If company A buys 70% of shares of company B at $10/share. Company B has EBITDA of 20 and a total of shares outstanding of 50, and a FDSO of 80. Company B has debt of 30. What is the EV/EBITDA multiple in this acquisition? Will EV/EBITDA differ if company A decides to assume the debt or do a debt-free deal?
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Should a listed company ever acquire a company for an EV/EBITDA multiple that is higher than it's own EV/EBITDAtrading multiple? (Originally Posted: 07/14/2015)
For example, company A is publicly listed and is valued at 7x EBITDA. It acquires company B, which is a private company in the exact same business, for 9x EBITDA. What should I consider in assessing whether this is makes sense or not?
If Company B is "better" (higher margins, faster growth potential, etc.), it should deserve a higher multiple than Company A.
Sure, I understand that. The question is really about what shareholders of company A should think of as they evaluate this transaction. Will it (ceterus paribus) likely improve company A's EV/EBITDA multiple? Or will integrating company B into A decrease the value of company B as it's now possibly facing the same economic reality/inefficiencies as company A? In this case, management of company A destroyed value by paying more than it's own multiple for company B. Of course, everything depends on the specific case, but I'm looking for general considerations when evaluating such a transaction from the POV of company A shareholders. Thanks
Assuming the two companies are in the same industry, adopting best practices from Company B could allow Company AB to achieve the same multiple that B standalone had (or higher given synergies).
Synergies and growth potential of the target are just two reasons to do so.
Uh, two words: operating leverage
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