Question 2. Valuation Discount and Premium The LTE Inc, a financial advisory fir

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Question 2. Valuation Discount and Premium The LTE Inc, a financial advisory firm, is putting together the deal book and running the valuation analysis for various private clients. Assume that you are the "rock-star analyst" in the firm and asked to lead the valuation team to finalize the offer. A 15% control premium and a 30% illiquidity discount are justified for all the situations. Also, assume that there are 100 million shares in all the target companies Discuss what adjustments should be applied in each scenario and calculate the maximum offer Deal A: A private equity (PE) firm, financial buyer, acquires a privately held company with dispersed shareholders. The intrinsic value of common equity based on the Relative Valuation-public comparables model is estimated to be $90 million. What would be the maximum offer to existing shareholders? Deal C. A strategic buyer acquires a privately held company with a majority shareholder, who owns 55% of the shares of this company. The intrinsic value of common equity based on the APV model is estimated to be $90 million and the present value of synergies is estimated to be $10 million. What would be the maximum offer to the controlling shareholder? To the minority shareholders?

Explanation / Answer

Deal A : Given that the firm is privately held with dispersed shareholding, the illiquid discount of 30% plus since the firm is acquiring the entire firm control premium of 15% shall also be payable.

Intrinsic Value : $ 90 million ; 15 % premium : $13.5 million. hence the value payable should be = $ 103.5 million. On this 30% illiquid discount 30% = $ 31.05 million. Hence maximum payable offer shall be 72.45 million

Deal C : Firm value : Estimated equity value + PV of synergies = 100 million

Payable to Strategic investor : Control premium of 15% plus discount 30%; {[100 * (1+15%) ] * (1-30%) } * 55% = $44.275 million

To minority shareholders (only liquidity discount applicable) : [100 * (1-30%) ] * 45% = $31.5 million

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