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M&A: Concepts and Theories: New York Institute of Finance

- It is industry specific as to what is an appropriate purchase price for an acquisition, but generally anything over 10 times EBITDA is risky as too many things can go wrong like a downturn in the business environment. - For larger public companies in the US, deals on average are about 10 times EBITDA, while smaller deals under $50M are typically around 7 times EBITDA. - For small acquisitions under $200M, acquiring companies do not need to hire investment banks as they have internal staff familiar with valuations, but larger multi-billion dollar deals typically do hire investment banks for their expertise and to shift blame if issues arise.

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51 views2 pages

M&A: Concepts and Theories: New York Institute of Finance

- It is industry specific as to what is an appropriate purchase price for an acquisition, but generally anything over 10 times EBITDA is risky as too many things can go wrong like a downturn in the business environment. - For larger public companies in the US, deals on average are about 10 times EBITDA, while smaller deals under $50M are typically around 7 times EBITDA. - For small acquisitions under $200M, acquiring companies do not need to hire investment banks as they have internal staff familiar with valuations, but larger multi-billion dollar deals typically do hire investment banks for their expertise and to shift blame if issues arise.

Uploaded by

Bhuwan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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M&A: CONCEPTS AND THEORIES

NEW YORK INSTITUTE OF FINANCE

Q&A

Are there any rules of thumb regarding paying for an acquisition, such as you
need to pay 10 times more than the annual revenue of the company or
something like that?

You should pay no more than 10 times annual revenue, or something like that?

It's really industry specific as to what is appropriate purchase price, but casting
aside that cliché, I mean, I'd say anything north of 10 times EBITDA is usually a
recipe for failure, because too many things can go wrong. There could be a down
cycle in the business environment, some other weird thing can happen in the cellar.
It's just-- it's just a-- a crapshoot, I think, north of 10 times EBITDA. And right now,
as I said earlier, you're seeing M&A deals in this country, the United States,
averaging about 10 times for larger public companies. You see the occasional 12 or
13 times EBITDA deal. Smaller deals, which is where my firm focuses a lot of its
work, probably seven times is kind of a reasonable average for a deal under, say 50
million in value. All right, any other questions? Well why don't-- Yeah?

While the acquired company doesn’t need any investment bank to do the
search for them, but they need them to finalise the deal, right?

I mean, for a big company that does 20 or 30 deals a year, for the small deals, they
don't need investment banks. They know what the values are in their industries.
They can get all the recent transaction and public company comparable data,
evaluation data off various data services, so they can do all that.

In terms of execution?

Execution they've done-- they've had the inside staff that-- and some of them-- and
sometimes the entire staff have actually worked at investment bank, so they've got
the same kind of people so if it's a small deal under one or 200 million, they don't
need investment bank. For the large ones, the multibillion dollar transactions, most

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of them will hire an investment banks, because the board of directors likes them to
have an investment bank so if something goes wrong, the banker can-- they can
say, well, Goldman Sach said it was OK, if it didn't go OK, it's their fault, not ours.

Other times, if it's a really big deal, you will need a fairness opinion as the buyer,
that you're paying a fair price and it's fair to your stockholders. If you're giving
shares, you'll need investment banks to help you appraise the shares and look at
the fairness and the projections and that sort of thing. So a lot of times the buyers
won't use one. Sellers, on the other hand, want to get the auction going. So Sellers,
at least in this country, will probably use investment bankers 75% of the time,
maybe 80%.

FutureLearn 2

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