Investment Banking: How to Find Past Stock Transactions
Don’t let the fact most investors don’t have to tell you what they’re doing discourage you from digging into past transactions. Investment bankers who know where to look can easily find out how investors are valuing various assets.
Track the stock market
The investment banker’s best friend in tracking the value of companies is the stock market. Usually starting after a company sells stock to the public in an IPO, those shares are free to trade as investors buy and sell. Those transactions, conducted on an exchange with publicly traded securities, are recorded and posted for all to see.
Investors are well trained to find stock prices, and they can do that easily using most well-known financial websites. Investors can view stock charts, to see graphically how stock prices have changed over time, or download tables of historical stock prices into their spreadsheets for further analysis.
Study private deals
Just to make things more difficult, not all companies have publicly traded stock. Privately held companies are much more difficult to track. Some private companies may have shares of stock, usually held by early employees or investors, but these shares can’t be traded as freely as can shares of publicly traded companies.
Looking up historical transaction data on private companies is much more tricky, and sometimes it isn’t even possible. That means that analyzing private transaction deals also requires a bit of estimation and approximation, with techniques such as the following:
Comparing with public companies: Even if a company isn’t publicly traded, you can sometimes triangulate its value using valuation techniques. Databases such as those from Dun & Bradstreet, Bloomberg, and S&P Capital IQ may often provide limited financial statements for private companies. Sometimes, though you can’t get the profit reported by private companies, there are decent estimates of its revenue.
You may be able to extrapolate the value of the private company by applying the industry’s valuation, such as by using price-to-revenue or price-to-book multiples.
Checking to see if debt is sold: Just because a company doesn’t have stock that’s publicly traded doesn’t mean there isn’t any market pricing available. Many large private companies may have debt outstanding. Investors can buy and sell a company’s debt obligations and investors can look up the prices of the debt to get an idea of how creditworthy the company is considered.
Another bonus: Even private companies must provide financial statements on the Securities and Exchange Commission’s EDGAR system if they have sold debt to the public.
Finding rounds of venture capital raised: Even private companies may disclose when they’ve lined up significant amounts of money in a round of financing with investors, such as venture capital firms.
Looking for transactions with public companies: Private sales aren’t so private when they’re done by publicly traded companies. When a company makes a significant buy or sell of interests in another company, that transaction may need to be disclosed. Similarly, companies may disclose when they buy or sell their interests in private companies, giving a rare glimpse at their market value.
Checking pre-IPO marketplaces: The wait for a company to sell shares in an IPO can be a long one for early employees. Employees, who may have been granted shares as part of joining the company, may be eager to sell so they can buy those Ferraris they’ve been pining for.
The introduction of new marketplaces for investors to sell their shares in a company that hasn’t gone public yet are springing up. Two of the emerging pre-IPO marketplaces are SecondMarket and SharesPost. Both are websites that allow holders of shares of private companies to sell those shares to accredited investors.
Companies that sell stock to the general public must typically follow all the rules of IPOs. The most important rule that affects companies looking to go public is the requirement to register securities with the SEC. Companies and their investment bankers must follow strict disclosure and filing guidelines to meet securities registration rules.
There are exceptions to the rule that calls for public securities to be registered, though. For instance, a company may sell shares to investors who are accredited. Accredited investors are those considered to know the risks of buying unregistered securities. Typically accredited investors are large banks, investment companies, and insurance companies.
But accredited investors may also be charitable organizations or companies with assets of more than $5 million, according to SEC rules. Individuals must meet pretty high bars to be considered accredited, including a net worth of more than $1 million (excluding a primary residence) or annual income of more than $200,000.
Look at pre-IPO marketplaces
The pre-IPO marketplaces have morphed from obscure websites to useful guides for investment bankers interested in private companies. These sites aggregate the shares private investors are looking to sell in companies that are privately held. The systems then pair up willing buyers for the shares and facilitate the transaction. Transactions are then compiled allowing members of the pre-IPO marketplaces to see what kinds of valuations the companies have.
Pre-IPO marketplaces help illuminate the long-dark area of private companies. They’re a breakthrough in creating a somewhat orderly market for an area of securities that was long orphaned. But don’t make the mistake of thinking that the prices on pre-IPO marketplaces are indications of what companies are truly worth once they do go public.
Pre-IPO marketplaces can cause market values to appear distorted because they lack the liquidity, or deep pool of buyers and sellers, which can unrealistically distort the price.
Buyouts can be precious pieces of information for investment bankers trying to see what different companies, especially smaller, private ones, are worth. If a buyout is large enough, the buying company will put out an 8-K regulatory filing alerting its investors of the size and value of the deal. Not all these mergers and buyouts pan out, but they can give investment bankers comparable transactions to analyze.