Firms entering the public equity market commonly examine their competitors’ multiples to arrive at a realistic issue price for their shares. For example, in the case of the widely followed IPO of Facebook Inc., the lead underwriter benchmarked the proposed value of the Facebook shares against the multiples observed for a group of peer companies. But how did the bank gather information about these multiples, and what is the best practice to calculate them? Will you be able to make your own judgment about the fairness of the issue price?
To answer these questions, you should understand how the multiples vary across industries, countries, and time. Once you determine this information, you will be able to identify comparable firms and derive multiples based on these firms.
The first step to understanding multiples is to focus on the empirical values concerning different enterprise and equity value multiples. The next step is to evaluate how these multiples vary across industries, countries, and time and define the realistic ranges for these multiples. The final step is to examine the implications of these values for selecting comparable firms.
However, before beginning a multiple-based valuation exercise, you should determine several factors, including:
- How to identify the empirical values for enterprise and equity value multiples.
- How and why these multiples vary over time.
- How and why these multiples vary across industries and countries.
Multiples change over time according to the economic cycle. In addition, multiples can be very different depending on the industry a company is working in. Do you know how to determine these changes and differences? The Accenture Academy course Analyzing Multiples across Industries, Countries, and Time will help you to identify the plausible ranges for the different enterprise and equity value multiples and why these multiples differ so much across industries, countries, and time. This information will give you the tools to better assess the reliability of your own valuation exercise.