according to schweser, M&A comps are superior to DCF valuations when there are a lot of comparable transactions. DCF gives the intrinsic value of the firm. M&A comps may be based on incorrect valuations of other firms. so why is it that M&A comps are superior?
i don’t think of comps as superior. hypothetically, the different valuations should give you the same range of values. people may argue that comps tell you what’s “really” going on in the marketplace - whether it’s a buyers or sellers market. i like to use dcf as a starting point and use comps to determine the negotiating range. in the end, it all depends on who’s the better negotiator.
practically speaking DCF is merely a model that suggests a value range for a company. A DCF is a model dependent on various inputs upon which two rational people can completely disagree. Therefore it is really only useful to the extent that you can convince the other party that your assumptions are the right assumptions. “intrinsic value” is highly subjective. M&A comps can be preferable because they represent marks at which other market actors were willing to commit actual capital. They provide safety to those transacting in the sense that you don’t have to defend a (potentially wrong) set of assumptions. You can always point to other transactions and say “hey, we may have overpaid, but that was what those companies were going for at the time.” Neither method provides a “superior” valuation, however, from my perspective comps limit the risk of the actors involved.