Abstract
Prior research, investigating the absolute performance of multiples as well as the relative superiority of different types of multiples, yields contradictory results that might be attributed to varying peer pool settings. This paper emphasizes on the technology sector and extends existing research, in its entirety being limited to trading multiples on listed companies, to transaction multiples on private firms. Employing a set of 22,967 observations on private market transactions of technology firms collected from 2000 until 2018, I examine the systematic impact of peer pooling on (i) the relative superiority of cross-sectoral multiples, (ii) the absolute superiority of sectoral multiples and, (iii) the absolute superiority of cross-sectoral multiples being segmented by various country-specific high-tech indicators. The multiples employed capture both, enterprise value and equity value multiples. The performance of the multiples in the various peer pool settings is evaluated according to bias as well as accuracy, utilizing the standard holdout routine on the transactions. The results indicate that (i) contradictory results in prior research on multiple’s bias may be strongly attributed to the varying peer pools employed, (ii) the enterprise value to total assets multiple clearly dominates across all peer pools on a cross-sectoral basis, indicating that contradictory results on multiple’s accuracy may not be attributed to the varying peer pools employed and, (iii) the performance of sectoral multiples depends on the value driver employed, showing only a weak relationship with the peer pool setting. Therefore, valuation analysts are recommended to utilize larger peer pools when employing cross-sectoral multiples, to emphasize on the enterprise value to total assets multiple, to further break down the high-tech sector into sub-sectors and, to employ sectoral multiples or multiples segmented according to country-specific high-tech indicators alternately.
Highlights
Over the years, numerous studies have been conducted, elaborating upon the absolute performance of multiples as well as on the relative superiority of a variety of multiple’s definitions
Empirical evidence on the performance of multiples reveals contradictory results that may be attributed to varying peer pool settings
Inconsistencies have been documented on (i) the performance of enterprise value as opposed to equity value multiples, (ii) the relative superiority of multiples according to the value driver employed and, (iii) the relative superiority of cross-sectoral multiples
Summary
Numerous studies have been conducted, elaborating upon the absolute performance of multiples as well as on the relative superiority of a variety of multiple’s definitions. These studies are subject to at least two limitations. They are built upon varying samples that might be responsible for result’s variations. They are in its entirety limited to trading multiples generated from capital market data on listed companies. Highlighted by the fact that the market for corporate takeovers of private firms is at least as important as the public market, utilizing the most appropriate peer pool in private firm valuation is a question of interest to valuation analysts, investors as well as the academic community
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