• 2023.05.10
• M&A

# Calculation of stock price in M&A (multiple method)

## Calculation of Corporate Value

The calculation method used in M&A is to calculate the corporate value and divide the corporate value by the number of outstanding shares to calculate the corporate value per share (stock price). In the case of a listed company, its shares are traded in the market, so the share price is the price at which the shares are traded in the market. The enterprise value (market capitalization) is calculated by multiplying the market price of the stock by the total number of shares outstanding. In contrast, unlisted shares do not have a market price like listed shares. In addition, although some transactions are conducted on a negotiated basis, the number of transactions is quite limited, and in many transactions, special circumstances between the parties involved come into play, so it cannot be said that the transaction case price necessarily represents an objective and fair price. Therefore, the valuation of shares of an unlisted company in an M&A transaction is calculated based on one (or more) of the three approaches. There are three approaches to the calculation of corporate value.

### Market Approach

This is an approach that ascertains value from the market. The price is calculated based on past transaction prices. Since the calculation of price is based on past transactions, it is sometimes referred to as the “transaction case method.” For example, if there were an equal number of transactions of 1,000 yen, 1,500 yen, and 2,000 yen each during a certain period of time in the past, the average of these transactions would be taken to determine the stock price to be 1,500 yen. However, since the number of trading cases of unlisted company stocks is extremely small and various special circumstances are at work, past trading prices do not necessarily constitute an objective price. Another method of the market approach is to calculate the unlisted company’s stock price by referring to the stock prices (market prices) of similar listed companies. This method calculates the market capitalization of a listed company as a multiple of the EVITDA or net income of the relevant listed company, and then calculates the market capitalization of the unlisted company by multiplying the EVITDA or net income of the unlisted company by the same multiplier (multiple). The stock price of an individual stock would be calculated by dividing the total stock market capitalization by the total number of shares outstanding. This method is also called the multiple method (comparable companies method) because it calculates the total market capitalization (corporate value) using a certain multiple. The multiple method has the advantage of making it very easy to calculate the corporate value (market capitalization) of unlisted companies, but it can result in large differences in calculated prices depending on which listed companies are used for comparison. In addition, since unlisted companies are often small, it is difficult to find similar companies among listed companies, which are often relatively large. If there are no similar listed companies due to the size of the company or the nature of its business, the multiple method cannot be used. The comparable industry method, which is used to calculate the valuation of shares held by family members in a family-owned company, also falls under this market approach.

### Income Approach

This method calculates corporate value based on the earnings generated by a company. The most common method is the DCF (Discounted Cash Flow) method, which calculates corporate value by calculating the future cash flows generated by the business and discounting them to present value, and is very often used in the calculation of stock prices in M&A transactions. The capitalization method calculates corporate value by converting the future earnings generated by a company into its present value. The corporate value is calculated by dividing the average earnings by the capitalization rate. For example, if average earnings are 100 million yen and the capitalization rate is 15%, the corporate value is 100 million yen ÷ 15% = 666.66 million yen. The dividend capitalization method is another income approach that calculates corporate value based on dividends that can be received in the future. It is used to calculate the value of shares held by non-family shareholders (who cannot exercise influence other than to receive dividends) in a family-owned company.

### Cost Approach

The cost approach calculates corporate value based on the cost of reacquisition of assets held by the subject company. The book value net asset method is one of the cost approaches, in which equity capital is considered as stock value, and stock price per share is calculated by dividing the amount of equity capital by the total number of shares issued and outstanding. The other method of the cost approach is the book value-per-share method. The market value of total assets minus operating debt and interest-bearing debt is used as the equity value, which is then divided by the total number of shares outstanding to arrive at the per-share price. The calculation of assets at market value under the net asset value method is not based on book value, but rather on actual market transaction prices.

## Multiple Method (Comparable Companies Method)

The multiple method (comparable companies method) is a method of valuing a target company based on the valuation multiples of similar listed companies. The valuation multiple of similar companies is the “multiple”. It calculates how many times the market capitalization of a similar publicly traded company is multiplied by the company’s earnings, EBITDA, net assets, etc. For unlisted companies, the same multiples are multiplied by the company’s profit, EBITDA, and net worth figures to calculate the unlisted company’s enterprise value. Since the market capitalization of listed companies is publicly available as a multiple of EBITDA (EBITDA multiple) and a multiple of net assets (net asset multiple), the corporate value can be easily calculated by multiplying the EBITDA and net asset prices of non-listed companies by these multiples.

### EBIT and EBITDA

EBIT stands for Earnings Before Interest and Taxes and refers to earnings before interest and taxes. EBITDA stands for Earnings Before Interest Taxes Depreciation and Amortization. It refers to earnings before interest, taxes, and even depreciation and amortization. It is an indicator of how much cash is actually left in the company. The multiple is calculated from “Market Capitalization divided by EBITDA (or EBIT). For example, if there is a listed company with a market price of 3,000 yen per share and this listed company has issued 1 million shares, the market capitalization of this company is 3,000 yen/share x 1 million shares = 3 billion yen. If the EBITDA (or EBIT) of this company is 150 million yen, then “Market capitalization / EBITDA (or EBIT) = 3 billion yen / 150 million yen = 20, and the multiple of this company is 20 times. In other words, 20 times EBITDA is the market capitalization.

### PER

PER stands for Price Earnings Ratio, which is calculated by dividing the market capitalization of a company by its net income. If the market capitalization of a comparable listed company is 1 billion yen and its net income is 200 million yen, the PER is 1 billion yen ÷ 200 million yen = 5 times. If the net income of an unlisted company is 50 million yen, then 50 million yen x 5 times = 250 million yen would be the market capitalization of the unlisted company. Therefore, if the unlisted company issued 10,000 shares, the price per share would be 250 million yen ÷ 10,000 shares = 25,000 yen.

### PBR

PBR stands for “Price Book-value Ratio” and is calculated by dividing the market capitalization of a stock by the price of its net assets. For example, if the market capitalization of a listed company is 1.2 billion yen and its net assets are 1 billion yen, PBR is 1.2 (market capitalization is 1.2 times net assets). If the net assets of the unlisted company for which the stock price is to be calculated are 700 million yen, then 700 million yen x 1.2 times = 840 million yen is the market capitalization of the unlisted company. Therefore, if the unlisted company issued 10,000 shares, the share price per share would be 840 million yen / 10,000 shares = 84,000 yen.