Value to EBITDA

Back when I was discussing the Kraft/Cadbury acquisition in my entries in this blog, I spoke -- as the interested parties there were speaking -- of the P/E ratio, historically an important metric for stock pickers, investors, acquirers, executives who are in part compensated in equity, and gurus.

I believe the gist of that discussion was that over time, the "E" in P/E has acquierd a specific meaning, reflected in the more elaborate acronym EBITDA (earnings before interest, taxation, depreciation and amortization.)

Now it is time to return to the subject to mention that the P part of the P/E ration is in the process of a more radical redefinition. It is not stock price but "enterprise value" that figures in the emerging metric. Here's a discussion from the website of the Stern School of Business at New York University. The "enterprise value" is defined as the combined market value of all securities issued by the enterprise. Why? Because this allows for apples-to-apples comparisons. Different firms will have different balances of debt to equity, i.e. bonds to stock, and these differences would skew price-to-earnings.

Does this help in, say, the discussion of an impending acquisition? Presumably acquirers would look for a low enterprise multiple, because they are going to be buying up that stock and becoming responsible for the payments on those bonds -- they want a sizeable earnings stream in return. If a P/E or P/EBITDA multiple is used instead, the responsibility for the target company's bonds falls out of the picture, or never gets into it.

You can see here how "Seeking Alpha" applied the idea, four years ago.

Medafor ISO Biotech Partner

Another story line to watch. Steven Anderson, the president and chief executive of CryoLife Inc. has written a letter to the board of directors of Medafor, a Minnesota based medical-technology company, suggesting a proxy fight is in the works.

The fate of the two companies is intertwined anyway. Cryolife (which is Georgia based) is the distributor of Medafor's product, HemoStase, a powder used to stop bleeding. In January, Cryolife bought 1.6 million shares of Medafor, and more recently indicated that it would like to buy the company outright, for $2 a share. Medafor rejected that offer, and Anderson's letter came in response to that rejection.

Then, in a conference call on Thursday, Anderson made the following pitch to Medafor shareholders: "Medafor's difficulty in securing working capital is a good illustration of a weakness we can help the company to overcome. Over the last two years, Medafor's management has attempted to secure more working capital in order to access better cash flow. This has been very difficult for management to accomplish because of the financial environment in the U.S. and the illiquidity issues facing the company. Medafor has been further hindered by a 'going concern' letter issued to the company in September 2009 by KPMG, Medafor's auditor, in connection with their 2008 audit of Medafor. A letter like this is issued by an auditing firm when they feel that the company may not have the capital resources to survive for the next twelve months. Both of these situations have negatively affected management's ability to adequately fund the company."