Market Multiples: Assessing the Relationships between M&A Deal Multiples, Market Conditions, and Target Accounting Measures

Abstract

Mergers and Acquisitions research often focuses on the prices paid, as a multiple of earnings or cash flow, by strategic acquirers for their targets. These multiples are salient to this body of research, as they form the basis of company valuation on a theoretical and practical level. A variety of factors influence the size of these multiples, including prevailing macroeconomic conditions, the particular industry of the target company, the target’s profitability, and company-specific factors such as the market’s perceived risk of the target. This paper analyzes the relationship between multiples paid in strategic acquisitions and prevailing macroeconomic conditions, as well as accounting measures of the target company, with the goal of assessing whether or not macroeconomic conditions or company-specific characteristics play a role in determining the multiple paid. Our research contributes to the existing literature by using forecast P/E and EBITDA multiples, which provide a more forward-looking picture of how targets are valued. We analyze the deals for the food, business services, measuring equipment, oil and gas, and software industries.