1. Introduction

On January 12, 2010, The Wall Street Journal (WSJ) announced that the Dutch brewing company Heineken acquired the beer business of Femsa, the leading integrated beverage company in Latin America:

 

Like an enthusiastically poured beer, Heineken enjoyed some froth from its 5.3 billion euro ($7.64 billion) acquisition of Femsa’s beer business.

 

While most people probably agree that $7.64 billion is a lot of money, this value alone does not tell us much about whether the price of the acquisition was high or low. To find out, we need to know what Heineken received in exchange for the acquisition price. We need a standard of comparison. The WSJ article uses earnings before interest, taxes, depreciation, and amortization (EBITDA) to better understand the acquisition price:

 

At 11 times historic earnings before interest, taxes, depreciation, and amortization, it is above recent small beer deals at eight times to 10 times, but below boom-era transactions at 13 times to 14 times.

 

We have just seen the first valuation multiple at work. Instead of doing his own complicated valuation to assess the fairness of the acquisition price, the journalist looked for a variable that explains a firm’s ability to generate value. He chose historic EBITDA and used that number to standardize the acquisition price. The result is a valuation multiple of 11 times EBITDA, which can be used to compare the transaction at hand with recent transactions in the same industry. In this example, the acquisition price seems relatively fair because comparable transactions were conducted at more or less similar valuation multiples.