The Acquirer's Multiple: The Deep Value Strategy That Outperformed the Magic Formula
In 2014, Tobias Carlisle published a book with a provocative thesis: the simplest possible deep value strategy -- buying the cheapest stocks by Enterprise Value divided by EBIT -- produced better long-run returns than Joel Greenblatt's celebrated Magic Formula, which added a quality overlay to the cheapness screen.
The Acquirer's Multiple, as Carlisle named the EV/EBIT ratio, became the intellectual centerpiece of a resurgent interest in pure deep value investing. Understanding why it works, how to calculate it, and where it fits in a value investing toolkit is essential for any serious practitioner.
This article is for educational purposes only and does not constitute financial advice.
What Is the Acquirer's Multiple?
The Acquirer's Multiple is simply:
Acquirer's Multiple = Enterprise Value / Operating Earnings (EBIT)
Where:
- Enterprise Value = Market Capitalization + Total Debt - Cash & Equivalents + Preferred Stock + Minority Interest
- Operating Earnings (EBIT) = Earnings Before Interest and Taxes (operating income from the income statement)
The name comes from framing the metric from an acquirer's perspective: if you were buying the entire business (hence using EV, which accounts for the full acquisition cost including assuming the debt), what multiple of operating earnings would you be paying?
A low Acquirer's Multiple means you are paying a small multiple of the business's operating income stream -- a cheap acquisition price.
Why EV/EBIT, Not P/E?
The choice of EV over market cap, and EBIT over net income, is deliberate:
EV vs. Market Cap:
Market cap ignores the debt the acquirer must assume. Two companies with identical market caps but one with $500M of net debt and one with zero debt are not equivalently priced for an acquirer. EV corrects this by adding net debt, making the comparison accurate regardless of capital structure.
EBIT vs. Net Income:
Net income is after interest expense, which varies with the capital structure -- not the operating performance. EBIT strips out interest (and taxes, which vary by jurisdiction), giving a clean measure of operating earnings power that can be compared across companies with different leverage levels and domiciles.
The combination of EV and EBIT creates a metric that is simultaneously:
- Capital structure neutral (no distortion from debt levels)
- Tax neutral (no distortion from jurisdiction differences)
- More manipulation resistant than net income (harder to inflate operating earnings than bottom-line earnings)
Why EV/EBIT, Not EV/EBITDA?
Many practitioners use EV/EBITDA -- adding back depreciation and amortization to EBIT. Carlisle argues against this for a fundamental reason:
Depreciation represents real capital consumption. A manufacturing company must spend capital just to maintain its machinery. Pretending that depreciation does not exist -- as EV/EBITDA does -- overstates the true free earnings power of capital-intensive businesses.
EV/EBIT retains D&A as a cost, making it more conservative and, Carlisle argues, more accurate for capital-intensive companies. For businesses where D&A and maintenance CapEx are roughly equal (a reasonable assumption for many industrials and old-economy companies), EV/EBIT and the true EV/Owner Earnings are similar in magnitude.
The limitation of EV/EBIT comes with high-depreciation, high-maintenance-CapEx businesses where reported D&A understates actual maintenance requirements. For these, EV/FCF or EV/Owner Earnings is superior.
Carlisle's Backtests: Why Pure Cheapness Outperformed Quality + Cheapness
Carlisle's central finding was counterintuitive: a simple ranking by cheapest EV/EBIT (the "Acquirer" portfolio) produced higher long-run returns than Greenblatt's Magic Formula, which combined cheapness (EV/EBIT earnings yield) with quality (return on capital).
The intuitive explanation: the cheapest decile by EV/EBIT includes many genuinely distressed, low-quality businesses. These businesses have often been oversold. When they revert toward normalcy -- improving operations, resolving a temporary setback, becoming acquisition targets -- the returns are dramatic precisely because the starting valuation was so depressed.
Greenblatt's quality overlay screens out the very worst businesses, which removes some of the highest-risk positions but also removes some of the highest-return ones. Over long periods, the diversification across many cheap, low-quality businesses in the Acquirer portfolio more than compensated for the individual disasters.
This does not mean quality is irrelevant to investing -- it means that in a systematic, diversified, quantitative strategy, raw cheapness has historically been a powerful enough signal without quality filtering.
How to Build an Acquirer's Multiple Portfolio
Carlisle's approach in his book was systematic and rules-based:
Universe: US-listed stocks above a minimum market cap threshold (originally $50M, though larger investors often use $200M-$500M to avoid liquidity issues)
Exclusions: Banks, financial companies, utilities, REITs (businesses where EV/EBIT is meaningless due to structural differences in balance sheet and income statement)
Selection: Rank all remaining companies by Acquirer's Multiple from lowest to highest. Invest in the cheapest 20-30 stocks.
Position Sizing: Equal weight. No concentration in any single position.
Rebalancing: Annually. Replace any companies that no longer qualify (valuation no longer in the cheapest decile, acquisition, delistings).
Expected Behavior: The strategy will significantly underperform the market for 1-3 year periods. It requires commitment to stay in the cheapest stocks even when they feel deeply uncomfortable.
The Behavioral Edge: Why the Strategy Works
Beyond the quantitative argument, there is a behavioral one. Carlisle argues that the Acquirer's Multiple works precisely because it is uncomfortable to implement.
The cheapest stocks by EV/EBIT tend to be:
- In out-of-favor industries with poor recent operating results
- Covered by few analysts (or none)
- Associated with negative news (restructurings, earnings misses, sector headwinds)
- Generating poor short-term price momentum
Institutional investors face career risk for owning such stocks. A fund manager who owns an ugly, cheap, ignored company must justify that position to clients every quarter. If it continues to decline, the manager looks incompetent. This career risk creates systematic underownership of the cheapest stocks, which is precisely what generates their excess returns.
Individual investors have a potential edge here: no career risk, no quarterly justification requirements, no benchmark tracking pressure. But they must have the psychological fortitude to hold unpopular, seemingly broken businesses while waiting for mean reversion.
Limitations of the Strategy
Value traps: Some cheap EV/EBIT stocks are cheap for a reason -- deteriorating competitive position, secular industry decline, or impending financial distress. Diversification helps reduce but does not eliminate this risk.
Leverage risk: Some cheap EV/EBIT companies carry significant debt. EV accounts for debt in the numerator, so highly levered companies are penalized in the ranking -- but not fully. A basic solvency check (Altman Z-Score, interest coverage) adds a layer of protection.
Industry cyclicality: At cyclical peaks, even poor businesses show high EBIT, making EV/EBIT appear low. Buying cheap cyclicals near peak earnings can result in poor returns when earnings normalize. Normalizing EBIT across the cycle is more rigorous.
Persistence required: The strategy can underperform for years. Carlisle documented periods of 3-5 year underperformance. Investors who abandon the strategy during underperformance periods realize the losses without capturing the eventual recovery.
The Acquirer's Multiple on ValueMarkers
ValueMarkers displays EV/EBIT alongside other valuation metrics for every company in its database. Investors can use the platform to:
- Calculate the current Acquirer's Multiple for any company
- Compare against sector peers to identify relative cheapness
- Track historical EV/EBIT trends to assess whether current cheapness reflects a temporary or structural issue
Combined with solvency screening (Altman Z-Score) and earnings quality checks (Beneish M-Score), the Acquirer's Multiple provides a powerful starting point for deep value research.
All content is for educational purposes only. This is not financial advice. Always conduct your own due diligence before making investment decisions.