33 Thoughtheearningsmultipleswillbeconsistent,
with both themarket value ofequity and earnings
includingtheportionofthesubsidiaryownedbythe
parent company, finding comparables can become
difficult,especiallyifthesubsidiaryislargeandhas
differentfundamentals(cashflow,growth,andrisk)
than the parent company.With firm value multiples, we run into a different set of
problems, again depending on how a cross holding is
categorized.
- Minoritypassiveandactiveinvestments.Firmvalue
multiplesareusuallybasedonmultiplesofoperating
measures(revenues,operatingincome,EBITDA).In
minority investments, none of these numbers will
incorporate the corresponding values for the
subsidiary in which the parent company has a
minorityholding.Infact,alladjustmentsforminority
investmentsoccurbelowtheoperatingincome line.
Asaconsequence,firmvaluemultipleswillbebiased
upward when there are significant minority
investments,sincethefirmvaluewillincorporatethe
valueoftheseholdings(atleastinthemarketvalue
ofequity)butthedenominator(revenuesoroperating
income) will not. - Majorityinvestments.Theconsolidationthatfollows
majorityinvestmentscanwreakhavoconfirmvalue
multiples.Toseewhy,assumethatcompanyAowns
60 percentof company Band reports consolidated
financialstatements.Assumealsothatyouaretrying
tocomputetheenterprisevalue-to-EBITDAmultiple