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If a public company wants to acquire a private company, can you use other public comps as part of your valuation? I know a public firm will higher valued because of liquidity and transparency, but is there some discount you apply to public comparables so you can use them to see what a private firm should be valued at? Or can you just use the public comps without discounting price?

Comments (5)

  • CompBanker's picture

    To your original question, the answer is yes, you can (and are expected) to use public comps as a valuation methodology for the private company. This valuation exercise is independent of who the buyer is -- be it a public, private, PE shop, or Mel Gibson (yes, I've had a buyers list with Mel Gibson as a buyer...).

    As for the liquidity discount, different banks will have different approaches. Bankers have a habit of backsolving for the answer that they are looking for, and the liquidity discount gives them the ability to do this. If your comps multiple is coming out too high, they may apply a 35% liquidity discount. If it's too low, the liquidity discount may be only 10%. Totally depends.

    Another tool I've seen used for M&A valuation is an Ownership or Control Premium, which has the opposite effect as the liquidity discount. The logic is, the public markets do not have a majority stake and therefore control of their investment. A buyer would be willing to pay a premium for a majority voting interest, hence the premium. This premium can be anything (10%, 50%), whatever the senior bankers need to get the multiple where they feel comfortable.