Three professors at the Leipzig Graduate School of Management reviewed 1,149 recent private equity cross-border transactions to determine the consistency of the business valuation metrics. The study from Benjamin Hammer, Nils Janssen, and Bernhard Schwetzler’s ‘Cross-Border Buyout Pricing’ confirms the impact of a number of factors influencing both the size of the multiples paid and their standard deviation. Understanding these factors may influence certain conclusions of value UK business valuers reach.
The authors clearly struggled to derive a usable dataset for their study. First, they reviewed EV/sales multiples from the small subgroup of deals recorded in Zephyr that have reliable EV numbers. Sales figures and acquirer characteristics were derived from Bureau van Dijk’s Orbis database. This resulted in a dataset of 1,149 transactions, out of approximately 10,000 private equity or leveraged buyout deals total during the period from 1997 to 2010 (more current transactions did not have complete financial details). For this entire set, the mean EV/sales was 1.96, with a standard deviation of 2.53. EV/EBITDA meanwhile had a mean average of 9.05 for the even smaller subset that reported these multiples.
The Leipzig professors note that, despite the huge capital flows from the global PE firms these days, the ‘opacity’ of private capital transactions has largely shielded them from view (this fact should be taken into consideration as BT now considers privatisation options).
Highlights of the new study include:
- Foreign buyers pay more than domestic buyers, and the values are less consistent. The authors attribute this finding to informational disadvantages of foreign acquirers. ‘As a result, foreign PE firms face latent risk of overpayment, especially when they are used to a domestic track record and fail to adequately price in foreign market threats as well as cross-border-related transaction costs.’ The dimension of these ‘pricing errors’ is huge; the authors found a 25%-to-37% higher EV/sales multiple from foreign PE buyers, compared to domestic ones.
- Similarly, ‘the spread in valuation multiples becomes smaller when the target operates in a country with high accounting standards.’
- Companies that were publicly listed prior to the buyout have a smaller valuation multiple spread than unlisted companies.
- Larger companies also have smaller valuation multiple ranges than smaller companies potentially because they’re more capable of producing complete financial and corporate information.
- The pricing spread is significantly reduced ‘when foreign PE firms involve a local partner through syndication,’ presumably due to better local knowledge.