To be sure, high-multiple acquisitions run bigger risks in the short run and often encounter skepticism in the form of investor churn and temporary stock-price weakness. There is an understandable wait-and-see attitude while Wall Street determines whether the high price meant that too much was paid for an unattractive target or that a fair price was paid for a desirable one.
A higher-multiple target may also involve a foray into a less stable sector, such as telecommunications or energy; in other words, higher risk commensurate with potentially higher return. Today’s shareholder base may not like the shift in direction. But for every shareholder who wants out, there are bound to be many more who will consider investing. Preoccupation with the existing shareholder base ignores the reality that today’s markets provide an unconstrained source of efficient capital.
Yes, high multiples raise the stakes. But if companies have been diligent about choosing the appropriate acquisition, a target’s seemingly high multiple shouldn’t be a deterrent. On the contrary, it may point to the rare situation in which one plus one can be made to equal three.
Justin Pettit (pettit_justin@bah.com) is a vice president with Booz Allen Hamilton who specializes in shareholder value and corporate finance. He is the author of Strategic Corporate Finance: Applications in Valuation & Capital Structure (Wiley, 2007).
