What is ‘Takeout Value’
The estimated value of a company if it were to be taken private or acquired. A firm’s takeout value considers various metrics, such as cash flows, assets, earnings and multiples used in similar takeovers. The current mergers and acquisitions environment can also affect the takeout value of a company.
There is not an exact formula for takeout valuation, since a variety of metrics, such as EBIDTA multiple, P/E ratio and even firm-specific information can be taken into account.
Explaining ‘Takeout Value’
The takeout value is used by both financial analysts and shareholders. The analysts will use the valuation to determine a range of possible price levels for takeover bids, while shareholders can estimate how much return they might receive if their shares are acquired.
Takeout valuation uses the metrics of the target company and compares them to multiples used in similar takeover transactions. For example, a past takeover saw a firm with earnings of $5 million get acquired for $22.5 million. This implies an earnings multiple of 4.5 ($22.5 million / $5 million). A similar company with earnings of $3 million is now being considered a takeover target. The takeout value of the new company would be $13.5 million ($3 million × 4.5).
Further Reading
- Shareholder Coordination Costs, Shark Repellents, and Takeout Mergers: The Case Against Fiduciary Duties – onlinelibrary.wiley.com [PDF]
- Balancing the Rights of Majority and Minority Shareholders in Take-Out Mergers: Trends in Delaware Law – heinonline.org [PDF]
- Shock-based causal inference in corporate finance and accounting research – papers.ssrn.com [PDF]
- Testing for efficiency in lotto markets – onlinelibrary.wiley.com [PDF]
- How does law affect finance? An examination of equity tunneling in Bulgaria – www.sciencedirect.com [PDF]
- The relation between firm-level corporate governance and market value: A case study of India – www.sciencedirect.com [PDF]
- What matters and for which firms for corporate governance in emerging markets? Evidence from Brazil (and other BRIK countries) – www.sciencedirect.com [PDF]
