Though deal volume has remained slow, multiples for growing companies are increasing, experts agree.
The trend, which applies only to top companies, is partially due to competition between private equity firms and strategic buyers that have a lot of money on hand.
“People give higher multiples to companies that are growing,” says David Grinberg (pictured) chair of the Mergers & Acquisitions group at Manatt Phelps & Philips. “People are being very specific with the companies they are buying, so they are only going for the very top companies. Even some very good companies are not getting sold,” Grinberg says.
A good example of a company that was able to generate a high multiple is J Brand Holdings LLC , which was sold to Fast Retailing Co. Ltd. in November 2012. Fast Retailing paid $290 million for an 80 percent stake in the company, according to Geoffrey Haydon, vice president of Moss Adams Capital, which is a multiple 2.9 times revenue. “J Brand is a good example of a company that had really taken market share from its rivals in the last two or three years,” says Haydon. (pictured, below)
There are three main reasons that the valuation multiples for some companies have gone up: The private equity community has about $100 billion in expiring capital that needs to be put to use; interest rates are still relatively low, which allows companies to borrow for less and pay a higher price; and with the large number of deals that happened at the end of 2012, there are fewer really strong companies in the market, which is also driving prices up, Haydon says.
Both private equity and strategic buyers are competing for targets. “There are a lot of buyers chasing the same companies, and of course that drives multiples up,” Grinberg says.
The trend, according to Haydon, is company-specific rather than sector-specific.
At some point, those top-tier companies are going to run out, and buyers may move on to looking at second or third-tier companies, according to Grinberg.
If the deal market starts to come back “in robust fashion,” either because people become more certain about the economy or government, Grinberg says he expects to see multiples decrease.
But for now, the trend could last for another 18 months or so, according to Haydon.
“The amount of overall unspent private equity capital has been going down for the last four or five years, so that will continue to be the case. I think this near-term 18 months is when you’ll see the multiples being affected by all this expiring capital,” Haydon says.