The Private Company Discount

Abstract

When appraisers or investment bankers value privately held companies by making comparisons to otherwise similar public companies, they typically apply a discount. Most practitioners attribute this discount mainly to the relative illiquidity of private companies; and, for this reason, they value private companies based on empirical studies designed to measure illiquidity discounts. But this assumption and the valuations based upon it are likely to be unreliable because private companies are valued differently than public companies owing to a variety of other, more "fundamental" factors that have caused the firm to stay private rather than choosing to list on an exchange. 2000 Morgan Stanley.

Measures of Value in Acquisitions: Family Versus Nonfamily Firms

“…Hotchkiss & Moradian, 1998;Koeplin et al, 2000). Specifically in our study, 59 acquirers positively answered our question of whether or not they retained one or more family members in the company after the acquisition.…”

“…This method has already been used in previous mergers and acquisitions studies (Hotchkiss & Moradian, 1998;Koeplin et al, 2000) and in family-firm studies (Allouche et al, 2008;Miller et al, 2007).…”

The Persistent Effect of Geographic Distance in Acquisition Target Selection

“…Studies have shown that a large proportion of acquisitions involve privately held targets, with little or no publicly available information (Capron and Shen, 2007). Acquisitions of such targets involve a substantial price discount (Koeplin, Sarin, and Shapiro, 2000), reflecting the information discount that acquirers experience while evaluating such targets. Target selection can be influenced by signals in the form of IPO processes, public disclosures, ties to investment banks, and coverage by the press and business analysis (Arikan, 2005;Reuer and Ragozzino, 2008), highlighting both the importance of information as well as the limitations on the part of the acquiring firms in gathering information.…”

The Timing of Initial Public Offerings

“…In the simulations reported below, the firm has a mean cash flow growth of 20% with a standard deviation of 40%. The public and private state prices correspond to a private firm discount of 30%, the middle of the discount range of 10-50% reported by Koeplin et al (2000). Finally, we use a range of private benefits centered on 10% of initial cash flows, which corresponds to the values reported above (see footnote 2).…”