Mergers and Acquisitions: Reducing the Private Firm Discount [Archive.org URL]

Owners of private companies normally sell their shares at a 20-30 per cent discount during mergers and acquisitions. The ‘private firm discount’ is one reason the stock market reacts more favorably when companies announce a private acquisition than when the target is a publicly-listed firm.

From the buyer’s point of view, says INSEAD Associate Professor of Strategy Laurence Capron, the discount reflects a presumed higher risk associated with the value of private assets due to a lack of information about the target firms, their lack of liquidity and their lack of visibility. From the seller’s point of view, the discount can reflect naivety, a lack of financial advice and the choice of a preferred buyer rather than the highest bidder.

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