M&A Deals: Private vs. Public Companies

One plus one makes three: this equation is the special alchemy of a merger or an acquisition... Two companies together are more valuable than two separate companies -...

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Photo: Daisy de Vries, Marketing Professional at Equidam; Source: Courtesy Photo
Photo: Daisy de Vries, Marketing Professional at Equidam; Source: Courtesy Photo

“One plus one makes three: this equation is the special alchemy of a merger or an acquisition. The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies – at least, that’s the reasoning behind M&A.” (Investopedia)

When it comes to M&A deals, it has always been easier for public rather than private companies to monitor company value, as private businesses did not have a system like the stock market where they could track their value frequently – until now.

Last week here at Equidam we launched a service for entrepreneurs to track and manage the value of their business on a daily basis. Our real-time valuation technology, which is the first of its kind, turns the value of private companies into more a continuous, ongoing management activity, rather than an incidental procedure.

Small business owners from all over the world value their business for a variety of reasons, of which M&A is one of them. However, when you, as a private company, consider a partnership with another business – whether this concerns a merger or an acquisition – there are some main differences to keep in mind.

Let’s take a look at these variables and how they influence the value of your business.

 

The Valuation

When investing in a company, the question that pops up immediately is: What is the worth of one share? The value of a company is one of the most important factors when deciding whether to engage in a merger. However, when investing in a privately held company, you cannot easily rely on the stock price to determine company value.

In addition, public companies are obliged to file financial statements with the Securities and Exchange Commission (SEC), to make it easier for investors to track performance on a quarterly and annual basis. Private companies are not required to provide information to the public, and therefore it can be very difficult to determine their financial health, historic profits etc.

When buying stock in a private companies, valuing a company is not the same as with public companies, since the value of the business is not so clearly stated as on the stock market. Moreover, since public and private companies have diverse characteristics, the valuation is often based on different metrics. Therefore, the value of both companies are not comparable – it’s like comparing apples with orange. So, what causes the valuation to be so different?

 

Market Liquidity

One reason valuation differs between both is the market liquidity of the stock. As with a public company, you can switch your investment to another stock on a daily basis, or even more frequently. With a private company, this is a lot harder, since you cannot trade you stock that easily.

If you want to get rid of your shares, there is a lot of upfront documentation. You cannot sell your shares to the public, quickly. The low market liquidity of private company stock causes the valuation to be lower than public companies.

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