What Does Multiple Accretion Mean?
Multiple accretion occurs when a public company acquires another company at a lower valuation multiple than the buyer's own public valuation multiple. The result of multiple accretion is that, immediately following the acquisition, the earnings of the acquired company are valued by the market at the higher multiple of the acquiring public company. This "re-pricing" of the acquired earnings may increase the share value of the public acquirer.
For example, if a private company is acquired at 4X EBITDA by a public company trading at 6X EBITDA, the incremental EBITDA contributed by the acquired company would experience multiple accretion of 2X because it would get re-priced at the overall 6X multiple.
Divestopedia Explains Multiple Accretion
Multiple accretion is a common arbitrage technique used by publicly traded companies. Theoretically, public companies are valued at a premium to private companies for a variety of reasons including:
- Larger public companies are perceived to be less risky than the private companies they acquire; and
- The shares of public companies are more liquid than the shares of private companies, and therefore they command a premium valuation.
It is important for private company owners considering selling to a public ompany to understand multiple accretion. Although a public company buyer will never pay a higher multiple than what it currently trades at, owners who understand multiple accretion should try to close the gap between the multiple at which their company is being acquired at, and the multiple at which the acquirer trades at.