It could be called the yeti of M&A pricing. That’s the often cited but rarely seen liquidity discount, which supposedly imposes a reduced price on privately owned targets merely because they don’t have publicly traded shares. If the haircut ever existed, dealmakers say, it was long ago washed away by the emergence of a more systematic, more efficient M&A market featuring competitive bidding and pricing multiples based on target quality. In fact, the only sector of the marketplace where hard evidence of a discount exists is in the lower tier of the middle market, and it’s pegged to size – targets of $10 million to $50 million in sales – as opposed to whether the target is public or private. More myth than reality When the whole company is being sold, “it’s more myth than reality,” says David Braun, President of Virtual Strategies, a Washington, D.C.-based deal firm. “The only time that a discount may apply,” he adds, “is in the sale of a minority interest because it lacks a control position. But the sellers of the entire company shouldn’t have to take a discount, because completing a deal in the private market usually runs smoothly.” “It’s easier to strike a deal,” Braun adds. “The buyer is generally dealing with one or two decisionmakers and you don’t have the same regulatory oversight, such as the SEC, that you have with a public company. Generally, it can happen a lot easier and it can happen quietly.” Robert Slee, a Managing Director at Robertson & Foley and a certified valuation analyst who has long studied deal-pricing trends, says that a liquidity discount may be assigned in valuing a private company for tax purposes. But in the M&A arena, “between the public and the private markets, there’s no difference.” Over the last two decades, notes Russ Warren, President of The TransAction Group, the development of the M&A market has been leveling influence. “What has become more efficient and more objective,” he says, “is that with the rise of the private equity groups, there has been a market for almost any mid-sized company since the 1980s.” In the view of William Weirich, a Managing Director at Matrix Capital Markets, a sale is a “liquidity event.” “So you argue that there really shouldn’t be a liquidity discount on the value of the company in the sale process because, by definition, the sale process is a liquidity event for the shareholders,” he states. In a report to the International Network of M&A Partners (IMAP), Slee reaffirmed a sliding scale for EBIT multiples based on annual revenues with firms booking less than $10 million selling at a median multiple of 5.4 in 2005. The multiples scaled upward to 6.4 for targets in the $10 million to $20 million range and more than eight if the seller delivered more than $50 in revenues. “There’s a size premium as you move up,” Warren says. “If there is any discounting, you tend to see it on smaller private companies as compared with smaller public companies,” Braun says. “But it has more to do with size than anything else.” (c) 2006 Mergers and Acquisitions Journal and SourceMedia, Inc. All Rights Reserved. http://www.majournal.com http://www.sourcemedia.com

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