Increasing M&A multiples? - Help
I am currently doing a report on a specific industry and I have noticed within the ten comparable companies I have selected, Enterprise multiples have all been increasing over the past two years. EV/Sales and EV/EBITDA are consistently increasing year over year.
Can someone help me determine what this could mean? I interpret this that since there has been more consolidation in the industry after the financial crisis, this has been driving up the multiples. But as I dig deeper into my precedent transactions, the majority of companies making acquisitions in this space are not industry leaders with a chunk of market share, instead they are one of the thousands of other companies in this space. Consequently, the companies in my comps list have rarely made acquisitions in the past two years, yet their multiples are increasing... Could someone help clarify what this could mean, thanks
Stock price increases + more uses of cash (e.g. more aggressive industry-wide acquisitions) and thus increases in debt, so many possibilities.
Great thanks. This happens to be a fairly niche industry, and some of the "larger" players in this industry are private and do not have a share price. What then?
And also like I stated above, the companies with the increasing multiples are not even the ones consolidating. So why would their multiples be increasing if they are not doing this?
Oops disregard my earlier comment, didn't read the second part of your question.
One possiblity could be an increase of unfunded pension liabilities - though, probably too small to make a big impact. My take is that because of the recent hot debt markets, lots of firms are refinancing/taking on debt at attractive interest rates. This would cause EV to go up, and since sales/EBITDA are still @ normal growth, should cause the multiples to go up.
Okay thanks I will look into that. Also, I am digging into one of the public company's financials, and I have noticed a rapidly increasing market cap but it also has a lot more spare cash now than it did two years ago. This company is actually one of the ones that has been consolidating very heavily.. How would it have more cash after completing almost 8 acquisitions in one year? Its debt has increased, but not by that much.
Have you checked divestitures? Check out how the acquisitions were financed - Co could have issued equity and just kept the cash on BS for acquisitions.
Yupp, good call that's exactly what they did
Not sure I fully understand why your first instinct is to link the increase in multiples directly to industry consolidation. What about other factors that may have changed, e.g. industry outlook?
Just because a company is consolidating doesn't mean their multiples must necessarily go up. Also, to the poster above - raising debt does not mean your EV automatically goes up! EV is the intrinsic value of the firm - you can't just create it by making changes to your capital structure. Yes, you can raise debt and go buy a bunch of assets so your EV increases, but those assets have earnings attached to them as well, ie you will affect both the denominator and numerator when calculating valuation multiples.
Lastly, if you are really trying to tie this down to consolidation, the logical approach is that other players are trying to consolidate. Hence, the companies on your list are potential acquisition targets, and thus, have an element of bid spec incorporated in their share price - resulting in the higher trading multiples.
Since when is issuing debt to finance acquisitions ever a 1:1 ratio? You could have a higher impact from debt than the increase in sales or EBITDA from the acquisition, unrealized synergies that will hit later on in sales or EBITDA, or a bunch of other factors.
I never stated EV will always go up from debt, merely stating that in this scenario, that is a POSSIBILITY. Also, depending on asset classification and equity or acquisition method, accounting for the assets can be different or not even reflected fully on BS.
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