Readers will be very familiar with the earnings multiple – be it Price Earnings Ratio (a key measure in stock markets) or EBITDA multiple (which is a convenient shortcut tool used in valuing private companies).

The PER for quoted stocks is published in real time on all Stock Exchanges, and derives from the market’s view of the future profits of the stock and the perceived risk attaching to their achievement.

With a bit of digging, the Enterprise Value, the prospective EBITDA and thus the current EV/EBITDA multiple of that listed business can be assessed. Depending on industry and growth prospects, profitable NZX listed enterprises are currently trading at EV/EBITDA multiples from about 6x to 30x, with quite wide spreads in each industry. This variation is perfectly understandable because the multiple implicitly makes judgment on each enterprise’s sector risk, strategy, growth, competitiveness, leadership and team competence, product and channel dominance, alliances, operational processes, etc.

Now we are able to apply – cautiously and with crosschecks – the multiple data learned from large, listed companies to their unlisted counterparts. The value multiples of medium sized unlisted enterprises require significant discount because of their higher risk and lack of liquidity. Smaller size, narrower customer and product bases, greater dependencies and (often) lack of succession planning all elevate the risk to achievement of sustainable future cashflows. Conversely, adjusting for a control premium raises the multiple. Data on recent private M&A transactions are hard to locate but invaluable to test pricing and ratio realism.

Now at last to the Magic Maths: –

Assume a large listed company acquires a perfect-fit, highly profitable bolt-on, which it integrates well.

The simplified maths are: –

($M) Enterprise




Corporate 5,000 417 12
Acquired Business 500 83 6
Acquisition Uplift 500
Post-Merger 6,000 500 12


So, a competent acquirer will cause an immediate lift in its Enterprise Value, and thus Equity Value and Earnings Per Share, by such a good buy. Any time where the future EBITDA cash stream is acquired at a multiple (notwithstanding a control premium lift) considerably below the acquirer’s own multiple status, it delivers an immediate capital gain to its shareholders. In this example, the discrepancy between the two multiples generates a doubling of the buy price.

The mathematics are good for both parties. Vendor gets a market price as befitting the particular risks of their own business and attributed to smaller private companies generally. The shareholders of the acquiring corporate receive a handsome accretion gain for adding synergy to and significantly derisking the acquired enterprise.


Extra value created! Magic!