Dear Clients and Friends,
A buyer’s rationale on the price paid for a business isn’t always so obvious.
In January, Fiserv acquired First Data Corporation for around $22 billion, 2x revenue; in March, Fidelity National bought WorldPay for around $43 billion, 10x revenue. In April, Deutsche Börse and General Atlantic teamed up to acquire Axioma for around 8x revenue. It’s clear that FinTech, data and analytics companies trade at widely divergent valuation multiples. And yet, we keep hearing bankers try to apply the multiples achieved by one company to estimate the value of another.
Many factors impact value, but, for the sake of brevity, we’ll note four of them: revenue growth; expected future profit; perceived risk; and supply and demand in a competitive market.
We’ll start with supply and demand: it’s personal. If you don’t want something (say an airplane) it doesn’t matter what the price is: you don’t want it. If you do want something, then the price you are willing to pay isn’t driven by “multiples,” it’s driven by competition in the context of affordability (i.e., you want to pay as little as possible).
However, revenue growth is one factor that drives multiples. Clearly, the market should value a company higher that is growing its top-line faster than another company—all things being equal. And the focus should be on expected growth in the post-deal world—not as a standalone. First Data, WorldPay, and Axioma all have potential to materially improve the revenue growth of their acquirers’ and that’s what counts most.
The same holds true for the more profitable company. In theory, the one with higher expected future profit should be worth more. But again it’s about the future profit in the new world.
The same approach holds true when assessing perceived “risk” to future revenue and profit. The firm with less risk should be worth more than the other. And this all should be measured in the post-deal context. (Sometimes the deal itself mitigates risk.)
Recently, we advised a company that was barely profitable. Its balance sheet was minimal. Yet, they sold for more than 6x revenue. Was the buyer foolish? Certainly, not. The company was growing fast; had strong management and proprietary IP; and was capturing market share quickly. Further, we helped the buyer see a unique opportunity to add significant strategic value. They understood how much revenue and profit the combined company could generate. The process was competitive and the buyer was disciplined on price. They’ve owned the business for some time now and are quite happy with it. We like that.
A few of the more interesting recent transactions this month include:
- Global Payments (NYSE:GPN) and Total System Services (NYSE:TSS) agreed to a $26.7bn merger,
- Nuvei (Plano, TX) agreed to acquire SafeCharge for $889mm,
- Intercontinental Exchange (NYSE:ICE) agreed to acquire Simplifile, LC for $335mm,
- TransferWise (London, UK) raised $292mm in a financing round led by Lead Edge Capital, Lone Pine Capital and Vitruvian Partners,
- Sisense (New York, NY) acquired Periscope Data (San Francisco, CA) for $100mm,
- Marlin & Associates advises Zoomdata on its sale to Marlin Equity. Read more here.