Private equity firms are increasingly favored by the companies, as it allows them to attempt unorthodox growth strategies away from the glare of public markets by taking them private.
Hellman & Friedman is a private equity fund that makes large-market buyout investments in communications, consumer discretionary, financials, healthcare, industrials, and technology sectors.
In this chapter, we are going to look at a comparable approach of valuation and understand how the target company got its number, and verify it with another method of assessing its ratio multiples.
Ultimate Software, a provider of cloud-based HCM and employee experience software, announced that it has agreed to be acquired by Hellman & Friedman in an all-cash transaction that will take them private.
Deal points tell us that Ultimate Services, the second-fastest-growing provider in the $17bn. HCM and payroll software market was valued at $11bn. Which represents a multiple of 9x their EV/Revenue.
Using the comparable company methodology, we compare Ultimate’s performance to some of the peers by assessing their multiples.
EV/Revenue means multiple of 5x across peer group suggests that the investors at H&F saw some serious potential as the valuation multiple for this deal is almost twice the average i.e. at 9x.
However, Ultimate Software’s revenue growth is driven by high demand for its HCM solutions and has notably, outperformed the industry’s share performance rally year over year.
Applying a 9.6x revenue multiple on their revenue we achieve a value very close to $11bn.
Another way to understand the attractiveness of the business is to look at its P/E ratio of 43. This tells us that stock owners were already paying $43 for every dollar earned per share while it was publicly trading.
Given that the earnings per share or EPS have advanced 53.6%, total revenue grew 24.4% year over year and a consistent client retention rate of 96%, this deal was materialized at a 32% premium i.e. $331.5 per share.