What Does "Multiple" Mean? The linguistic contortions employed by President Clinton bring to mind the variety of meanings ascribed to the word "multiple" in the context of acquisition valuations. What was the multiple on that deal?……is a question routinely asked and answered. The question and answer however, are often imprecise, leading inevitably to comparisons that can be very misleading. While the answers to the first two questions illustrated above are disingenuous, answering "it depends" when asked, "What is the multiple?" can be a more appropriate response. In the article that follows, we will discuss this subject as it relates to several recent deals that have taken place in the chemical industry. What is the Multiple? A multiple is typically calculated by dividing the total consideration in a deal by an earnings figure. As we will discuss below however, what is used as the numerator in this simple calculation, and what is used as the denominator, can vary significantly. DSM’s acquisition of Gist-Brocades – A day after this deal was announced last year, a panelist flying to an M&A conference read in the Wall Street Journal that the multiple on the deal was 19. During the panelist’s presentation that took place later that morning, reference was made to the 19 multiple. At an ensuing break the panelist was approached by one of the attendees and was told that the multiple was not 19, but was 14. The attendee was a DSM employee who was familiar with the deal! Why the difference between how the DSM employee viewed the deal and how it was reported in the paper? The DSM employee was using an EBITDA multiple and the Wall Street Journal was using a P/E multiple. Because the numerators and denominators in these calculations are completely different, the multiples are completely different. Albemarle’s recent bid for Albright & Wilson – An article in the March 15th issue of Chemical Marketing Reporter on this offer also illustrates different ways to calculate a multiple. At one point in the article, the multiple was reported as 6.1. Later, in the same article, the multiple was reported as 7.4. Why the disparity? The 6.1 multiple was based on 1998 actual EBITDA and the 7.4 multiple was based on 1999 projected EBITDA. DuPont’s acquisition of Herberts from Hoechst – DuPont’s recent deal to buy Herberts offers a striking example of the use of multiples that are like night and day. The Wall Street Journal reported on October 30, 1998 that DuPont’s price was 18 times EBIT. Chemical Week reported that the EBITDA multiple was 7.94, significantly lower than that reported in the Journal. Why the disparity here? While it is not entirely clear, the difference may be explained at least in part by the fact that the Journal used as its denominator an EBIT figure and Chemical Week used EBITDA. A review of some other recent transactions and offers shows that multiples are rarely calculated on the same basis from one publication to another (see following chart). What is the Multiple? Hercules/BetzDearborn 10.6 CMR 13 CRN Ciba/Allied Colloids 12.1 CMR 16 CW Akzo/Courtaulds 8.2 CW 14 CEN Goodrich/Freedom 11 CEN 13.9 CW DSM/Gist-Brocades 19 WSI 14 CEN Dupont/Herberts 7.94 CW 18 WSI Albemarle/Albright & Wilson 6.1 CMR 7.4 CMR CW (Chemical Week), CMR (Chemical Marketing Reporter), WSJ (Wall Street Journal), CEN Chemical and Engineering News) Before comparisons are made, the method of calculating the multiple must be determined: What is in the numerator? Is it just cash paid? Does it include debt assumed? If there are liquid assets or cash as part of the assets acquired, are these subtracted from the total? Are there other payments, such as for a non-compete, that are included in the calculation? What is in the denominator? Net income? EBITDA? EBIT? And is it last year’s numbers? A projection? An average of some kind? And are capital expenditures factored into the calculation? The point here is not that the calculations you see in the press are wrong. They are undoubtedly correct. The point is that before comparisons are made from one deal to another, it is important to determine how a multiple was calculated to make sure the comparisons are meaningful.