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
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