How does economic growth affect corporate valuations? - A study into how acquisition multiples rise and fall during economic fluctuations.

Abstract

Mergers and Acquisitions (M&As) refers to the consolidation of companies or their major business assets through financial transactions. This tool is particularly important in today's dynamic landscape characterised by continuous changes, uncertainties and challenges. While M&As significance is clear, prior research notes fluctuations in transaction volume and valuations across economic climates. These fluctuations often originate from broader factors like economic expansions or shocks which exhibit similar macroeconomic patterns impacting investor sentiments and M&A valuations. While it's acknowledged that corporate valuations vary with economic conditions, there exists a research gap concerning the relationship between acquisition multiples and the economic climate. Therefore, our study aims to investigate how corporate valuations, particularly the acquisition multiple EV/EBITDA is influenced by economic circumstances. To address our research question we gathered data on 1,935 transactions by publicly listed EU companies from 2005 to 2022. We also collected data on several variables including GDP growth, inflation, interest rates and unemployment rate. Among these, the GDP growth rate serves as the indicator of the economic climate. Our findings reveal that the acquisition multiple EV/EBITDA fluctuates with economic conditions and that interest rates exert a significant influence. Unlike previous studies focusing on valuation changes and operational performance in economic cycles, our research fills a gap by examining the interplay between corporate valuations and operational performance across economic scenarios. Our insights offer investors guidance on market timing and identifying undervalued companies for potential increased profitability.