Chapter 13Multiples in Practice
13.1 A FRAMEWORK FOR THE USE OF STOCK MARKET MULTIPLES
The practical considerations about of market multiples presented in this chapter are based on the principles discussed in Chapter 12. We aim at providing the key tools to apply the relative valuation via multiples, and to critically assess relative valuations carried out by third parties. Our discussion is organized in the following way:
- How to build the sample of comparable companies in the industry under consideration.
- How to define a short list of companies comparable to the one being studied.
- How to “clean” the sample.
- How to assess the validity and actual comparability of multiples.
- How to cross-check the consistency of different multiples, business models, and value drivers.
- How to choose the proper multiples for the valuation.
13.1.1 Building the Panel of Comparables
The sample of comparable companies can be selected using the main international databases (i.e., Bloomberg and Datastream are the most popular), which include information about the industry they belong to, the kind of activity they perform, their degree of diversification, as well as all the economic and financial information required to calculate their multiples.
The first step of the analysis consists of the identification of the industry the company works in. The direct competitors of the company—when available—are usually good candidates in terms of comparability. Bear in mind that geographical markets of reference ...
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