Clearly not my strong suit. What is the big dif between a company’s public value and what is perceived as its private market value?
30% illiquidity discount
Also +30% control premium. So net equal, right?
Not necessarily. You could have a private firm that takes the 30% discount, but that doesn’t automatically mean that an investor has majority control over the firm’s operations. NakedPuts Wrote: ------------------------------------------------------- > Also +30% control premium. So net equal, right?
^^^ This is for an analysis of whether to take a company public or buy it out privately, right? If you take a company public, you’ll benefit from the disappearance of the liquidity discount. If you take a company private, you’ll pay the control premium to get it, then get hit with a liquidity discount once it’s no longer trading.
My post was tongue-in-cheek. “Private Market Value” was recently thought to mean an amount at which a PE firm would buy it out, and was thus higher than the current “market value”. All else equal, however, a public firm should be worth more than a private firm due to liquidity.
Without tvPM specifying the exact transaction, it’s hard for us to comment on the bid/ask spread for the firm. Possibilities include: + IPO + sponsored/LBO/MBO take-private + strategic acquisition/divestment + negotiated vs bidding Also, depending on perspective, there may be no difference in public/private values: if you’re a buy-and-hold type, then discounting cash flows doesn’t depend on the status of acquiror or target. (Are you talking price or value?)
share price. So the background is a publicly traded company (lets say its Cisco). You have a analyst that calculates what they feel the private value of the stock is…so what a company would acquire it at or the company would be worth if it went private. Based on that value is part of the rationale for finding what they feel is the true value of the stock. My question is what the major dif is in what people look at to give it a private value that is different than its public value.
tvPM Wrote: ------------------------------------------------------- > My question is what the major dif is in what > people look at to give it a private value that is > different than its public value. This depends which side of the table you’re on. If you’re a minority investor, you obviously put more value in the liquidity associated with public ownership as compared to private ownership. However, if you’re an acquirer looking at a potential target, one could argue that the private value should be the same as the public value, assuming you did absolutely nothing to improve that target business or extract synergies once you owned the company. Why? Well, you CFA folks should know – if you had to describe the intrinsic value of a company, you’d probably look at the discounted value of its future cash flows, right? So, the idea that public valuation should be any different from private valuation is all predicated on the assumption that something about the underlying business will necessarily change depending on the circumstances of the ownership. In practice, when people talk about private value being less than “public value,” what they actually are referring to is the control premium that an acquirer will have to pay in order to take that public company private. This control premium exists because most minority investors value the liquidity of public stock, so if an acquirer wants to convince a minority investor to give up their shares, the acquirer will have to give them a little extra. That “little extra” can be anywhere from 10% or more depending on the circumstances and fundamentals of the target company. Why does this make sense, you ask? Why should the acquirer pay a premium just to take a public company private? Think about it – the whole reason they are looking to acquire the target in the first place is because they realize there are some synergies to be extracted, or they know of ways to improve the business. They’ve figured out ways to optimize the company once they’ve taken it private, and have probably mapped out a 100-day plan and a clear vision on how to improve the company’s strategy, operations and capital structure. So at the end of the day, the whole reason why a public-to-private transaction might happen is because the potential acquirer believes they can get a good deal by acquiring the target and developing it in the future, and the minority investors all are happy with the premium they’ve been paid for exchanging control of said target. In so many words, I’ve tried to explain the analytical process that we go through whenever we are looking at public-to-private deals (I am looking at a couple of them right now). To summarize, the whole reason why an acquirer would have to pay a premium to current company valuation is because they need to convince minority shareholders to give up their stake. But that doesn’t necessarily MEAN that public and private valuations should be different; remember that assuming you did absolutely nothing to change the company or its capital structure, the NPV of the business’ cash flows should be the same. But the whole point is that this assumption goes out the window, because acquirers buy companies specifically because they realize there is value that can be unleashed when they change or help grow the target business – and this is exactly the reason why buyout firms are willing to pay a control premium to current public valuation. This is why buyouts and mergers exist. Hope this helps.
typically a public company goes private only for one of the two reasons - i) one entity owns more than 90% (varies in different exchanges) of the firm, hence regulator thinks its no longer a pulic company ii) promoter feels that the market is severly undervaluing the company and thus decides to delist the company, obviously he has to pay back every investor who does not want to be a shareholder in a private company now, after going private u can do whatever u want, market has no belief in ur books since books are not subject to intense scrutiny, PE players who buy the stock may have to hold it for several years, hence illiquidity discount. thus private companies are generally atleast 30% cheaper, all other things equal
It also makes sense to take a company private if you feel that there are reorganizations or actions that are impossible to take as a public company (because these are long term benefits, and the short term punishment of the stock price will make it impossible to do as a public company). in you can do that, and increase free cash flow and therefore the enterprise value, then take it public again, it makes sense to pay the control premium. Obviously, there’s a lot of crystal ball gazing and assumptions that go into how much free cash flow you can generate if you do this, and I seem to recall research that says that most of these efforts aren’t very effective in practice, probably because the benefits of taking someone private are often painted overly rosy.