Thinking of a takeover…Well how about ‘The Acquirer’s Multiple’

Thinking of a takeover…Well how about ‘The Acquirer’s Multiple’

The Acquirer’s Multiple – Background
Many people have heard of the infamous Magic Formula documented by Joel Greenblatt in his book “The Little Book That Beats the Market” which is a direct quantitative value investment model in ranking stocks by price and ROIC. In a similar nature, The Acquirer’s Multiple founded by Tobias Carlisle is a valuation technique, combining both value + quality in order to find the top 30 most attractive takeover candidates, based on the investment strategy described in his superb book “Deep Value: Why Activist and Other Contrarians Battle for Control of Losing Corporations.”

This is a form of Deep Value investing, and it was the original investment style that Warren Buffett used while he was learning under his mentor Benjamin Graham. In a nutshell, deep value investors are concerned about protecting their downside, and look for undervalued stocks with a large margin of safety between value and price – “Corporate gold dollars are now available for 50 cents or less – but they do have strings attached.” – Benjamin Graham (1932).

The Makeup of The Acquirer’s Multiple

The premise of the methodology is to examine several financial statement pieces such as debt, preferred stock, minority interests, interest, depreciation, and amortization. The actual formulation is:
Enterprise Value / Operating Earnings (TTM)

You can use MarketXLS formulas like shown below to calculate The Acquirer’s Multiple.
The Acquirer's Multiple

Using the same formulas, we calculated the Acquirer’s multiple for all of the S&P 500 stocks. Below are the top 10 companies with lowest figures.

For the Q2 2018, below is the full list of S&P stocks with their respective Acquirer’s Multiple Values. Negative values are ignored. Many other symbols were ignored for which the data could not be obtained. The following table is just an indicator of the concept and MUST NOT be relied on for any decision making.

Symbol

Name

Aqui Multiple

GNW

Genworth Financial Inc.

11.66

KR

Kroger Co.

12.90

MU

Micron Technology

18.00

BEN

Franklin Resources

18.74

UNM

Unum Group

27.18

GLW

Corning Inc.

27.49

PHM

Pulte Homes Inc.

27.76

DHI

D. R. Horton

28.63

DAL

Delta Air Lines

28.75

UAL

United Continental Holdings

28.75

LYB

LyondellBasell

28.91

AFL

AFLAC Inc

29.20

HIG

Hartford Financial Svc.Gp.

30.43

CMI

Cummins Inc.

31.31

AA

Alcoa Inc

31.38

PFG

Principal Financial Group

31.42

LUV

Southwest Airlines

31.49

COF

Capital One Financial

32.80

PSX

Phillips 66

33.12

LNC

Lincoln National

33.25

COP

ConocoPhillips

33.62

OMC

Omnicom Group

34.66

STX

Seagate Technology

34.82

FE

FirstEnergy Corp

34.95

AET

Aetna Inc

35.05

XL

XL Capital

35.60

T

AT&T Inc

35.84

AN

AutoNation Inc

36.47

FLR

Fluor Corp.

36.98

PCAR

PACCAR Inc.

37.14

LLL

L-3 Communications Holdings

38.65

DFS

Discover Financial Services

38.71

WU

Western Union Co

39.51

CI

CIGNA Corp.

39.88

UTX

United Technologies

40.21

AAL

American Airlines Group

40.50

CINF

Cincinnati Financial

40.52

IR

Ingersoll-Rand PLC

40.59

AZO

AutoZone Inc

40.75

SNA

Snap-On Inc.

40.93

TAP

Molson Coors Brewing Company

41.15

PGR

Progressive Corp.

41.21

ALL

Allstate Corp

41.33

CMCSA

Comcast A Corp

41.61

STI

SunTrust Banks

42.16

ESRX

Express Scripts

42.49

MAS

Masco Corp.

42.54

TROW

T. Rowe Price Group

42.76

EMN

Eastman Chemical

42.87

MTB

M&T Bank Corp.

43.37

MO

Altria Group Inc

43.60

CB

Chubb Corp.

43.61

K

Kellogg Co.

44.20

HCA

HCA Holdings

44.53

IPG

Interpublic Group

44.71

ANTM

Anthem Inc.

44.83

DVA

DaVita Inc.

44.89

BBBY

Bed Bath & Beyond

44.91

JPM

JPMorgan Chase & Co.

45.01

URI

United Rentals

45.01

GT

Goodyear Tire & Rubber

45.49

ADM

Archer-Daniels-Midland Co

45.66

GM

General Motors

45.66

JCI

Johnson Controls

46.03

WBA

Walgreens Boots Alliance

47.13

GRMN

Garmin Ltd.

47.37

APA

Apache Corporation

47.58

NFX

Newfield Exploration Co

48.44

CBS

CBS Corp.

49.07

VZ

Verizon Communications

49.07

WRK

Westrock Co

49.08

NSC

Norfolk Southern Corp.

49.14

AMGN

Amgen Inc

49.41

ORCL

Oracle Corp.

49.48

GPC

Genuine Parts

50.37

SWKS

Skyworks Solutions

50.57

INTC

Intel Corp.

50.63

AIG

American International Group

50.81

PM

Philip Morris International

50.88

DRI

Darden Restaurants

51.11

FTR

Frontier Communications

51.18

AXP

American Express Co

51.43

RHI

Robert Half International

51.66

USB

U.S. Bancorp

51.95

CSX

CSX Corp.

51.99

PNW

Pinnacle West Capital

52.16

FAST

Fastenal Co

52.45

FDX

FedEx Corporation

52.73

ETN

Eaton Corporation

52.88

PBI

Pitney-Bowes

52.95

STZ

Constellation Brands

53.47

PNC

PNC Financial Services

53.51

UPS

United Parcel Service

53.54

GD

General Dynamics

53.60

CVX

Chevron Corp.

53.80

LEG

Leggett & Platt

54.77

ITW

Illinois Tool Works

54.84

TRV

The Travelers Companies Inc.

54.97

MMM

3M Company

54.99

IBM

International Bus. Machines

55.04

ABC

AmerisourceBergen Corp

55.20

REGN

Regeneron

55.65

AMG

Affiliated Managers Group Inc

55.67

OI

Owens-Illinois Inc

55.71

BIIB

BIOGEN IDEC Inc.

55.80

CF

CF Industries Holdings Inc

55.80

RCL

Royal Caribbean Cruises Ltd

55.89

WFC

Wells Fargo

56.07

APD

Air Products & Chemicals Inc

56.23

HBI

Hanesbrands Inc

56.62

HON

Honeywell Int'l Inc.

56.70

IP

International Paper

56.98

GIS

General Mills

57.07

PEP

PepsiCo Inc.

57.12

KIM

Kimco Realty

57.31

PPG

PPG Industries

57.56

GWW

Grainger (W.W.) Inc.

57.78

MLM

Martin Marietta Materials

57.81

NOC

Northrop Grumman Corp.

58.09

MHK

Mohawk Industries

58.12

PVH

PVH Corp.

58.22

NDAQ

NASDAQ OMX Group

58.23

XOM

Exxon Mobil Corp.

58.40

SWN

Southwestern Energy

58.44

UNP

Union Pacific

58.70

NEM

Newmont Mining Corp. (Hldg. Co.)

58.78

MMC

Marsh & McLennan

59.78

ALLE

Allegion

60.07

KSU

Kansas City Southern

60.08

KEY

KeyCorp

60.85

LMT

Lockheed Martin Corp.

61.40

QCOM

QUALCOMM Inc.

61.54

DGX

Quest Diagnostics

61.61

HAL

Halliburton Co.

62.14

TEL

TE Connectivity Ltd.

62.47

BBT

BB&T Corporation

62.64

ACN

Accenture plc

63.15

WM

Waste Management Inc.

63.48

TXN

Texas Instruments

63.53

FFIV

F5 Networks

64.48

RTN

Raytheon Co.

65.45

MS

Morgan Stanley

65.59

JNJ

Johnson & Johnson

65.70

LH

Laboratory Corp. of America Holding

65.99

TXT

Textron Inc.

66.08

MSFT

Microsoft Corp.

66.32

KMB

Kimberly-Clark

66.34

DOV

Dover Corp.

66.40

JBHT

J. B. Hunt Transport Services

66.73

SWK

Stanley Black & Decker

66.81

SBUX

Starbucks Corp.

66.94

MCD

McDonald's Corp.

67.06

MCO

Moody's Corp

67.55

R

Ryder System

67.57

XRX

Xerox Corp.

68.02

AME

Ametek

68.25

AVY

Avery Dennison Corp

68.36

LEN

Lennar Corp.

68.55

AEP

American Electric Power

68.70

RL

Polo Ralph Lauren Corp.

69.52

KO

The Coca Cola Company

69.75

APH

Amphenol Corp A

70.28

CL

Colgate-Palmolive

70.50

WY

Weyerhaeuser Corp.

70.55

CTSH

Cognizant Technology Solutions

72.04

EIX

Edison Int'l

72.17

VRSN

Verisign Inc.

72.50

ICE

Intercontinental Exchange

72.59

PAYX

Paychex Inc.

72.73

BA

Boeing Company

73.72

ES

Eversource Energy

73.77

AAPL

Apple Inc.

74.27

RSG

Republic Services Inc

74.85

KMX

Carmax Inc

75.17

XLNX

Xilinx Inc

75.48

OKE

ONEOK

76.15

SHW

Sherwin-Williams

77.23

NEE

NextEra Energy

77.80

EXC

Exelon Corp.

78.00

ROK

Rockwell Automation Inc.

78.22

KHC

Kraft Heinz Co

78.46

PX

Praxair Inc.

78.80

HSY

The Hershey Company

79.09

XEL

Xcel Energy Inc

79.52

WEC

Wisconsin Energy Corporation

79.63

IRM

Iron Mountain Incorporated

79.88

COST

Costco Co.

79.95

BLL

Ball Corp

80.19

GE

General Electric

80.36

EOG

EOG Resources

81.19

DTE

DTE Energy Co.

81.31

FLIR

FLIR Systems

81.66

CTAS

Cintas Corporation

83.81

MSI

Motorola Solutions Inc.

83.82

WAT

Waters Corporation

84.28

XYL

Xylem Inc.

84.36

AVGO

Avago Technologies

85.60

PEG

Public Serv. Enterprise Inc.

85.75

VMC

Vulcan Materials

85.81

COL

Rockwell Collins

86.01

NLSN

Nielsen Holdings

88.90

DHR

Danaher Corp.

89.26

CCL

Carnival Corp.

90.21

WMB

Williams Cos.

90.58

FMC

FMC Corporation

90.70

D

Dominion Resources

91.02

ZTS

Zoetis

91.79

NRG

NRG Energy

91.89

CERN

Cerner

92.47

ECL

Ecolab Inc.

93.24

FB

Facebook

93.80

V

Visa Inc.

93.80

FISV

Fiserv Inc

93.91

VRSK

Verisk Analytics

94.15

NKE

Nike

94.17

MKC

McCormick & Co.

94.27

ED

Consolidated Edison

96.83

PSA

Public Storage

98.51

DUK

Duke Energy

99.25

SPG

Simon Property Group Inc

99.38

AVB

AvalonBay Communities

99.85

CTXS

Citrix Systems

101.25

BDX

Becton Dickinson

103.00

MA

Mastercard Inc.

103.44

MRO

Marathon Oil Corp.

105.75

PLD

Prologis

108.31

SYK

Stryker Corp.

110.48

VTR

Ventas Inc

111.79

F

Ford Motor

112.03

SCG

SCANA Corp

114.68

CAG

ConAgra Foods Inc.

121.19

EW

Edwards Lifesciences

121.56

CME

CME Group Inc.

122.07

CNX

CONSOL Energy Inc.

122.16

ABT

Abbott Laboratories

124.71

BSX

Boston Scientific

125.55

HCP

HCP Inc.

126.17

PNR

Pentair Ltd.

128.07

HAS

Hasbro Inc.

128.12

TMO

Thermo Fisher Scientific

128.19

FIS

Fidelity National Information Services

129.31

APC

Anadarko Petroleum Corp

129.85

ATVI

Activision Blizzard

131.96

O

Realty Income Corporation

133.18

SRCL

Stericycle Inc

133.42

MDLZ

Mondelez International

133.57

ESS

Essex Property Trust Inc

136.36

GGP

General Growth Properties Inc.

139.05

COG

Cabot Oil & Gas

145.17

NI

NiSource Inc.

151.20

GS

Goldman Sachs Group

152.19

EQR

Equity Residential

153.92

CHK

Chesapeake Energy

155.50

TRIP

TripAdvisor

156.15

SLB

Schlumberger Ltd.

160.43

PYPL

PayPal

162.55

CMG

Chipotle Mexican Grill

167.29

ADBE

Adobe Systems Inc

172.91

ISRG

Intuitive Surgical Inc.

179.66

BMY

Bristol-Myers Squibb

182.70

VRTX

Vertex Pharmaceuticals Inc

183.93

GOOGL

Alphabet Inc Class A

184.32

PRU

Prudential Financial

198.91

KMI

Kinder Morgan

233.20

RHT

Red Hat Inc.

236.86

ADP

Automatic Data Processing

252.15

AMZN

Amazon.com Inc

282.19

HES

Hess Corporation

285.95

NFLX

Netflix Inc.

328.32

NOV

National Oilwell Varco Inc.

347.25

NBL

Noble Energy Inc

347.83

EXPE

Expedia Inc.

397.77

HP

Helmerich & Payne

424.27

HUM

Humana Inc.

519.69

NAVI

Navient

934.33

MAC

Macerich

1546.67

MCK

McKesson Corp.

3216.16

CNP

CenterPoint Energy

7066.71

LLY

Lilly (Eli) & Co.

21090.25

Symbol

AAPL

Acquirer’s ​​ Multiple

Enterprise Value

/

Operating Earnings

74.271

986622195180

13284000000

The Enterprise Value is the total cost to buy out a company and it is calculated as:
Market Cap + Preferred Equity + Non-controlling Interests + Total Debt – Cash and Cash Equivalents

The reason why we use this rather than just the Market Cap (Share price x Total Shares Outstanding) is that it includes additional liabilities such as debt, preferred equity and non-controlling interests which the owner will need to adjust for.

It uses Operating Earnings rather than EBIT, whilst similar have a distinction in that Operating Earnings is calculated from the top down whilst EBIT is constructed from the bottom up. This process allows us to use a variable that is standard and can be compared on a like for like basis across different companies, industries, and sectors.

Operating Earnings is calculated as:
Revenue – (Costs of Goods sold + Selling, General and Admin costs + Depreciation and Amortization)

Interest repayments reduce earnings and are tax-deductible, so a company’s debt impacts it’s reported earnings and therefore removing this and tax allows us to compare companies with different capital structures.

Final Words

To sum up, this is a great process for identifying shares that have an optimal blend of value and quality in your chosen market that is not only simple but as effective as Joel Greenblatt’s Magic Formula. I would love to find out your thoughts and personal experiences on The Acquirer’s Multiple below…