What's Driving Valuations - Five Reasons EBITDA Multiples Remain Elevated in 2016

5/18/2017 What's
Driving Valuations? Five Reasons EBITDA Multiples Remain Elevated in 2016
   
Business / # MarketMoves
AUG 9, 2016 @ 08:07 AM 4,442 
What's Driving
Valuations? Five
Reasons EBITDA
Multiples Remain
Elevated in 2016
Jeff Golman, CONTRIBUTOR
I write about middle-market deals and trends in the
PE and M&A space. FULL BIO 
Opinions expressed by Forbes Contributors are their own.
Here's Why 2017 Could Be The Best Year In
Wall Street History
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5/18/2017 What's Driving Valuations? Five Reasons EBITDA Multiples Remain Elevated in 2016
After a recordbreaking year for deal
 
making in 2015, merger and acquisition  
activity is off to slow start in 2016. Global
deal volumes fell 23 percent through the
end of June, making this the slowest first
half to the year for global M&A since
2013.¹
However, this recent contraction in global
deal activity doesn’t exactly come as a
surprise given the ongoing global
economic instability and political turmoil.
Britain’s decision to exit the EU, the
United States’ contentious presidential
race, an increase in antitrust scrutiny and
the threat of rising interest rates have
inevitably led to some uncertainty among
dealmakers. And, as we very well know,
uncertainty is the enemy of dealmaking.
The failure of several large, highprofile
transactions has also put a damper on
M&A activity this year. In the first half of
2016, the total value of withdrawn M&A
was more than double the level reached in
1H 2015, and the highest since 2007.2
Despite an overall drop in deal volume
this year, premiums for highquality
targets are rising. Valuations have reached
the highest multiple since 2007, with
acquirers paying an average of 11.1 times
EBITDA to make acquisitions.3 For U.S.
targets, valuations are even higher. The
median EBITDA multiple for U.S. targets
this year sits at 15.7 times EBTIDA—a
tremendous markup to say the least.3
A prime example of these elevated levels is
the proposed acquisition of U.S. organic
food company WhiteWave Foods by Paris
based Danone. The deal, which was done
at approximately 39.0 times 2016
projected EPS of White Wave and
approximately 20.5 times 2016 projected
 
EBITDA, is expected to bolster Danone’s  
U.S. portfolio.4 What’s most interesting
about this deal is not only the high price
and premium, but also the fact that
Danone’s stock closed up following the
announcement of the deal. With
shareholders pushing up the stocks of not
just takeover targets but acquirers as well,
CEOs may feel that the market is
rewarding growth through acquisitions,
giving them the confidence to pursue
mergers and acquisitions.
All things considered, however, M&A deal
activity has remained relatively robust in
2016, as many key drivers of a healthy
dealmaking environment remain. For
example:
1. Equity markets remain at all
time highs. A runup in global
stocks added more than $4 trillion to
the value of equities worldwide
between June 27 and July 14, 2016,
on speculation central banks in major
economies will boost stimulus.3 At a
time when valuations for equities are
on the rise, it allows companies to use
their own highvalued stock to
purchase a target’s equity and achieve
growth through M&A.
2. Boards and CEOs remain
confident in both the economy
and M&A landscape. Looking
ahead, we can also expect corporate
confidence to continue to grow
alongside the U.S. economy, which
expanded an annualized 1.1 percent in
the first three months of 2016. That is
higher than a second estimate of 0.8
percent, according to final figures
released by the Bureau of Economic
 
Analysis, largely due to consumer  
spending, which continued to boost
growth.5
3. Corporations are still facing
difficulty in achieving
acceptable levels of organic
growth. In a climate where organic
growth is increasingly difficult to
come by, there is growing pressure on
companies to make acquisitions in
order to raise revenue and profit.
M&A has proved to be a far more
attractive and much easier pitch to
shareholders than building growth
organically, which not only takes
more time to result in profitability
than making an acquisition, but may
also require an increase in expenses.
4. Leverage levels remain at all
time highs due to cheap and
available credit. Continued
favorable credit markets and lending
environment have enabled higher
leverage levels. Even with the Federal
Reserve’s decision to raise interest
rates in late 2015, it appears that any
additional rate increases will occur at
a fairly slow pace in small
incremental stepups.
5. PE firms sit on record levels of
dry powder ready to be
deployed. Global callable reserves
(“dry powder”) of private equity funds
continue to increase, reaching a
record high of $1.37 trillion by March
2016, as pension funds, endowments
and sovereign wealth funds increase
their allocations to private equity in
hopes of aboveaverage returns.6
Meanwhile, high prices and limited
 
opportunities are keeping a lot of PE  
capital on the sidelines. The deals that
are being closed are coming at an
extremely high cost.
On a global scale, it’s safe to assume that
the Brexit will likely impact M&A moving
forward. Thus far, it has increased market
volatility and negatively impacted the
global economic outlook. Ongoing
uncertainty will inevitably lead to a more
cautious approach to M&A for the rest of
the year. Aside from the Brexit, there are a
number of other factors that have the
ability to derail momentum of M&A
activity this year, including an unexpected
acceleration in rate increases,
geopolitical/exogenous events such as
terrorist attacks and the failure of
companies to meet or exceed earnings
expectations.
However, the purchase price for high
quality targets will likely continue to rise
in this year, as strategic buyers focus on
paying premiums for growth and financial
buyers scramble to put committed capital
to work. Particularly this will be seen in
industries defined as “high growth,” such
as healthcare/pharma and technology.
With both strategic and private equity
acquirers on the trail for acquisitions,
purchase price multiples and deal activity
are likely to see an upward trend through
the remainder of this year and into 2017.
Sources:
1. Financial Times
2. Dealogic
3. Bloomberg
4. S&P Capital IQ
   
5. US Bureau of Economic Analysis
6. Private Equity Growth Capital
Council
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