BigCo’s chief financial officer is trying to determine a fair value for PrivCo, a nonpublicly traded firm that BigCo is considering acquiring. Several of PrivCo’s competitors, Ion International and Zenon, are publicly traded. Ion and Zenon have P/E ratios of 20 and 15, respectively. Moreover, Ion and Zenon’s shares trade at a multiple of earnings before interest, taxes, depreciation, and amortization (EBITDA) of 10 and 8, respectively. BigCo estimates that next year, PrivCo will achieve net income and EBITDA of $4million and $8million, respectively. To gain a controlling interest in the firm, BigCo expects to have to pay at least a 30% premium to the firm’s market value. What should BigCo expect to pay for PrivCo?
a. Based on P/E ratios?
b. Based on EBITDA?