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Distorted multiples in times of crisis


In order to determine a purchase price in M&A transactions the parties regularly use multiples that refer to a company’s EBITDA for the current business year. For this purpose, multiples are derived either from comparable listed companies ("trading multiples") or from published data concerning prices in comparable M&A transactions ("transaction multiples").

The stock prices of many companies deteriorated in the wake of the coronavirus crisis. But in the same period, their trading multiples increased in some cases. In this article, we will explain this seemingly contradictory effect using German automobile manufacturers as an example and make recommendations how to avoid overvaluation. Moreover, we will point to possible future challenges that might arise in the area of purchase price determination using transaction multiples as a consequence of the coronavirus crisis.

Contradictory trading multiples

EBITDA multiples are entity multiples derived from the enterprise value consisting of market capitalisation (equity value) and total debt. The chart below shows that, in relative terms, market capitalisations (dotted lines) heavily decreased in the first half of 2020 as compared to entity values (not dotted line).

Despite the decline in stock prices, the implied EBITDA multiples increased in the same period (see chart below). 
The reason for this contradictory development is the much lower values of projected 2020 EBITDA compared to the decline in entity values observed on the capital market. The rising multiples are thus not an indication of an increase in entity values, but they rather result from a mathematical effect taking place when calculating the multiples (EBITDA 2020 in the denominator decreases more sharply than the entity value in the numerator) as well as an earnings situation in 2020 that is not representative due to the crisis.

In order to avoid overvaluation when performing a trading multiple valuation, it is therefore advisable to focus on more sustainable reference periods. The development of trading multiples on the basis of projected 2022 EBITDA values show, for example, a slight decline in the multiples and thus suggest a more consistent trend (see chart below).
In addition to a multiple valuation, it is also advisable to carry out a valuation in a present value approach, e.g. based on the ‘discounted cash flow’ method. In this forward-looking valuation method, the entity value results primarily from the entity's  sustainable, adjusted earnings power and is therefore less distorted by temporary effects caused by the crisis.

Transaction multiples – possible future distortions

In addition to calculating a purchase price based on trading multiples, comparable M&A transactions are often used in practice to derive multiples, which are usually published by specialised financial service providers . They are derived in most cases based on publicly available information on the purchase price and performance indicators for the last two financial years.

Because this calculation is based on historical data, it is possible that the transaction multiples might be significantly distorted in a "post-crisis period". Below, we will illustrate this possible distortion effect based on a sample calculation.

The following chart illustrates a possible EBIDTA development of a company which was severely affected by the crisis in 2020 and which will start in 2021 to recover from the crisis but not returning to the pre-crisis level yet ("root run").
In our example, we assume that this company will be sold in 2021. The purchase price was determined by the buyer on the basis of a simplified ‘discounted cash flow’ method in the following manner:
Based on the entity value (example: kEUR 844) and the projected EBITDA development, an EBITDA multiple of 9.4 (2021) and 8.9 (2022) was thus assumed (see chart).

However, if this sample transaction was analysed in terms of transaction multiples, data on EBITDA for the historical two years only would probably be available in addition to the entity value. Therefore, there is a risk that either a multiple of 7.0 (2019) or 16.9 (2020) might be recorded in the statistics. In this simplified example, both multiples would be suitable for future company valuations only to a limited extent as they rely on historical data and due to distortions caused by the coronavirus crisis.


The effects of the coronavirus crisis on current trading multiples and future transaction multiples should be carefully analysed in a company valuation. Due to possible distortions caused by the crisis, it is advisable to place a strong focus on forward-looking valuation methods based on  sustainable earnings power (e.g. discounted cash flow).

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