ARBITRAGE PRIMER
Arbitrage occurs when a public company acquires another company at a lower valuation multiple than the buyer’s own public valuation multiple. The result of this arbitrage (multiple accretion) is that, immediately following the acquisition, the earnings of the acquired company are valued by the market at the higher multiple of the acquiring public company.
This “re-pricing” of the acquired earnings may increase the share value of the public acquirer.
For example, if a private company is acquired at 4X EBITDA by a public company trading at 6X EBITDA, the incremental EBITDA contributed by the acquired company would experience multiple accretion of 2X because it would get re-priced at the overall 6X multiple.
A Private Company with $1,000,000 EBITDA acquired at multiple of 4x = a $4,000,000 valuation in the Private Value World.
In the example above, that same $1,000,000 would be valued at $6,000,000 ($1,000,000 * 6) in the Public Value World in which the acquiring company resides.
Creating $2,000,000 in accretive value.
Multiple Arbitrage
Moving the acquired earnings from
Main Street to
Wall Street
"Give a man a fish and you will feed him for a day, teach a man to ARBITRAGE and you will feed him forever."
Warren Buffett
Shefford Group, LLC.
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