Private Firm Valuation and M&A Calculating Value and Estimating Discounts in the New Market Environment

List of Exhibits ix

Preface xiii

1 Introduction 1

1.1 Private Firms – Setting out their Stall 2

1.1.1 Introduction to SMEs in Different Countries 2

1.1.2 Introduction to Family Firms in Different Countries 3

1.2 The Relation Between the Two Dimensions of Private Firms 5

1.3 A Note on Germany and the German Mittelstand 5

1.3.1 Mittelstand vs. Family Firm 6

1.3.2 Mittelstand vs. SME 7

2 The M&A Transaction with Private Firms – A Process Analysis 9

2.1 The M&A Transaction – the Process and Important Elements 10

2.1.1 Preparation Phase 11

2.1.2 Marketing Phase 11

2.1.3 Due Diligence Phase 12

2.1.4 Negotiation Phase 13

2.2 Question 1: Which Factors Influence the M&A Process and the Transaction Price Paid? 14

2.2.1 The Seller – Disposal Motives 14

2.2.2 The Bidder – Acquisition Motives 16

2.2.3 Competition 16

2.2.4 Transaction Charges 18

2.2.5 Trust 18

2.3 Question 2: Which Factors May Play an Additional Role when the Target is an Independent Private Firm? 20

2.4 Question 3: How Can the Influence Factors be Analyzed – Setting the Model 24

2.4.1 Methodology 25

2.4.2 Data Set 29

2.5 Study Results 29

2.5.1 The Seller – Disposal Motives 32

2.5.2 The Bidder – Acquisition Motives 35

2.5.3 Competition 36

2.5.4 Transaction Charges 38

2.5.5 Trust in the Respective Counterparts 40

2.5.6 Study Results – Summary of Findings 45

2.6 Study Assessment 47

2.6.1 Limitations of the Study 48

2.7 Relationship Between the Study, Valuation Concepts and the Control Premium Discussion 49

Appendix A Measurement of Factors 50

I Measurement of Selling Pressure 52

II Measurement of Synergies 52

III Measurement of Competition 53

IV Measurement of Bidders’ Transaction Charges 57

V Measurement of Trust 60

3 Valuing Private Companies – the PCD 67

3.1 Liquidity vs. Marketability 67

3.2 Overview of Discounts and Premiums 68

3.3 Is a Discount for the Lack of Liquidity for a Controlling Ownership Interests Necessary? 69

3.4 Discounts in Praxis 70

3.5 DLL for Minority Interests 71

3.5.1 Cross-Sectional Differences 71

3.5.2 Controlled Differences 72

3.5.3 Restricted Stock Studies 72

3.5.4 Initial Public Offerings (IPOs) 74

3.5.5 Can Empirical Evidence for Minority Stakes be Used for a Controlling Ownership Interest in a Private Company? 76

3.6 The DLL for Control Ownership Situations and the PCD 77

3.6.1 Acquisition Approach 77

3.6.2 Which Factors Influence the Measurement of the PCD? 82

3.6.3 Determining the Appropriate Discounts with the Acquisition Approach: Study Selection and Assessment 91

3.6.4 Discount for the Lack of Marketability – Summary of Study Results 95

3.7 Understanding the Standards of Value 97

3.8 Understanding the Methodologies 102

3.8.1 Summary 105

3.9 Application Problems Resulting from Systematic Difference Between Market Environments and Company Classes 108

3.9.1 Economic Market Environment 108

3.9.2 Market Environment – Time 109

3.9.3 Firm Characteristics 112

3.10 Development of the Market Environment 115

3.11 PCD Study 120

3.11.1 Short Note on Methodology 120

3.11.2 The Data Sets 122

3.11.3 Results 123

3.12 Summary of Findings 144

3.12.1 General Recommendations for the Application of a PCD or DLL 146

3.12.2 How to Use the Study Results in this Book 146

3.12.3 Empirical Results Summary – Germany 147

3.12.4 Empirical Results Summary – North America 149

3.12.5 Empirical Results Summary – Western Europe 149

3.12.6 Empirical Results Summary – UK 150

3.13 Conducting a PCD Study 151

3.13.1 How to Proceed? 152

3.13.2 Which Multiples to Choose 152

3.13.3 Matching the Multiples – Computing the Discounts 153

3.13.4 Detecting Patterns – Data Clustering 154

3.13.5 Cross-Sectional Regression 160

3.13.6 Databases and Data Collection 164

3.13.7 Outlier Treatment 166

3.13.8 Measurement of Variables 166

Appendix B The PCD and the Relative Valuation Methodology 167

Appendix C How Different is the Mittelstand Compared to Dependent Private German Firms? 171

References 173

Databases 175

Glossary 177

Index 179