A popular valuation metric is “Earnings Before Interest, Tax, Depreciation and Amortization” (EBITDA), for example to valuing unlisted companies and mergers and acquisitions.
For an attractive investment, a company competing in a high growth industry, an investor might expect a significant acquisition premium, above book value or current market value, which values the company at several times the most recent “EBITDA”. A private equity fund for example, may buy a target company for a multiple of its historical or forecasted “EBITDA”, perhaps as much as 6 or 8 times.
In certain cases, an “EBITDA” may be sacrificed by a company, in order for the pursuance of future growth; a strategy frequently used by corporate giants, such as, Amazon, Google and Microsoft, among others. This is a business decision that can impact negatively on buyout offers, founded on “EBITDA” and can be the cause of many negotiations, failing. It may be recognized as a valuation breach, with many investors maintaining that, sellers are too demanding, while buyers are regarded as failing to realize the long-term potential of, expenditure or acquisitions.
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