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How to tell if a company is a potential takeover target?

Sunday, May 5, 2013

Sometimes, we see companies being taken over and, many times, at a huge premium. Have you wondered how takeover targets are determined?


Well, quantitatively, one way to determine if a company has the potential to be a takeover target is to look at its Enterprise Multiple. This is a financial ratio that is arrived at by dividing Enterprise Value by EBITDA (earnings before interest, taxes, depreciation and amortisation).

So, to understand Enterprise Multiple, we have to understand Enterprise Value and EBITDA.

Enterprise Value is the company's market cap plus debt, minority interest and preferred shares, minus total cash and cash equivalents. This is a more accurate takeover valuation than just looking at the company's market capitalisation.

EBITDA is used to evaluate profitability of a company. EBIT looks at operating profits and EBITDA looks at earnings before any accounting or financing adjustments come into the picture.

Put Enterprise Value over EBITDA and we get a ratio. The lower the ratio, the more attractive the company is as a takeover target because a lower ratio suggests that the company's valuation is cheaper.

Of course, each industry has its own norms. So, a low Enterprise Multiple does not make a company a more attractive takeover target if every company in the industry has the same low ratio. If, however, a company has a much lower Enterprise Multiple than its peers, then, it is probably an attractive takeover target.


See the Enterprise Multiple of China Minzhong: here.
See the Enterprise Multiple of ASL Marine, Marco Polo Marine and Jaya Holdings: here.

The above links bring us to a service provided by "Infinancial Analytics" which I discovered quite by accident. I wish to draw readers' attention to the section on "About Market Valuation" at the bottom of the pages.

Although useful, EV/EBITDA is only one approach in valuing a company and shouldn't be the be all and end all.

Related posts:
1. China Minzhong: New substantial shareholder.
2. Marco Polo Marine: A neglected gem.
3. Recommended books for FA.

6 comments:

seefei said...

MPM is the lowest and the one with the mostest potential of being taken over. How that day will come...

AK71 said...

Hi seefei,

I think it would have to be a totally irresistible offer for Chairman Lee to sell his 60% stake in the company. ;)

Steven said...

Hi AK,
This site (financials analytics)you posted was very useful in my FA. Amazing diagrams and graphs. Thanks!

AK71 said...

Hi Steven,

You are welcome. I am glad to share any useful discovery. :)

HFD92 said...

Hi ak,
Mr markets seems to be very bearish recently... ESP today where results are out... however I'm still pretty OK considered the probable long term synergy with Indofoodd suskes.

What's ur take?

Best regards,
Dave tay

AK71 said...

Hi Dave,

It is hard to account for Mr. Market's behaviour most of the time. ;)

I hope to look at China Minzhong's results and chart later tonight. I will share my thoughts here in my blog then. :)


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