replace a M&A search using the various print publications. Depending on the particular aspects of each M&A research request, we recommend first searching SDC by several possible SIC codes that may match the target company. If the first set of results it too large, the search can be limited limiting by words in the target's business description in addition to the other search criteria. It is also good to consider including "pending deals" along with "completed deals," in an effort to account for information the publisher may not have secured. Print out or download just the target name and business description to review. This first attempt casts a wider net of transactions and serves as a "best effort" of finding relevant deals. After identifying the targets that best describe the subject company, consult SDC for the additional transaction data. This is often an expensive search, yet takes no more than one half hour. When compared to spending at least one hour consulting print sources, the trade off may be justified. In addition, the SDC database contains a wealth of financial information that is not reported in the print sources. For example, limiting a search further by selected financial details from the target's balance sheet and/or income statement may save the analyst valuable time. In most cases we believe that a carefully designed and executed SDC search is appropriate.
If, however, SDC is too expensive, or the use the print sources is preferable, we recommend all four of the publications referenced in this article. Not only do they report transaction data, each publication has its own value-added feature. Securities Data Publishing's Merger Yearbook is highly recommended because its transaction data is obtained directly from the SDC database. The Merger Yearbook also contains annual statistical information about merger and acquistion activity. To supplement the Merger Yearbook, more recent transaction information is found in the Mergers and Acquisitions Sourcebook and the Corporate Growth Report. The Corporate Growth Report also provides a monthly article relating to the valuation of a specific industry. The bi-monthly journal Mergers & Acquisitions not only contains and M&A roster, but also excellent, substantive articles on mergers and acquisitions. Mergerstat Review is not only an excellent source of transaction information, but also statistics and studies frequently consulted by financial analysts and business appraisers.
And just when you thought the article was over
Just as we finished writing this article we learned of a new online database for M&A Data. Mergerstat's Mergerstat Review is now available as a database on the Internet on a subscription basis. We welcome this new addition to electronic sources of M&A data. Depending on your research needs, the Mergerstat Review database is a complement or replacement of the SDC database.
Jan Davis (formerly Tudor), Owner of JT Research, can be reached at jt@jtresearch.com. Karin Mohtadi, an analyst with Veber Partners, can be reached at 503-229-4405.
Sources of M&A Data
Corporate Growth Report
Mergers & Acquisitions Sourcebook
Quality Services Company
1-800-266-3888
Mergers & Acquisitions
IDD Enterprises
1-215-790-9000
Merger Yearbook
Securities Data Publishing Co.
1-215-765-5311
Mergerstat Review
A Division of Houlihan Lokey Howard & Zukin
1-800-455-8871
http://www.hlhz.com
Electronic
Worldwide M&A Database
Securities Data Co.
1-201-622-3100
Mergerstat Review
A Division of Houlihan Lokey Howard & Zukin
1-800-455-8871
http://www.hlhz.com
For additional sources, consult the NVST Mergers and Acquisitions Meta Site for a list of M&A-related publications.
| Copyright © JT Research LLC Site updated: June 12, 2006 |
Web site by Rareheron Web Design Portland, Oregon |