Question

Lifesaver Inc., a producer of personal protective equipment, trades on the TSX Venture stock exchange at an EV/EBITDA multiple of 4.0x. From performing a precedent transaction analysis, you note that recent acquisitions of similar companies have transacted at an EV/EBITDA multiple of 6.0x. The following is not a valid potential reason for this discrepancy:

a. Special purchaser considerations, such as synergies, being inherent in the precedent transaction multiples.
b. Multiples implied by precedent transactions are not relevant when considering publicly traded companies.
c. The presence of a control premium within the EV/EBITDA multiple implied by the acquisitions.
d. The presence of an implied minority discount (a discount due to a lack of control in the company when purchasing shares in the open market in the 4.0X EV/EBITDA trading multiple

Answer 1

The incorrect option is (b) because precedent transaction multiples are relevant when considering publicly traded companies, as they serve as a reference point in market transactions.

Step-by-step explanation:

The student's question revolves around the discrepancy in EV/EBITDA multiples between publicly traded companies and precedent transactions during acquisitions. The incorrect statement given the options is option (b): Multiples implied by precedent transactions are not relevant when considering publicly traded companies. This is because precedent transaction multiples are indeed relevant and often looked at when valuing publicly traded companies, as they provide a benchmark for market transactions.

Option (a) suggests that synergies may be factored into precedent transaction multiples, which is valid because they reflect the specific value a buyer may gain from an acquisition, beyond the standalone value of the target company. Option (c) is valid because purchasers are often willing to pay a control premium for the ability to directly influence a company's operations. Option (d) is also valid because a minority discount may be applied when acquiring shares without control over the company, as is the case in the public markets.

Answer 2

b. Multiples implied by precedent transactions are not relevant when considering publicly traded companies.

Step-by-step explanation:

The following options are the valid reasons

1. Option c is valid as the lacking of control would generate the valuation that creates the difference compared with the purchase route.

2 Option a is valid as at the time of purchased made, synergies this would become a big factor for incorporation the valuation

3. OPtion d is valid as the control premium would push up the valuation in the previous transactions

But the option b is not valid as the discounted cash flow and the previous transaction would be considered as important for the valuation purpose