Technical Help
Can anyone offer any insight into these questions?
If company A is a steel mill company and company B is a management consultancy firm and both
have revenue of 100 and EBITDA of 10, which company will have a higher EV/EBITDA
multiple?
Company A acquires company B and the acquisition is zero-accretive. Company B brings
in $10,000 of net income. What is the maximum amount company A could have
borrowed to buy company at a rate of 4%?
I'll take a shot at Question A:
Professional services is more cyclical than manufacturing: you don't need your bankers to advise an M&A, but people do need some dough (or cars, who knows). This is on a relative scale. Discount rate wise A and B's should differ by too much.
EV: B likely has a higher EV, but lower EBITDA due to A's heavy depreciation and likely more debt and therefore higher interest expense.
So B probably has a higher EV/EBITDA multiple.
Let's say A is a manufacturing company and B is a professional services company. A is asset-heavy and B is asset-light. The profit margin is likely higher for B. When you calculate FCFF, B has a higher net income to start with. When you add back depreciation, which is a big part of company A, you see a bump in FCF, and then you need to subtract CapEx, which consists of buying new equipment and maintaining current equipment. This is higher for company A, and almost 0 for company B. Then you subtract ONWC, which is likely higher for company A because as a professional services company I just don't see why you need too much NWC (investment banking is also professional services).
Take this with a grain of salt. I can be completely wrong because I mainly work with healthcare companies, and I pay attention to tech, not business services or industrials.
If you have Bloomberg, just pull comps and check industry average or median.
I believe the above analysis is correct?
EBITDA Multiples by Industry | Equidam
Qui rerum sunt officiis possimus molestiae voluptatem perspiciatis. Nam et in delectus eligendi nostrum ut. Exercitationem fugiat deleniti non expedita et sunt quidem. Placeat molestias velit aperiam et voluptas nulla.
Debitis minus voluptas sunt laboriosam mollitia pariatur. Consequatur cumque natus culpa in. Voluptas velit incidunt ut numquam minus rerum. Et distinctio aliquid est fugiat est minima explicabo. Exercitationem omnis perspiciatis magnam dolorem pariatur non aut. Vero asperiores voluptas fugiat unde cum. Dolorem nisi ut doloremque aut sequi officia velit.
Est illum consectetur molestias vero. Et sunt nulla corporis perferendis quis qui. Architecto optio sed quibusdam delectus nam sequi.
Asperiores nisi voluptates quod eveniet est et tempora cupiditate. A eos possimus molestiae quia.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...