Answers / M&A Advisory

A company trades at 8x EV/EBITDA versus a peer at 12x. Why the gap, and what would you check?

A core M&A Advisory interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.

THE SHORT ANSWER

A lower multiple reflects either fundamentally weaker prospects or a mispricing. Fundamental reasons: lower expected growth, higher risk/cyclicality, lower or less-stable margins, weaker returns on capital and cash conversion (high capex/working capital), smaller scale, customer/supplier concentration, weaker management or governance, less geographic/product diversification, or structural headwinds. Quality-of-earnings differences also matter — one firm's EBITDA may carry more add-backs or one-offs. Before concluding, I'd check the multiples are computed consistently (same EV build, lease/IFRS-16 and SBC treatment, normalized EBITDA, calendarized periods) — apparent gaps often come from inconsistent calculation. If after normalization the discount isn't justified by fundamentals, it may be a genuine mispricing and an acquisition or investment opportunity. The discipline: decompose the gap into growth, risk, margin/returns, and quality, and always ask 'is the discount deserved, or is the market wrong?'

WHAT INTERVIEWERS LISTEN FOR

  • ✓Lower multiple = weaker growth/risk/margins/returns/scale/governance — or mispricing
  • ✓Check QoE differences (add-backs, one-offs)
  • ✓Confirm multiples computed consistently (EV build, IFRS 16/SBC, calendarization)
  • ✓If discount unjustified → potential opportunity

COMMON MISTAKES

  • ✗Assuming the cheaper one is automatically a buy
  • ✗Not checking for inconsistent multiple calculation
  • ✗Ignoring earnings-quality differences

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