I can think of two scenarios: one is acquisition is done via cash; another one is done by stocks (and the stock itself is overvalued).
The yardstick of overpayment
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EBITA or EBITDA (or use Charlie Munger’s word, replace it with bullshit)
I know from my own software industry experience, 10x sales (or revenue) is usually a fair price.
Example:
Francisco Partners Completes Acquisition of Sumo Logic: Pursuant to the terms of the definitive agreement announced on February 9, 2023, Francisco Partners has acquired all outstanding shares of Sumo Logic common stock for $12.05 per share in cash, valuing the company at an aggregate equity valuation of approximately $1.7 billion.
SUMO LOGIC HISTORICAL REVENUE (Zippia)
Sumo Logic’s peak revenue was $300.7M in 2022. The peak quarterly revenue was $79.8M in 2022(q4). Sumo Logic’s revenue increased from $155.1m in 2019 to $300.7M currently. That’s a 93.91% change in annual revenue.
If my memory is correct, they were losing a lot of money too.
Note each industry has its own metrics (or yardsticks).
In the below example, I assume Square and AfterPay is in the fintech space, and Disney is in the content creation (movie and animations to be specific), and park/entertainment business.
Two Examples
Scenario 1: Disney buying 21st Century Fox, US $71.3 billion
Scenario 2: Square Inc (now Block) bought AfterPay for $29 billion
(Reuters) The $29 billion deal in 11 weeks: how Square bought Afterpay
(paymentgenes) The Real Reason Why Square is Acquiring Afterpay
Both scenarios didn’t play out well. Both acquirers’ stocks ($DIS; $SQ) were down since the acquisitions. Btw, I googled those two deals’ closing date.
For Block (Square Inc., I used 02/01/2022 per this source, noted another source too)
I think, maybe we should track the performance between the day before deal was announced until now.
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Consolidation in the Production Monitoring software space
In addition to Sumo Logic, we have
New Relic (by Francisco Partners and TPG for $6.5 billion) –
Revenue in 2023 (TTM): $0.96 B
According to New Relic ‘s latest financial reports the company’s current revenue (TTM) is $0.96 B. In 2022 the company made a revenue of $0.88 B an increase over the years 2021 revenue that were of $0.75 B.The revenue is the total amount of income that a company generates by the sale of goods or services. Unlike with the earnings no expenses are subtracted.
Splunk (Cisco): this is after Cisco Completes Acquisition of AppDynamics (2017)