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Realizing that EV is the minimum "price tag" for a company, but has this taken the place of EBITDA as it compares to measuring a companies value for acquisitions?

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Dear nanhalia,

EV = enterprise value = value of debt + value of equity.

EBIDTA = earnings before interest, taxes, depreciation and amortization, is a proxy for "earning power of a company". So they aren't that comparable directly...

Best,

Lleweilun Smith
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Thanks for the reply. Would you say that financial buyers of companies are focusing on EBITDA - CAPEX or do you think they are focusing more on Free Cash Flow? If FCF, how do you think they calculate it?
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Dear nanhalia,

For what its worth, Warren Buffett is not a big fan of EBITDA. The problem is that amortization is often truly not a "cash charge"; however depreciation usually eventually is a real expenditure. Take that however you like it... Also taxes are a real expense, I like the idea of an "after-tax" proxy for cash flow.

I like Stewart's methodology of FCF = NOPAT - I (I = "investments"). His methodology also focuses on various sources of "free money" on the balance sheet (he calls "non-interest bearing current liabilities" or NIBCLS); the idea is that for example increases in accounts payable may fund a business (and increase its free cash flow).

My feeling is that though folks use several different sorts of models, to check each other. For example, they may make some FCF predictions, then compare price/FCF or price/earnings to a peer group (is it comparable? If not, why?) But I think that ultimately some sort of DCF must be done.

Lleweilun Smith
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Hi nanhalia,

My response is probably a little late but I think currently FCF is the predominant factor in valueing acquisitions. In the big LBO days, EBITDA was probably more common since they were looking for the quick flip and didn't care about taxes, depreciation or interest, since they weren't looking for any net income, weren't going to waste cash on upkeep, or care about the poor junk bond holders anyway.

Now, it seems the acquisition is more strategic so the sooner they can make it accretive the better and the more efficient they make the acqisition the better. So FCF is closer to expected earnings + expected savings + non cash charges - investment costs. With some additional debt costs or dilution factored in, I'm sure the Investment Bankers will produce all sorts of analysis spreading out into the future but I think you'll find that most acquisitions have a total purchase price including debt at around 10x pretax + depreciation or roughly 16x (pretax+deprec x ( 1 - tax rate)).

My impression,

ZB
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