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This is the third primary valuation method, alongside Comps and DCF. It values a company based on the multiples paid for similar companies in past M&A deals. It's often considered a "ceiling" for valuation because it includes a control premium - the extra amount an acquirer pays to gain control of a business.
The Concept: If a similar company was acquired for 12.0x its EBITDA last year, your company might be worth a similar multiple if it were to be acquired today.
Example: Valuing Regional Banks
Step 1: Find Relevant M&A Deals
May 2023: JPMorgan Chase acquires First Republic Bank
December 2022: U.S. Bank acquires Union Bank
June 2021: PNC acquires BBVA USA
Step 2: Gather Transaction Data and Calculate Multiples We select the appropriate multiple for the banking industry.
Step 3: Apply the Multiple to Your Company, lets say a Tangible Book Value of $5.0 Billion.
Deal Value: This is the total equity value paid for the target company. It's the price tag for the shareholders' ownership.
Tangible Book Value (TBV): This is a measure of a bank's physical, tangible assets minus its liabilities and any intangible assets (like brand value or goodwill). It represents the bank's core net worth, or what would be left over for shareholders if it were liquidated.
P / TBV Multiple (Price to Tangible Book Value): This is the ratio of the Deal Value to the Tangible Book Value (DealValue/TBV). It shows how much of a premium (if >1.0x) or discount (if <1.0x) the acquirer paid relative to the bank's hard asset value. P/TBV > 1.0 is better, and < 1.0 is not as favorable.
Implied Equity Value = Your company TBV × Median P/TBV Multiple
Implied Equity Value = $5.0B × 1.18x = $5.9 Billion
❗ Why P/TBV for Banks? A Critical Distinction
We must use a specific metric like Price / Tangible Book Value (P/TBV) for a bank, not a general metric like EV/EBITDA. Here's why:
A Bank's Business IS its Balance Sheet: For a normal company (e.g., a car manufacturer), debt is financing. For a bank, debt (like customer deposits) is a raw material they use to create their product (loans).
EBITDA is Meaningless for a Bank: EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization) is designed to show operating profit before financing costs. For a bank, interest is not a financing cost, it's a core part of their revenue and expenses. Removing it makes the profit metric useless.
P/TBV Reflects the Business Model: Tangible Book Value is the hard value of a bank's net assets. Using the P/TBV multiple shows how much the market is willing to pay for the bank's ability to generate profit from that asset base. It's the correct tool for the job.
Note: We often use the median instead of the average to avoid outliers skewing the data.
Example if it were a for normal companies (non-financial firms like manufacturers, tech companies, etc.), you typically use multiples like EV/EBITDA or P/E (Price to Earnings).
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