Submitted by: Submitted by changhuapp
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Category: Business and Industry
Date Submitted: 12/19/2011 12:50 AM
Market Multiples
A Brief A Brief
• L Law of one price: Identical assets must have f i Id ti l t th identical prices. • In practice one estimates the value of the subject In practice, one estimates the value of the subject company by observing prices paid for similar companies relative to some benchmark companies relative to some benchmark
– E.g, the ratio between the observed enterprise value (E+D) and the corresponding EBIT or EBITDA.
• Using multiples is referred to as “Market g p approach,” while using DCF is referred to as “income approach.”
A three‐part process A three part process
• Part I: Search and select • Part II: Adjust and compute Part II: Adjust and compute • Part III: Apply and conclude
Part I: Search and select Part I: Search and select
• Th The purpose is to identify group of comparable companies whose i t id tif f bl i h business operations are as similar as possible to those of the subject company. • Needs to understand the business operation of the subject company
– – – – – – How does it create value? What drives its financial performance? Who are its customers and suppliers? pp With whom and how does it compete? What risks does it face? And so on. And so on.
• Inspect companies one by one until some are identified that possess such traits.
A systematic selection procedure A systematic selection procedure
• P i t th d t il d i Prior to the detailed inspection of company analysis. ti f l i • Begin with the universe of all publicly traded Begin with the universe of all publicly traded companies
– Large, commercially available databases such as S&P g , y Compustat or Bloomberg’s
• Eliminate all those not corresponding to certain three‐ digit SIC codes. digit SIC codes • Exclude companies based on finer industry classification, e.g., four digit SIC codes. classification e g four‐digit SIC codes • Perform Keyword search, available through “10kwizard.com”
Commonly used multiples Commonly used...