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Going-Private Transaction Studies- an overlooked rich source or the final nail in the coffin of DLOM/LOMD & Illiquidity Discounts in private company valuations?

We note restricted stock studies, Pre-IPO placement studies and bid-ask spread studies continue to be presented in support of lack of marketability (Discount for Lack of Marketability (DLOM) or Lack of Marketability Discount (LOMD)) or illiquidity discounts despite the presence of highly questionable assumptions.

We hereby present an alternative method which we believe to be a far more robust, reliable and meaningful method of ascertaining the presence or absence of a lack of marketability or illiquidity discount.

Going-Private Transaction Studies

Going-Private Transaction Studies involve an analysis of the differences in premiums paid above pre-announcement share price in public company going private transactions versus staying public M&A transactions (ie a public company acquirer of a public company target). As such it is not the premiums themselves that are relevant rather to what degree premiums differ when the company becomes privately owned as opposed to when it stays publicly owned on acquisition.

We present our formula:

r = ((1+% Acquisition Premium in Going Private Transactions)/(1+% Acquisition Premium in Non-Going Private Transactions)) -1

, where % is displayed as a fraction, the presence of a Lack of Marketability Discount is indicated by a negative r value result and the absence of a Lack of Marketability Discount is indicated by a positive r value result.

We believe the use of this formula in conjunction with a review of a large database of both going private and non-going private transactions throughout the world over an extended period of time offers a robust, reliable and meaningful method for identifying the presence or absence of a Lack of Marketability Discount or Illiquidity Discount in private company acquisition transactions. There is the option to exclude VC/PE firms as acquirer if there are good grounds for assuming a short period to going public again in those instances.

We would encourage you to carry out your own detailed review of the 25 years ending 31st December 2024, the 12.5 years ending 30th June 2012 and the 12.5 years ending 31st December 2024, on a worldwide basis, considering both the mean and median, and we believe your findings will be conclusive as to the presence or absence of a lack of marketability or illiquidity discount in private company valuations and furthermore we would encourage you to test whether your findings are conclusive as to whether or not by variation your overall findings are unaffected by the exclusion from the sample of any going private transactions where Venture Capital, Private Equity or similar type firms are the acquirers (you might also cross check a list of the top 50 private equity firms against the sample to ensure that the firms are correctly classified) should it be viewed that such instances amount to only temporary illiquidity or temporary lack of marketability. We recommend you exercise caution if choosing to limit your analysis to short periods or per country data if there is weak statistical power.

While in our view there is nothing controversial in there being no lack of marketability or illiquidity discount when valuing 100% of a private company and there is an option to go public or a public buyer, the irrelevance of the status of the buyer (whether buyer status is public or private) and the prospects of going public would be a revelation as would the non-observability of such discounts when small, partial & non-controlling public company shareholdings are taken private (ie not a public buyer, not a public company post-acquisition and no real prospect of going public any time soon given the determined move in the opposite direction (at least where no VC/PE acquirer)), thereby allegedly stripping such shares of that assumed marketability and liquidity. We will leave it up to you to draw your own conclusions and no conclusions are, or are intended to be, inferred in this report.

Green Diamond Capital & Research Holdings LLC

Warning: The contents of this blog are provided wholly on a without prejudice basis and wholly without liability for loss through reliance upon same. You are strongly advised to obtain your own expert advice before making decisions.