The Discount Premium between Private M&A and LBO Transactions

Abstract

Financial buyers consistently paid their acquisitions cheaper than strategic buyers did in the 1990 (Butler 2001). One of the explanations is that they follow a dispassionate approach as they screen a dozen of deals for each transaction. Strategic buyers are restricted to their industry sector and therefore to a few targets. One other explanation is that financial buyers have developed good negotiation skill. They also overestimate synergies and can get carried away in the auction process (Roll 1986, Gaughan 2002). In this study, we seek to establish the existence of discount premium applied by financial buyers. Our study is important because the extant practitioner and academic literature tends to equate a discount premium with a liquidity discount. While the market prices of public companies are readily available, pricing information about private firms is scarce. The method of comparables along with estimates of the discount premium are routinely used to value private firms, typically in conjunction with valuation approaches such as forecasting and discounting future cash flows. The starting point in the method of comparables is to identify comparable public firms and determine an appropriate public-firm valuation multiple of an accounting fundamental. Using a novel data of 200 private LBO and M&A European transactions in small and midcaps, this article explain the reasons of this difference and estimate the discount premium between M&A and LBO transactions for the period 2004-2007. We follow the same methodology used by Koplein et al (2000), and Officer (2007). We have identified a set of acquisitions made by private equity firms with LBO. For each LBO transactions, we have identified an acquisition of private company, in the same industry that was acquired around the same time and that was closest in size. Then we compare the valuation price paid by the financial and the strategic acquirer. Our inferences rely on the use of enterprise-value-to-EBITDA (EV/EBITDA) and enterprise-value-to-sales (EV/SALES) multiples, two valuation multiples widely used in practice. The principal findings of our research can be summarized as follows: French LBO transactions are acquired at an average discount of 16.20 % to 17.25 % relative to similar French M&A transaction. UK LBO transactions are acquired at an average discount of 15% relative to similar UK M&A transaction. Both financial and strategic UK buyers paid their acquisitions higher than French and European buyers. Using both a univariate and a multivariate approach that overcome the selection biais due to difference in size and controls for differences in industry, firm size and growth, we find that financial buyers pays their acquisition lowers than strategic buyers with a discount premium that ranges from 16 and 24%.