I've been interning in IBD this summer and on all the M&A projects I've worked on the valuation was only based on multiples predominately TEV/EBITDA. No one ever spoke about a DCF? What's the point of a DCF when valuation / purchase price is mostly based of comps?
Would be great if someone could provide an answer behind why they're used and the purpose of a DCF other than saying 'it is used to support the comps/multiple valuations'.
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Because the counterparty advisor is likely doing some sort of analysis to either argue for a lower or higher relative value to the comps. Its just another point to use - sellers want a higher number and buyers want a lower number for any acquisition. It is easy for an advisor to say "here is what they need to believe to hit their numbers" and can show some wacky thing to their client.
Multiples inherently imply DCF valuation (future cash flow generation) in them
The reverse is also true :) chicken and the egg thing right?
Eggs came many billions of years before chickens. Likewise, one comes first in terms of market vs. individual valuation. In theory, the market multiple should represent the summation of all individual DCFs - there would be no market without the DCF.
true but a DCF can also have an exit value based on a multiple which itself is based on market multiples.
Like I said, you can do whatever you want to make your client happy. You can have a made up capital structure because the current capital structure is not the terminal leverage, you can have random growth numbers, you can make it 10 years vs. 5 years because you don't want to give too much weighting to the terminal value...how many times have you heard an MD say "this is too high" or "this is too low" and you just go adjust your range on the sensitivity table? It is just part of knowing what something should be worth.
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