How does the valuation process differ for public and private companies in mergers and acquisitions?

1 Public company valuation

Public companies are those that trade their shares on a stock exchange, and have to disclose their financial information and performance to the public. Valuing a public company is relatively straightforward, as you can use the market price of its shares as a reference point. However, the market price may not reflect the true value of the company, as it can be affected by factors such as market sentiment, speculation, and liquidity. Therefore, you also need to use other methods, such as comparable company analysis, precedent transaction analysis, and discounted cash flow analysis, to estimate the intrinsic value of the company. These methods rely on financial ratios, historical transactions, and future cash flows, respectively, to compare the target company with similar companies or deals in the same industry or sector.

2 Private company valuation

Private companies are those that do not trade their shares on a stock exchange, and have more flexibility and privacy in their financial reporting and operations. Valuing a private company is more challenging, as you do not have a market price to use as a benchmark. Instead, you have to rely on the information provided by the company itself, or by third-party sources such as industry reports, databases, and brokers. You can use the same methods as for public companies, but you have to adjust them for the lack of marketability, liquidity, and transparency of private companies. For example, you may have to apply a discount for lack of marketability, which reflects the difficulty of selling private shares, or a premium for control, which reflects the ability to influence the strategic decisions of the company.

3 Valuation multiples

One of the most common ways to compare the value of public and private companies is to use valuation multiples, which are ratios that relate the value of a company to a financial metric, such as revenue, earnings, or cash flow. Valuation multiples can help you to assess the relative value of a company within its industry or sector, and to identify potential synergies or gaps in the deal. However, valuation multiples can vary depending on the type of company, as public companies tend to have higher multiples than private companies, due to their higher liquidity, visibility, and growth prospects. Therefore, you have to adjust the multiples for the differences in risk, growth, and profitability between public and private companies.

4 Valuation drivers

Another way to understand the value of public and private companies is to identify the key drivers that influence their performance and potential. Valuation drivers are factors that affect the revenue, costs, margins, cash flows, and risks of a company, and can be internal or external, quantitative or qualitative. Some examples of valuation drivers are market size, growth rate, competitive advantage, customer loyalty, innovation, regulation, and reputation. Valuation drivers can help you to evaluate the strengths and weaknesses of a company, and to estimate the impact of the merger or acquisition on its value creation or destruction.

5 Valuation challenges

Valuation is not an exact science and can be met with various challenges and uncertainties in the context of mergers and acquisitions. Data quality and availability, assumptions and projections, and market conditions and timing are all common issues. The accuracy of financial and operational data can vary depending on the source, format, and frequency, particularly for private companies that may have less standardized reporting systems. Assumptions and projections can be subjective due to the perspective, expectations, and motivations of the parties involved in the deal. Market conditions and timing can also influence the value of a company as demand for capital, interest rates, exchange rates, industry trends, and competition can change quickly.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?