{"id":263,"date":"2010-12-06T02:02:48","date_gmt":"2010-12-06T08:02:48","guid":{"rendered":"http:\/\/graduatetutor.com\/mba-tutor-homework-help\/?p=263"},"modified":"2010-12-06T02:02:48","modified_gmt":"2010-12-06T08:02:48","slug":"valuation-multiples-with-googles-groupon-offer-part-2","status":"publish","type":"post","link":"http:\/\/graduatetutor.com\/mba-tutor-homework-help\/finance-tutor\/valuation-multiples-with-googles-groupon-offer-part-2\/","title":{"rendered":"Valuation Multiples with Google’s Groupon offer! (part 2)"},"content":{"rendered":"

Google\u2019s recent bid to buy Groupon\u2019s business offers interesting lessons in valuation. Rather than rewrite the story, I want to point you to a\u00a0finance tutor<\/a>\u2018s article on\u00a0business valuation<\/a>.<\/p>\n

Finance Tutor addresses the article from the\u00a0perspective\u00a0of testing the valuation concepts you learn in business school. With their\u00a0permission, I repost finance Tutor\u2019s article here. This is the second part and focuses on explaining multiples based valuation methods.<\/p>\n

Part 2<\/strong><\/p>\n

\n

Valuation Multiples: Groupon\u2019s $6 Billion value using multiples<\/h1>\n

Our last post on\u00a0business valuation<\/a> spoke about how you can approach\u00a0business valuation<\/a>using the discounted cash flow method or the\u00a0valuation multiples<\/strong> method.\u00a0 Here we show you how you can estimate the value of Groupon\u2019s business using the multiples valuation method.<\/p>\n

Your first task when trying to arrive at a multiples based valuation is to find comparable companies. Comparable companies are similar companies or companies that are in the same business, companies with similar characteristics, growth rates, profit margins, etc. Often it is not possible to get an exact match so picking a company with similar characteristics, growth rates and profit margins is sufficient.<\/p>\n

For Groupon, Google itself may be a comparable company to arrive at valuation multiples. Google is significantly larger and but its slower growth rates compensate for the size difference. Apple has shown great growth but is much larger and is not a purely service business. Ebay can be a comparable firm to arrive at valuation multiples too. Lets start with Google.<\/p>\n

Sales Multiples (valuation multiple)
\n<\/strong><\/p>\n

According to the NYT, Groupon\u2019s revenue may top $1 billion a year. This is a good place to start.\u00a0 Google has revenues of 27.55 billion and a business valuation of 149.21 billion (enterprise value) today according to yahoo finance. This works out to a sales valuation multiple of 5.4x (149.21\/27.55).<\/p>\n

Using this 5.4x sales valuation multiple, Groupon\u2019s\u00a0business value<\/a> will be $1 Billion*5.4 = $5.4 billion! This business valuation is in the ball park of the rumored deal price!<\/p>\n

Earnings Multiples <\/strong>(valuation multiple)<\/strong><\/p>\n

Google has a PE multiple of 23.23. PE stands for Price\/Earnings per share. This indicates that its business valuation is approximately 23.23 times its earnings as Google has very little debt.\u00a0 If we assume that Groupon has the same profit margins as Google (28.8%), we can estimate its potential earnings at 288 million (28.8%*$1 Billion).<\/p>\n

Using the above estimates, we can arrive at\u00a0Groupon\u2019s business valuation<\/a> of $6.69 billion (288*23.23). This business valuation is again in the ball park of the rumored deal price! At first sight, it looks like Google is overpaying for Groupon. But it may not be overpaying. It may be a steal!<\/p>\n

So are the\u00a0business valuation<\/a> concepts you learn in class used in business valuations in the real world? Looks like a resounding YES! So make sure you get your MBA finance concepts clear. You may be called to use it in the near future!<\/p>\n

Go ahead and try the same with EBAY or AAPL\u2019s valuation multiples. Let us know what you would pay for Groupon business using valuation multiples.<\/p><\/blockquote>\n","protected":false},"excerpt":{"rendered":"

Multiples based valuation requires comparable companies to start with. Comparable companies are similar companies or companies that are in the same business, with similar characteristics, growth rates, profit margins, etc. These financial and operating metrics are used to arrive at valuation multiples. <\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[14],"tags":[26,78,61],"_links":{"self":[{"href":"http:\/\/graduatetutor.com\/mba-tutor-homework-help\/wp-json\/wp\/v2\/posts\/263"}],"collection":[{"href":"http:\/\/graduatetutor.com\/mba-tutor-homework-help\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/graduatetutor.com\/mba-tutor-homework-help\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/graduatetutor.com\/mba-tutor-homework-help\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/graduatetutor.com\/mba-tutor-homework-help\/wp-json\/wp\/v2\/comments?post=263"}],"version-history":[{"count":2,"href":"http:\/\/graduatetutor.com\/mba-tutor-homework-help\/wp-json\/wp\/v2\/posts\/263\/revisions"}],"predecessor-version":[{"id":265,"href":"http:\/\/graduatetutor.com\/mba-tutor-homework-help\/wp-json\/wp\/v2\/posts\/263\/revisions\/265"}],"wp:attachment":[{"href":"http:\/\/graduatetutor.com\/mba-tutor-homework-help\/wp-json\/wp\/v2\/media?parent=263"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/graduatetutor.com\/mba-tutor-homework-help\/wp-json\/wp\/v2\/categories?post=263"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/graduatetutor.com\/mba-tutor-homework-help\/wp-json\/wp\/v2\/tags?post=263"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}