The Price of Corporate Liquidity: Acquisition Discounts for Unlisted Targets

Abstract

This paper documents acquisition discounts for stand-alone private firms and subsidiaries of other firms (unlisted targets) of 15-30%, on average, relative to acquisition multiples for comparable publicly-traded targets. My results support the contention that acquisition discounts for unlisted targets are the price paid by private owners or corporations for the liquidity provided by the buyer. Specifically, I demonstrate that corporate parents are significantly liquidity-constrained prior to the sale of a subsidiary, particularly so when the subsidiary is being sold for cash. Furthermore, acquisition discounts for both stand-alone private targets and subsidiaries are significantly greater when debt capital is relatively more expensive to obtain. Acquisition discounts for subsidiaries are also significantly greater when the parent-firm has below-market stock returns in the 12 months prior to the sale. I also find some evidence that information asymmetry affects acquisition discounts, but the economic significance of this effect is modest relative to the liquidity effect. Overall, my results are strongly consistent with the notion that sale prices for unlisted targets are affected by both the need for, and availability of, liquidity.

Keywords: Mergers and acquisitions, unlisted targets, private targets, valuation

JEL Classification: G34, G30