Valuation - why are European companies valued at a lower multiple than US companies?
This topic came up in a discussion - looking at some data, this is consistently true through most, if not all industries, some more than others. Two similar assets, one in the US and the other in Canada/Europe - the US one would get bought at a higher multiple. Since its systematic, I assume there is a pretty solid reasoning for it - any thoughts? Or ideas on places to look?
Thanks.
without giving this much thought i'd guess it might have something to do with corporate tax rates
The US has the second highest corporate taxes in the OECD, behind Japan, so if anything this would have a drag on us multiples
http://www.oecd.org/dataoecd/26/56/33717459.xls
If I had to come up with a reason I'd speculate that, when talking about aquisition multiples, it's easier to achieve merger synergies from reducing headcount in the US than SOME (rather than making sweeping generalisations about "Yurup") European countries with tougher labour regulations
Giving this even less thought, I would guess it might have to do with lower projected growth rates / smaller terminal values for companies that do business in Europe.
Investor sentiment? investors in the US have traditionally been more growth optimistic than Europeans. Other historical reasons? (Could someone else elaborate? Japan historically has always had very high PE for no apparent reason)
Should be enough said, but I will elaborate.
In most industries, western Europe has lower growth rates and more developed industries than in the US. You can adjust for these factors by looking at forward multiples PEGs or any number of approaches including a DCF. All multiples are is a proxy for a DCF over the life of a business. In fact all valuation approaches are really just a proxy for a DCF. Multiples (public/private), LBO analysis (this is just an equity DCF), replacement cost (assumes that the most I can ever earn is how much it costs to build the suck because someone included a reasonable rate of return).
The other way to think about this is, why do blue chips have lower multiples than growth stocks. Heck, why does a mature real estate market with no place to go in the US cost more to enter than a growing community (in general).
Growth my man, Growth. And always the DCF.
interesting link on the tax rates...i had no idea the US was so high relative to socialist europe; i figured they taxed companies just as their citizens.
does anyone know why income tax in w. euro is so high but corporate tax is so low?
Well why do governments raise taxes?
One reason is perhaps to raise government revenue.
Another reason is the socialist motive of punishing successful/rich people ("reduce inequality" or "from each according to his ability, to each according to his need").
I suspect the latter is more common in Europe. Thus, European governments focus their high tax rates on successful/rich people.
Tax Structure is more important for M&A. Valuation would be on expectations of future profits, they simply set on average more "reasonable" expectations in their companies performance!
I am sorry, but the 35 hour work week is just laziness. I agree, Europe does a better job at healthcare, social issues etc. (ignoring the rise of Islam extremism) but it stifles innovation and efficient capital allocation.
My personal opinion is that the European companies who succeed, do it in spite of their system .
Gsus --
No shit european countries are not purely a socialist state. Notice the usage of relative within the sentence. They are in fact more social democratic/welfare states than is america. Please refrain from the cliché - americans are so ill-informed compared to the euros.
Edit: OK, I don't like you Gsus. I don't like the way you patronized me and you insulted Americans. And by the way, I'm not an American. So I started off writing a rant here. But actually the last thing I want to do is get into an even more protracted argument. So I'll just say that I fundamentally disagree with you in several ways.
"Europe" encompasses a diverse range of positions upon the political spectrum. The social welfare paradigm is more prevalent in some countries than others, however, where lack of uproar has allowed it, success and growth have typically come from more liberal reforms over the past 40 years.
The relative merits of either system are far more nuanced than a few paragraphs can allow, and is a debate that has long featured within public office and will continue to do so for a while to come.
Indeed, I would argue that the strengths of both US and European industry are embedded within the culture that spawned them. American firms respond with speed, are innovative and more fiercely competitive within their own market, whilst by their very nature, successful European firms need to be more outward looking, and benefit from the diversity at their base.
Socialism had a long run; it failed.
I suggest we refrain from brief and sensational dialogue. It is both tiresome and in many cases incorrect.
Awesome thread, but I disagree with Londonbanker. There have been far more misinformed threads than this one. It definitely ranks among the top recently, but Pepstar and some of the other formers stars of the board had some much more ludicrous and misinformed discussions.
--
"Gsus" - an interesting name for someone who thinks others are full of themselves. "hey I know, I'll call myself Jesus - no I'll spell it Gsus to show how clever I am."
Based on your long-winded responses, you've obviously been wanting to rant about Americans for a long time. Well now you've had your chance.
I'll pray for you. Or is that pray TO you?
I will admit to overgeneralizing and having a catch all bucket "Europe" for many disparate countries but while you may be astounded by American ignorance, I am exasperated by European (French, German, etc.) haughtiness and the feeling of moral superiority.
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