M&A: Comparable Companies Analysis Pros & Cons

In my opinion, "Comparable Companies Analysis" is a reasonably simple and quick way to value a Company. Here below the Pros and Cons of this method

Pros:

• Market Based: the information used to calculate the valuation for the Target is based on actual public market data reflecting the market's growth and risk expectations & overall sentiment
• Relativity: easily measurable and comparable vs other companies
• Quick & Convenient: valuation can be determined on the basis of a few easy-to-calculate inputs
• Current: valuation is based on prevailing market data which can be updated on a intraday basis

Cons:

• Market Based: a valuation that is completely market-based can be skewed during periods of bearishness or irrational exuberance
• absence of relevant comparables: "pure play" comparables may be difficult to identify or may even be non-existent. An example may be a start-up or a company that belong to a niche sector; in this case an analysis implied by trading comps may be meaningless or misleading
• potential disconnect from cash flow: valuation based on current or expected market conditions may have significant disconnect from the valuation implied by a company's projected cash flow generation

I think that the "Comparable Companies Analysis" is a good tool to value a company if performed together with the other 3 popular methods

1. Precedent Transaction analysis
2. Discounted Cash Flow analysis
3. LBO analysis