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Reverse Multiple Arbitrage

Definition - What does Reverse Multiple Arbitrage mean?

A reverse multiple arbitrage occurs when a completed strategic acquisition does not deliver the intended synergies, but, rather, puts the buyer at risk and involves negative effects. It usually results from both organizations being incompatible with each other, forcing a deviation from the buyer's original strategy and, ultimately, jeopardizing the future profitability of the acquired and/or combined entity.

A reverse multiple arbitrage is typically characterized by a loss of:

  • Identity: The organization acquired does not possess an identity that matches up with the buyer. The identity and culture of the combined entity is diluted by this incompatibility, which may result in a loss of transaction goodwill. In the case of a public company buyer, investors may decide to sell out of the combined entity, and potential investors may choose to remain on the sidelines until the combined company's identity is sorted out.
  • Customers: The customers of the combined entity do not approve of the acquisition, or consider it dilutive to the value that they are accustomed to receiving. In this case, they cease to be interested in buying the combined entity's goods and services, negatively impacting the revenue line.
  • Supplier relationships: Distributors do not share the same values and vision, so make the decision to not carry on with the business relationship.
  • Human capital: The combined company's employees may not match up or they have different cultures and working conditions than they are accustomed to. Employees may leave, which could significantly decrease in go-forward value.

Divestopedia explains Reverse Multiple Arbitrage

A reverse multiple arbitrage usually occurs because the qualitative elements of the due diligence—namely, cultural fit—were not addressed. The buyer did not raise some key 'fit' questions, such as:

  • What are the differences and commonalities between both employee cultures?
  • How are employees paid and how do they progress professionally in their companies?
  • What kind of ability to grow and develop do they have in their individual companies?
  • What is the employee strategy in the short-, medium- and long-term?
  • How do the two companies deal with distributors?
  • Were the existing customers analyzed to determine if there was fit for the acquisition completed?
The confidentiality agreement does not usually allow for the buyer to get in touch with the target's customers and suppliers during the process. However, a sophisticated buyer will find ways to assess the customer base to prevent reverse multiple arbitrage from occurring. Furthermore, the buyer will keep a close eye on the entire strategy being implemented with particular emphasis on integration. During due diligence, reverse multiple arbitrage can be prevented by paying attention to how the combined entity will proceed post-transaction, rather than just focusing on the financial metrics.
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