What Influences the Discount Applied to the Valuation for Controlling Interests in Private Companies? (An Analysis Based on the Acquisition Approach for Comparable Transactions of European Private and Public Target Companies)

Abstract: In this study, we analyze what influences the size of the PCD for controlling stakes. As empirical research has shown, the discount applied to the value of private companies (or controlling stakes) can be quite significant. What is not clear, however, is what influences such a discount. In our study, we decided to analyze this issue focusing on the listing costs and the different types of buyers (listed or not listed) of the target companies. Since a private target company that is acquired by a publicly listed buyer is quasi automatically listed (through the acquisition) a public buyer saves the potential listing costs for the target company and should, therefore, be able to pay a higher price for the private target company, i.e., apply a lower, or no, discount for the private company. We use the acquisition multiple approach on a matched-pair sample (as done by Koeplin, Sarin and Shapiro 2000) for European target companies from 1999 to 2009. Thereby, we observe that, on average, the discount for private companies is different for the two types of buyers and a private buyer pays less for a private target than a public buyer.