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EBITDA Valuation-Interview


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I am unfamiliar with this valuation methodology that my interviewing firm uses, can anyone point me to any resources...?



Is it basically just deriving an EBITDA multiple based on comparables?


Perhaps of some usefulness:


A renowned practitioner of April 15th warfare is John Malone, who is well represented in our portfolios. Expanding his original investment vehicle, Telecommunications Inc., through an aggressive acquisition strategy, he orchestrated over 480 transactions with smaller cable television system operators between 1973 and 1990; that is an average of more than 2 per

month for almost two decades. Ultimately, he built the nation’s largest cable system. Because that business produces very stable cash flows, like a utility in its collection of millions of monthly customer service charges, he willingly assumed larger amounts of debt than the typical company could tolerate. This did not merely finance the expansion; the interest expense also

greatly reduced Telecommunication Inc.’s taxable income.


As well, in order to encourage the national buildout of expensive cable infrastructure, government regulations permitted cable companies to deduct from taxable income the non-cash goodwill amortization charges that arise from acquisitions; ordinarily, companies are not permitted to use goodwill amortization to reduce income taxes. Mr. Malone used this mechanism as well, modulating both types of expenses — interest and goodwill amortization — in order to produce no reportable or taxable income, even as he built an exceedingly valuable enterprise. In fact, it was due to this particular tax reduction strategy that a new method of valuing companies was developed by a young, theretofore unreknowned media analyst named Mario Gabelli. It eventually became, and remains, a de-rigeur valuation tool. Frustrated in trying to value Telecommunications Inc. using the standard P/E ratio — the “E” standing for earnings — since the company had no “E”, Mr. Gabelli employed an alternative formula. This was the enterprise value/EBITDA ratio, which recast the “E” as operating earnings before deducting interest expense, non-cash depreciation and amortization charges, and taxes. He was able to posit, on that basis, that telecommunications Inc. was dramatically undervalued, whereas it had previously been shunned by investors who had assessed the company as, simply, a highly indebted and unprofitable enterprise.


from Horizon Kinetics 1Q2013 commentary

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You typically use an EV/EBITDA multiple to compare valuations across companies since it adjusts for the differences in the capital structure. That way you're comparing the valuation on an asset level instead of just on the equity.

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