03 Equity Discount Premium

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EQUITY DISCOUNT PREMIUM BETWEEN PUBLIC AND PRIVATE COMPANIES IN THE EUROZONE 33

Jaime lvarez y Paula Herrera: Equity discount permium between public and private companies in the EurozonePrima de descuento entre las empresas cotizadas y no cotizadas en la Eurozona

Anlisis Financiero, n. 120. 2012. Pgs.: 33-47

Jaime lvarez* y Paula Herrera**

Equity discount premium betweenpublic and private companies in

the EurozonePrima de descuento entre las empresas cotizadas y

no cotizadas en la Eurozona

ABSTRACTNon-listed firms analyzed by investors show poor firm marketability and financial information. Due to these fac-tors, there is a higher perceived risk and, as a consequence, the private-held firms are sold at a discount over simi-lar listed firms and over firms that generate acceptable levels of financial information within the Euro area. Thispaper concludes that the discount on privately-own companies across industries is economically reasonable andstatistically significant.

Keywords: Equity premium, discount premium, private transactions, Eurozone transactions.JEL Classification: G34, G39

RESUMENEn el anlisis de valoracin de las empresas no cotizadas los inversores potenciales consideran la falta de informa-cin financiera y liquidez. Esto hace que se incremente el riesgo percibido y, por tanto, se generen primasde des-cuento con relacin a las empresas cotizadas y sobre las que se maneja todo tipo de informacin dentro de laEurozona. Este trabajo estudia las transacciones realizadas en diferentes sectores con el resultado de que dicho des-cuento es razonable y estadsticamente significativo.

Palabras Clave: Prima de descuento, transacciones privadas, empresas no cotizadas, transacciones en la ZonaEuro.

Cdigo JEL: G34, G39

Recibido: 20 de junio de 2012 Aceptado: 3 de septiembre de 2012

* Facultad de Ciencias Econmicas y Empresariales. Universidad Complutense de Madrid (Espaa). Contacto: [email protected]** Universidad de los Andes (Colombia).


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ANLISIS FINANCIERO34



1. INTRODUCTION

When valuing assets and investments, investors analyze sev-

eral key factors, like risk, size, liquidity, and interest rates.Nevertheless, the process is more complex when the firm is

not listed, due to a lack of liquidity, company-specific infor-

mation, and, most important, an observable market price. As a

consequence, specific and appropriate valuation methods

should be considered.

This lack of marketability and information make those firms

less interesting to potential investors. Thus, the lower the lev-

el of appeal to investors in a particular stock, the higher the

expected return. As a consequence, these type of firms should

be sold at a discount over similar listed firms.

As the discounted cash flow (DCF) model requires some

parameters not available to the unlisted firm, the analyst

requires a complementary model using estimations through

comparable firms. A well known model to value private com-

panies is the Relative Valuation Method (RVM), which,

besides its simplicity, incorporates some market values. In

this way, the value of an unlisted firm is approximated by the

prices paid for similar firms, after being standardized for per-

formance measures. The accuracy and reliability of the

method is a function of how similar the comparables firms

are. However, there are many factors that affect the decision

to buy or sell stocks of a particular listed firm, differing con-

siderably in terms of value creation (size, earnings, cash

flows, and risk). Accordingly, the valuation process should

take into account these different features.

Many studies, using different measurement methods, provide

evidence of a liquidity discount. Nevertheless, few studies

have tried to estimate the value of a firm based on others non-

standard features besides liquidity. Koeplin et al (2000) tried

to estimate what they called Private Company Discount, just

for the American market. They acknowledge that any private

placement discount should be valued differently than listedfirms. Accordingly, the discount should be associated with

other factors besides liquidity, and thus, taken into account.

One way to find out the private company discount is to calcu-

late the difference between the lower price paid by a closely

held firm, and the price paid by a portfolio of listed firms, both

groups with similar value features.

To examine the Private Company Discount embedded in the

Euro Zone, we compare historical transaction multiples of

privately held companies with transactions multiples of simi-

lar publicly held firms. The values used in the multiples areDeal Equity Value and Deal Enterprise Value against Profit

before and after tax, EBITDA, EBIT, Operating Income,

Total Assets and Shareholders funds.

This article proceeds as follows. Section I presents a literature

review, Section II describes the sample data set, Section III

explains the methodology, Section IV describes and analyzes

the empirical results. Finally, Section V concludes.

I. LITERATURE REVIEW

Potential investors of unlisted firms dont have a direct access

to an observable equity price posted on any platform. If the

investor decides to value a specific private company by com-

paring it to industry-like listed firms, the accuracy of that val-

uation will depend on how similar are both firms in terms of

value characteristics like risk, growth rate, capital structure,

the size and timing of cash flows, and liquidity. However, the

fundamentals of listed companies within a specific industry

may differ considerably, thus a discount may be applied to

account for these differences in characteristics.

The most outstanding characteristic is marketability, meaningthe ease at which an asset could be traded since the market is not

frictionless or free of trading costs. Marketability could be

defined as the degree to which an asset can be converted into

cash quickly with almost no transaction costs (Bajaj et al, 2001).

The estimation of the marketability discount has thoroughly

been studied and measured using different models whose

results differ substantially (Koeplin et al., 2000; Chiming Wu,

2010; Officer, 2006; Bajaj et al, 2001). Other studies (Hibbert

et al, 2009) attempted to estimate a liquidity premium or mar-

ketability discount exclusively. In relative terms it refers to

the price discount or excess return that bears an asset when itis compared against a security with higher level of liquidity,

and with equivalent key characteristics like credit and market

risk, sector of activity, etc. The methods to estimate the mar-

ketability discount could be grouped in i) Pre-IPO approach

ii) restricted stock approach, and iii) comparable acquisitions

approach.


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In the first approach, the discount is estimated by comparing

the Initial Public Offering (IPO) price of a firm with the price

of previous transactions when the firm was private. Emory

(1997) found an average marketability discount of 44%(median of 43%) for transaction prices relative to the IPO

prices, being the average discount steady through the period

1985-1997. Likewise, Williamette Management Associates

estimated an average marketability discount ranging from

32% to 74%.

The Pre-IPO approach has several deficiencies in the estima-

tion of the marketability discount. First, the transactions

before the IPO might differ substantially from the ones

embedded in the IPO itself. Pre-IPO dealings probably are

issued for insiders, like managers or other investors that pro-

vide monitoring or administration services (Damodaran,2002a). Therefore, part of the price discount for private pre-

IPO transactions reflects some type of management compen-

sation for providing those services. Second, only successful

firms or the ones with high expectations of improvement car-

ried the IPO ahead, resulting in sample bias, since unsuccess-

ful firms are not included. Also, changes in the characteristics

of values, and in the macroeconomic environment between

private transactions and IPO dates, affect the prices, and thus

the discount estimation.

The restricted stock approach compares the difference in prices

between market and restricted stocks (common shares not mar-

ketable during a period of time). The lack of liquidity of the

restricted type explains the difference in prices. At Bajaj et al

(2001) is shown a review of 8 authors that estimated the average

marketability discount within a 20% - 30% range, inlcuiding his

own estimation of 22,21%. Silber (1991) reported an average

discount of 33,75% within a -12,7% - 84% range. He suggested

that the discount should not be the same for all types of compa-

nies. Wruck (1989), and Hertzel & Smith (1983) found mean

marketability discounts of 17,6% and 13,5% respectively1.

Nevertheless, the majority of the restricted stock issues are

placed to insiders and accredited investors who typically are

committed to management and monitoring activities of thefirms, thus the discount reflects some compensation for serv-

ices provided and monitoring costs. Additionally, Bajaj et al.

(2001) found significant factors affecting the discount from a

cross-sectional analysis. Those factors were percentage of

shares issued over total shares after issue, business risk meas-

ured by volatility, financial distress, and total income.

The comparable acquisitions approach compares the acquisi-

tion price multiples of private and public held firms. As it was

the case for the other two approaches, the discount reduction

accounts for more factors than just marketability. Koeplin et al(2000) used the following simple approach:

They reported that private targets were, in domestic and for-

eign transactions, significantly smaller in net sales and assets

than their public peers. Furthermore, the cumulative growth

rate for the 3 years before the acquisition was in domestic

transactions higher for private targets than public targets.

They showed that private companies sell at a significant dis-

count based on EBIT and EBITDA2

. In case of domestictransactions, the mean was 28.26% and 20.30% respectively.

For foreign targets, average was 43.87% and 53.85%. As for

sales multiples, the discount was not significant for neither

domestic nor foreign transactions. Keoplin et al. (2000) sug-

gested that to value revenue, different industries follow differ-

ent procedures. Additionally, attempting to control for the dif-

ference in companies characteristics, Koeplin et al. (2000)

estimated regressions separately for domestic and foreign

transactions. The independent variables were size, growth,

industry, and a dummy variable indicating privately / publicly

held. They found that private company discount is still signif-

icant for earnings multiples.

Officer (2006) compared the multiples paid for unlisted tar-

gets3 with portfolios of comparable publicly held firms. The

multiples used were price to equity book value, price to earn-

ings, deal value to EBITDA and deal value to sales. Officer

found that multiples of unlisted firms had an average discount

of 15% -30% relative to the multiples paid to control related

publicly held firms. Although the approach is similar to

Koeplin et al. (2000), Officer attributes the discount to the

lack of liquidity.

Aflaw in the comparable acquisitions approach is that it relies

in the systematic differences in features between private andpublic firms, ie, closely held companies have smaller assets

and revenues, and higher earnings growth rates. Additionally,

Bajaj et al. (2001) show that in contrast to a public transaction

of a comparable firm, private transactions for Pre-IPO, and

restricted stock approaches are acquired by insiders who

receive compensation for services or employment contracts,





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resulting in a reduction of price. Nevertheless, those differ-

ences are not relevant to our case, because the goal is to cap-

ture the total reduction in price of a private held firm com-

pared to a public held one, and where marketability is just oneof the factors accounted for. In fact, applying just a liquidity

discount is only appropriate when valuing firms based on

multiples of comparable transactions.

To value a firm, it is common to use the discount cash flow

(DCF) method along with a comparable multiples approach

(CMA, also called relative valuation), because the market val-

ues similar companies in similar ways. Nevertheless, the DCF

valuation method fits better to publicly held than privately

held companies. This is due mainly to the difficulties to meas-

ure the market risk of unlisted firms and, therefore, their cost

of capital. The less reliable these factors are, the less reliableis also the value of the estimated firm.

There are two main reasons to apply the CMA to our work.

First, the use of this method is quite spread among analysts of

unlisted firms. Three reasons: easy to understand, fewer

explicit assumptions, and the incorporation of the market fac-

tor. According to Damodaran (2002b), relative valuations

yield values that are closer to the market price than DCFs.

Kaplan and Ruback (1996) found that the relative method in

the same industry have lower valuation errors, although the

DCF method provides better reliable value estimations. How-

ever, the value of the firm should be adjusted somehow, since

the characteristics of private and public firms are different.

The second reason to use the CMAinstead of the DCF method

is embedded in the analysis. The DCF method is not very suit-

able to obtain some conclusions based on hundred of firms

across the Euro Zone. Apply the DCF method to so many

firms would generate many drawbacks. This is due to the fact

that there are many variables playing in the field: CF calcula-

tions, expectations, risks, etc., that surely would be a burden

in the process of DCF valuation, generating more noise than

information. The relative valuation method, on the other hand

is more useful and practical, generating less errors, and, there-

fore, easier to identify facts and reach conclusions.

II. THE SAMPLE

The source of the data is Zephyr, a Bureau Van Dijk data base

with information ranging from mergers and acquisitions to

IPOs, private equity, and venture capital transactions, cover-

ing all the European Stock Exchange spectrum, and the targets

represent almost all European countries. The data included

5.881 and 8.827 transactions of public and private held targetsrespectively, from September 1996 to April 2011. The data

was depurated to eliminate all transactions with missing infor-

mation as industry, date and deal type.

The original idea was to estimate private company discounts

based on matching private transaction with public acquisition

within the same country, industry division, and similar time

period. Unfortunately, due to the large private unmatched

transactions, the sample became significantly reduced. For

example, France is the country with more private and listed

transactions, but only 130 pairs fit the conditions. In conse-

quence, the results for each country could fall into a sort of

selection biased, failing to be statistically significant. To over-

come these obstacles, it was decided to analyze the private

company discount for the total Euro Zone instead.





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The sample displayed various categories. As shown in 1, the

deal types can be classified in two groups regarding the con-

trolling interest. Transactions with a controlling interest is just

1.41% of total listed companies while in closely held compa-nies is 63.94%.

We define acquisition following the Zephyr4 as Any deal

where the acquirer ends up with 50% or more of the equity of

the Target is coded as an Acquisition as the Acquirer now has

control of the Target. Even if the acquired stake is very small;

if the final stake is 50% or above the deal is classed as an

Acquisition. The Acquirer has purchased a number of shares

in the Target and the resulting stake held is less than 50%. Be

aware that a stake of only 2% could be classified as an acqui-

sition if the Acquirers overall stake reaches 50% or above.

It could be expected that when new investors buy participa-

tions in unlisted firms, they have the intention to be involved

directly in managing it, or indirectly, in monitoring it. On the

contrary, investors in public, listed firms, usually hold a port-folio of diversified firms, letting managers and board directors

to run the firms.

Thus, when investors are involved in the administration of the

firm, two things could occur: i) the acquired price has taken a

discount to compensate management and/or monitor services;

ii) a premium is paid for acquiring a controlling interest5 and,

therefore, reducing discount on the private company. Follow-

ing these lines, the sample was broken down in two groups

based on transactions ending or not in a controlling interest. (1

and 2).





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All transactions have been sort out following three dimen-

sions: country (Europe), year (1999-2011), and industry (clas-

sified by 2 digit NACE code list). For each dimension, the

number of deals has been further broken down in controlling

or not controlling interest, and private and public transactions

(see Table 2). The appendix shows the results by industry.

Some sectors have been eliminated to accommodate data,

being reduced from 84 to 52 sectors.

As shown in Table 2, these selection criteria reduced the sam-

ple to 83 and 5,310 public transactions, and 950 and 2,342 pri-

vate transactions in controlling and no controlling interest

respectively. Although the sample is significantly reduced

mostly in the controlling interest segment, almost all countries

in the Euro Zone are well covered.

Table 3 reports some statistics on Operating revenue, EBIT-

DA, EBIT, Profit before & after taxes, Total Assets, and

Shareholders Funds for the four variables studied. The mean

and median are higher for public than private companies. In

fact, the mean of the listed firms is statistically different than

the one of the unlisted at a significance level of 1%. The

exception is Total Assets in the controlling interest sample,

where the significance level is 6%. This could be attributed to

a high level of variance for Total Assets, so that the mean plusone standard deviation in private transactions exceeds the

mean for public targets.

Although median and mean are unbiased estimators of the

central tendency, the mean is highly sensitive to extreme out-

liers, whereas the median is hardly sensitive and, therefore, a





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more robust metric. Observing both metrics for all groups,

there is an outstanding difference between them, and this is

factored in the estimation of the private company discount.

Finally, Table 3 shows a large standard deviation for most ofthe variables, indicating a great dispersion from the average.

III. METHODOLOGY

To estimate a liquidity discount for unlisted firms in the Euro

Zone, we developed a method following Koeplin et al. (2000),

and Officer (2006).

Valuation Multiples Used

The main idea is to approximate the value of a firm through

the use of multiples of publicly held comparable firm with

similar growth rates, industry, risk, cash flow generation, and

size. This methodology standardizes the prices paid by trans-

forming them into fundamental measures or value character-

istics of the firm acquired. The ratios or multiples obtained

are then applied to any firm being valued. For example, if the

price paid for a comparable firm B (similar to A) was 100

and the net assets of B were of50, then the multiple price to

net assets for B is 2,00 (100 / 50). Thus, for A who has 25

of net assets, the value is 50 EUR (25 x 2,00), As net assets

x Multiple price to net assets of comparable firm B.

Usually prices are standardized relative to revenues, book val-

ue (such as net assets or stock/equitys book value) and earn-

ings. It is also common in some industries to use additional

specific parameters such as employees, clients, etc., each one

with some advantages and pitfalls (see Mascareas, 2005).

The multiples selected must be precise and accurate in reflect-

ing the essentials of the firm, the cash flow generated by the

firm, with its associated risk, and the growth rate. In other

words, they should be potential measures of value for bothpublic and private firms. However, it is hard to decide the

most appropriate multiples without knowing which specific

firm is going to be valued, and for the purpose of estimating

the private company discount, many measures of performance

should be used, and this is the reason this paper makes use of

all multiples available from Zephyr.

Zephyr defines Deal Equity Value as: If stated, equity value

equals deal value. If not specified, the value equals the value

of shares given and the estimated price per share. Deal Enter-

prise Value: If stated, enterprise value equals deal value. If notspecified, use the following definition: equity value + short

term & long term interest bearing debts cash & equivalents.

When the multiple turns negative, the results have not signifi-

cance. The meaning of each multiple is different due to the

influence that the accounting variables have upon it. P/E mul-

tiples are influenced by the mix debt and equity, or capital

structure because earnings are computed after interest expens-

es and taxes. Price to EBITDA multiples are influenced by

capital intensity, whereas Price to EBIT by depreciation.

Both, nevertheless, are independent of the capital structure.

However, these multiples do not reflect how the firm is con-

trolling costs, and it varies extensively among industries.

Private Company Discount

The mean and median of multiples based on all unlisted firm

transactions were compared to those listed firms under the

same industry and year. In comparison to Koeplin et al.

(2000), who match just one private transaction with a public

comparable company, or Officer (2007), with a portfolio of

comparables, we take a different path. Thus, with the intention

to avoid an excessive sample size reduction and selection bias,

a group of similar public and private firms are compared. Withthe intention to only count multiples that were economically

reasonable, negative parameter values and their associated

multiples were deleted.

The private company discount was estimated by matching

listed and unlisted firms for each of the two controlling seg-

ments, and for every sector, multiple, and year. The discount

was estimated by the following formula (see Koeplin et al,2000):

Hypothesis Tests

We carried out the Student T Test to each multiple of unlist-

ed firms to check if there is a statistical significance in the





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mean estimation. This type of test is used to judge goodness of

the estimator compared to the data in the sample when the

variance is unknown. In other words, to test if the private com-

pany discount is likely to occur by chance or not.

The null hypothesis used for multiple i is:

Ho:mean private equity discount for multiple i=0

In the other hand, the alternative hypothesis is:

Ha:mean private equity discount for multiple i /= 0

Therefore, it is used a two tailed t-test expecting a rejection for

the null hypothesis for a given significance level.

IV. RESULTS & ANALISYS

Table 4 exhibits the mean, median and standard deviation of

deal equity value relative to each fundamental. It can beobserved the difference between means and medians. Medi-

ans are always lower than means in both sample types (con-

trolling and not controlling), but it is even more outstanding

in private firms transactions. Thus, it can be inferred the

presence of high outliers in both samples. In addition, the

standard deviation is usually higher than the mean (some

reach 300%); ie, see deal equity value to EBITDA in the not

controlling interest, and to EBIT in the controlling interest

sample respectively, reinforcing the thought of considerable

outliers in the sample.





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The most outstanding and surprising - fact about table 4 is

that these deal equity value multiples suggest that the private

company discount is instead a premium. In both sample types,

almost all medians and means are higher in privately heldtransaction multiples than in listed firms. Additionally, in pri-

vate firms the standard deviation of multiples is higher. Also,

when a controlling interest is acquired, the mean earnings

multiples are higher than when it is not acquired, but this is not

the case for the median. Also, this result is not as clear for

mean transactions of private firms, although it is for the medi-

an, perhaps, reflecting the presence of outliers in transactions

of private firms since means are more sensitive to them than

medians.

For example, only the mean of deal equity to EBIT is higher

when a controlling interest is acquired. But for the median, the

operating income multiple, and all earnings multiples (EBIT-

DA, EBIT, and profit before and after tax) are higher when apremium is paid for the controlling interest.

The statistics of deal enterprise value multiples are shown in

Table 5. In this case, the sample is smaller because the corre-

sponding data are not available for all transactions. Particular-

ly, the smaller group in deal enterprise value multiples is in the

financial sector.





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In this case, the statistics show quite similar results. First,

medians are lower than means in both samples, but high stan-

dard deviations, particularly in privately held targets. Second,

in general terms, mean and median multiples are higher in theacquisition of private firms. Third, roughly, all mean multi-

ples are higher when a controlling interest is acquired.

Table 6 shows the estimates of private company discounts for

the Euro Zone. The mean and median are all negative but one.

This conclusion is similar to the one found in our previous

analysis of the multiples for transactions in both sample types:there is no private company discount. Instead, the results sug-

gest a premium.




Mean discounts are very large although, these cases have notstatistical significance, others have and a premium of this size

is not rational. This issue is addressed afterward.

For the first multiple, the mean private company discounts are

-766% and -626% with median of -22% and -6%, respective-

ly. Mean (median) discounts from deal equity value to EBIT-

DA reach -711% (-40%), and from deal enterprise value mul-tiples 515% (-29%). At last, for total asset multiple, the result-

ing private company discounts have means (medians) of -

726% (-30%) as of deal equity value and -432% (-7%) as of

deal enterprise value. Mean discounts are still very large, but

medians are below 100% though in a wide range and sill neg-

ative.


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Considering the group Without controlling interest, only the

mean discounts of operating revenue, EBIT, and total assets

are statistically significant at 99% level for both, deal equity

and enterprise value. Something similar can be seen in theControlling interest acquired group. But, only deal equity

value multiples to operating revenue and total assets, and deal

enterprise value multiples to profit before and after tax are sta-

tistically significant with confidence level of 99%.

However, for confidence levels of 95% the following mean

discounts are statistically significant: deal equity value multi-

ple to EBITDA, and deal enterprise value multiples to operat-

ing revenue, EBITDA, EBIT and total assets. Regarding

shareholdersfunds multiples; they are significant at a level of

10% in both deal value types.

Comparing both groups across fundamentals (Figure 1), every

mean and median deal equity multiple is higher than its corre-

sponding enterprise equity multiple: thin lines are below their

corresponding thick lines. This is reasonable, given that usu-

ally deal equity value is lower than deal enterprise value.

On the other hand, nothing can be concluded about a lower

discount when a controlling interest is acquired or not. There-

fore, when the stake acquired does not include a controlling

interest, means & medians deal equity and enterprise valuemultiples all have similar patterns. But when a controlling

interest is acquired, then, there is barely any correlation. At

any rate, this is less obvious than in the previous case, and

changes are more variable. Also, the patterns between mean

deal types (for means and medians) are less similar.

As it can be seen in the analysis of targets features (section

II), and in the descriptive statistics of the multiples used, the

fact that mean discounts are extremely larger than median dis-

counts suggests again the presence of large outliers. But, even

though medians are in the negative two digit bracket, there is

no economical reason to think in a premium instead of a dis-count for private equity. An explanation is that this estimation

of the private company discount for the Euro zone does not

have any comparable value within the same country. Instead,

many transactions are compared for many countries with dif-

ferent macro & micro economic features and risk levels. Fur-





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ther, it cannot be ignored the possibility of faulty data and,

therefore, an erroneous estimation of multiples.

With the intention of controlling some of these possible draw-backs, the private company discount was computed again, this

time taking into account only the previously estimated posi-

tive private company discounts for each sector and year.

exhibits the new results.

Although the sample is significantly reduced, all mean private

equity discounts are statistically significant at level of 1% or

5%. As expected, the discounts are positive after acquiring a

controlling interest. Additionally, all means (medians) are in a

range of 37% - 77% (33%-79%), much lower than those pre-

viously found. Since mean and median ranges are quite simi-

lar, then, we could assume that the private company discount

for the euro zone is in that range.

Figure 2 plots the results in Table 7. Mean private equity dis-

counts (Panel A) follow similar patterns between deal types,

but for median discounts, the likeness is beyond doubt. It is

remarkable that, when a controlling interest is acquired, medi-

an discounts (Panel B) of the EBIT multiples are higher than

70%, while median discounts of other multiples are below

64%. Mean discounts with multiples EBIT tend to be higher

for both Panels A & B. This may suggest that when buying a

private firm, the market penalizes more the EBIT multiple.





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V. CONCLUSIONS

The private company discount computed for the Euro Zone is

not economically reasonable. First, a negative private compa-

ny discount suggests a premium over public firms. This goes

against the standard theory of a discount price paid for a firm

with less liquidity, lower size, and higher risk. Second, mean

values are extremely large (reaching a 25,000% premium).

Thus, when applying private equity discounts to transactions

of listed firms, the resulting multiples are very large. For

example, the multiple deal equity value to operating revenue

of a public firm is equal to 3. Applying a discount of -

10.000%, the resulting multiple is 303 (3 x (1-(-10.000%)).This is not a credible multiple for any firm. On the contrary,

median discounts (above -100%) are more reasonable in val-

ue, although they are still negative.

The large values, and the gap between means and medians can

be explained by the presence of large outliers, since the mean

is more sensitive to them. These results can also be attributed

to the fact that this study compares transactions across all

countries in the Euro Zone. In other words, in order to com-

pute the private company discount of a private firm, a one-to-

one comparison between firms in different countries should

be arranged.

When outliers and negative values for mean and median pri-

vate company discounts are left out, then, the discount is eco-

nomically reasonable and statistically significant for all deal

value types and multiples. It was found that mean private

company discounts (medians) range between 37% (33%) and

77% (79%).

Although all countries in the Euro zone use the same curren-

cy, they differ in economic features (business cycle, GDP)

and risk levels. Besides, as we cover many countries across

Europe with different accounting and fiscal systems, there is

the possibility of faulty information and, therefore, miscalcu-





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lation of multiples in the Zephyr s database. Therefore,

these two factors could account for both, the large figures, and

the large percentage of the discount found.

An additional limitation is that those who buy privately held

firms tend to be high ranking officers and private equity funds.

As they provide services like managing and monitoring, part

of the discount reflects the compensation for those services.

And, although this study controls for differences based in the

controlling stake, no significant differences between each

sample type (controlling & not) were found.

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Notes

1.- Quoted in Bajaj, et al. (2001) at 99-100.

2.- EBITDA: earnings before interest, taxes, depreciation & amortization

3.- Officer (2006) defines unlisted targets as stand alone private corpora-

tions, and not listed subsidiaries of publicly held firms.

4.- B u r e a u Va n D i j k . G l o s s a r y . I n Z e phy r Us e r G u i d e .

http://webhelp.bvdep.com/Robo/BIN/Robo.dll?project=ZephyrNeo_E

N&newsess=1 at Deal Classifications. Date of access: May 04, 2011

5.- See Damodaran (2002a) at 1; Bajaj et al. (2001) at 97, and Koeplin et al

(2000) at 95.





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APPENDIX - DEALS AVAILABLE FOR EACH ECONOMIC ACTIVITY. SOME SECTORS HAVE BEEN ELIMINATED TO

ACCOMMODATE DATA




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