Here's the start of the math:
- EBITDA Valuation - based on 2018 figures: PCM Inc.'s EBITDA was $55 million for its fiscal year ended December 31, 2018. That means Insight is acquiring PCM Inc. for 10.5 times annual EBITDA.
- Adjusted EBITDA Valuation - based on 2018 figures: PCM Inc.'s adjusted EBITDA was $60.8 million for its fiscal year ended December 31, 2018. That means Insight acquired PCM Inc. for 9.5 times annual adjusted EBITDA.
At first glance, those valuations are alarmingly high, especially since this isn't a pure SaaS or cloud business. Most MSPs -- which tend to have heavy recurring revenue -- are selling for about 4X to 8X annual EBITDA. The multiples tend to be 4X to 6X for all cash up-front deals. The higher valuation deals tend to involve pure recurring revenue, healthy EBITDA profit margins (15 percent plus) and performance-based earn outs over a year or two, according to ChannelE2E conversations with M&A participants.
Still, the Insight and PCM figures above don't include expected "cost synergies" between the two companies. And those synergies are critically important as Insight pitches the deal to shareholders and analysts.
Insight Enterprises Acquires PCM Inc.: Expected Post-Deal EBITDA Valuation
The synergies -- slang for potential office closings, job cuts and other consolidation moves -- should drive up PCM Inc.'s profitability and therefore drive down the deal's valuation multiple.
Indeed, the purchase price implies a transaction multiple of 4.5 times EBITDA, according to Insight Enterprises CEO Ken Lamneck, who disclosed the figure during a call with Wall Street analysts this week.
How does Insight Enterprises arrive to that figure? The quick math involves $70 million in cost savings coupled with PCM's adjusted EBITDA for 2018.
During that call with analysts, Insight Enterprises CFO Glynis Bryan offered this statement on the M&A deal's valuation and associated math:
"For the twelve months ended March 31, 2019, PCM reported approximately $2.2 billion in net sales and adjusted earnings before interest, taxes, depreciation, amortization, and one-time items of $60 million. The purchase price implies a transaction multiple of 4.5 times, calculated as the ratio of enterprise value to PCM’s last twelve months adjusted EBITDA including the $70 million in expected synergies.
Assuming a closing sometime in the second half of 2019, we expect this acquisition to be accretive to earnings in 2020, excluding approximately $25 million in transaction costs, restructuring and integration costs incurred most of which will be incurred in 2019 and excluding acquisition-related intangible amortization expense.
In addition, we expect to achieve our expected annualized run-rate synergies of approximately $70 million by the end of 2021, primarily from efficiencies related to corporate expenses, streamlining sales and service delivery operations, and the effects of combined technology systems and operations. As Ken noted, we expect to realize more than 50% of these synergies within the first twelve to eighteen months."
IT Solutions Provider Valuations: Seller vs. Buyer Perspectives
Still, the true valuation depends on which side of the deal you represent. Sellers will likely celebrate the lofty 10.5 times valuation based on 2018 EBITDA. Buyers will likely celebrate the far more conservative 4.5 times valuation based on 2018 adjusted EBITDA plus expected cost synergies.