Are valuation multiplies observed in current European M&A deals overvalued?
Philippe Giraudon, CIIA, PHG Finance, Corporate Finance Advisory & Training managing partner, commented that current multiplies in European M&A deals are higher than before crisis in 2008. We may thus suspect a forthcoming valuation bubble in M&A deals. Though multiples depend on industry, from buyer's perspective, a given price can only be justified if expected revenues and synergies do materialise in practice, which does not often happen as planned.
In practice, there are three drivers of valuation multiples: (1) prospects of sales and profit margins, (2) risk associated with the company and (3) level of interest rates.
P. Giraudon, CIIA commented that "Valuation multiples observed on stock markets and in M&A transactions across Europe do not seem to be supported by high growth and margin prospects or by low risk businesses; they rather seem to be supported by very low interest rate levels in a context where numerous investors are desperately trying to find profitable investments".
Therefore a rise in interest levels may challenge the value of M&A deals and stock markets. Buyers who base their investment decisions on conservative assumptions will not be affected as long as debt raised to finance such acquisitions can be properly repaid. In addition, less risky acquisitions usually involve target companies that have mid to long-term contracts, as revenues can be forecasted with more predictability.
Other trends that can be spotted in M&A deals:
1. European M&A deals are supported by a growing number of acquisitions by non-European buyers
2. Commercial agreements and partnerships seem to become more frequent as a serious alternative to full M&A deals between corporates.
"We may wonder whether M&A corporate transactions as such may more and more be replaced by comprehensive commercial agreements between strategic partners; such contract-based partnerships my even prove easier to implement, less costly, as well as flexible to adapt to changing economic environment in comparison with equity-based deals" said P. Giraudon, CIIA.
Financial Analyst Association (FAA) together with Lithuanian financial market institute took the opportunity to invite P. Giraudon, CIIA to hold intermediate level course about "Mergers & Acquisitions" on the 28th May, 2014. Philippe Giraudon is Certified International Investment Analyst and Certified European Financial Analyst, and has a 12 year experience in Mergers & Acquisitions.
In Europe, having Certified International Investment Analyst (CIIA) qualification ensures a high level of quality that, for example, ensures that M&A processes are executed in a relevant way for stakeholders. The community of CIIA holders shares expertise in the financial area, speaks the same language and has a common understanding of technical details. It helps to create of community of financial players that develop a commonly shared practice in the field and minimize cultural difference.
More about Certified International Investment Analyst qualification in Lithuania can be found here.
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Philippe Giraudon is Certified International Investment Analyst (CIIA) and Certified European Financial Analyst (CEFA) and has a 15 year experience in Mergers & Acquisitions, Leveraged Finance and Strategy & Corporate Development in large European and Anglo-Saxon banks between Paris and London (e.g. BNP Paribas, Baird International, HSBC). Philippe is managing partner in PHG Finance, Corporate Finance Advisory & Training business for 2 years.
Philippe has also been training Finance Professionals, Corporate Managers and Business School students for 9 years in Corporate Finance, Company Valuation, Financial Analysis and Mergers & Acquisitions across various countries.