M&A multiples for high-growth companies should be looked at growth-adjusted
Cisco’s acquisition of AppDynamics was an amazing transaction in many respects and plenty has been written about it. However, as I was reading the take of Tom Tunguz on the deal’s acquisition multiple, it occurred to me that not all valuation multiples tell the same story.
Let me explain: 17.3x EV/TTM Sales may appear high at first glance, but that’s without considering the company’s growth rate. Here are the same transaction multiples, adjusted for each company’s top-line growth:
As you can see, while AppDynamics is still at the top end of its peer range, the growth-adjusted price tag appears much less outlandish.
It is true that valuing a company is more art than science. But valuations are negotiated, and that’s where the right type of number-crunching can help justify a seemingly high purchase price.
Let’s look at Tom’s scatter chart in a slightly different way:
Based on this, Cisco’s M&A advisors could argue that AppDynamics is priced at a premium vs. its expected valuation. In fact, SuccessFactors was growing just as quickly and its multiple was much lower.
But here is the counter-argument: SAP underpaid for SuccessFactors. Its multiple is the same as that of companies growing at half the pace. This implies that SuccessFactors could be an outlier, which is also supported by this peer group having a correlation factor of just 0.587.
So what if we exclude SuccessFactors? Here is the chart:
Now the correlation is 0.77, much higher than when SuccessFactors was included.
And the AppDynamics valuation multiple is exactly what it should be, taking growth into account.
About the author: Georgios Markakis is Managing Partner at Venero Capital Advisors (www.venerocapital.com), an independent corporate finance boutique providing mergers & acquisitions, strategic and capital raising advice to high growth companies in the UK and continental Europe.
