If disregarding the possible multiple expansion due to the company having a stronger market position/entered a higher valued segment as a result of an add-on, is there a general theoretical way of judging if an add-on acquisition will increase IRR in an LBO? It obviously also depends on form of financing for the purchase, but is there a way to generalize? Perhaps looking at earnings yield?
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Yea your best approach is probably looking at the return on investment (synergies, additional EBITDA to cash paid) to the required return (WACC). If it will generate more in Adj. EBITDA (as compared to $$$ paid) than the WACC its probably a good investment and will increase IRR.
WACC keeps it capital structure agnostic as if the observed capital structure is all equity WACC will equal COE.
Your WACC point does not apply if the sponsor has to inject equity. If they are using ‘equity’ in the form lf cash on BS agree then.
Wouldn't your WACC just adjust though, or would considering it using only the projects WACC clean that up better... Following this thread now as hopefully someone smarter than me can come answer correctly lol
Obviously just modeling would be the most precise, but as a rule of thumb interested to see what else is out there
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