Maximizing the Divestment Price of a Privately Held Company

Abstract

While several studies have demonstrated that there is a relative price difference between companies listed on the stock market and privately held enterprises, no academic study has addressed the question of how this private enterprise discount can be reduced and the proceeds from a divestment can be maximized. This research project has focused on the seller’s perspective in the takeover process in order to answer the following research question: What factors influence the ability of sellers to extract value when divesting a privately held target and how can these factors be optimized? Based on the existing knowledge base, the following key success factors have been determined to be the main elements of the divestment process to be studied: Increasing negotiation power by creating competition; Initiating the sales process under favourable market conditions; Selecting a group of bidders with the highest potential synergies; Inviting financial investors to the bidding process; Increasing transparency of target company information; Controlling information dissemination to potential bidders; Articulating a compelling value and growth story for each buyer; Optimizing the auction process used in the divestment; Overcoming price differences using deferred or conditional payments; and identifying and mitigating potential deal breakers. Typically, M&A advisors are hired by the owners of privately held companies in order to create a market for their illiquid asset. A survey-based study validating the perceived importance of the key success factors has been conducted in addition to multiple case studies, where specialized M&A advisors and their clients have participated. The study of five selected cases involving a privately held target company during and after the divestment process has produced results with high significance to other researchers and professionals involved in mergers and acquisitions. From multiple case studies, the best possible practices regarding the optimization of the key success factors has been derived and used to reappraise the existing knowledge base. While based on a systematic analysis of the data obtained, the research question has been answered, further studies with a larger sample will be necessary to generalize findings and to validate the theory developed.