Advertisement

Journal of Systems Science and Complexity

, Volume 30, Issue 6, pp 1364–1381 | Cite as

Acquisition discount and valuation effect of private M&As in China

  • Jichang DongEmail author
  • Danxiao Jiao
  • Xilong Sun
Article

Abstract

An acquisition discount can reflect not only the liquidity demands for unlisted targets but also the strategic requirements, management efficiencies and capital allocations for the listed bidders. Based on Officer (2007), the authors choose an acquisition approach to generate an acquisition discount for unlisted targets. In China, unlisted firms are sold at a deeper discount than listed firms. The deeper discount mainly depends on the liquidity demand and the characteristics of the bilateral trading components. Larger bidders tend to pay more, whereas smaller targets are sold at lower discounts. The values of unlisted targets in the TMT industry are underestimated. Furthermore, buying out unlisted targets can significantly increase the abnormal return of public bidders during the announcement period. Deeper discounts or stock payments have a positive effect on the stock values of the bidders, whereas this positive increase will be weakened if the bidder is large or has a previous ownership relationship.

Keywords

M&As multiples approach TMT industry unlisted targets valuation effect 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. [1]
    Xie H and Wang S, A new approach to model financial markets, Journal of Systems Science and Complexity, 2013, 26(3): 432–440.MathSciNetCrossRefzbMATHGoogle Scholar
  2. [2]
    Officer M S, The price of corporate liquidity: Acquisition discounts for unlisted targets, Journal of Financial Economics, 2007, 83(3): 571–598.CrossRefGoogle Scholar
  3. [3]
    Paglia J K and Harjoto M, The discount for lack of marketability in privately owned companies: A multiples approach, Journal of Business Valuation and Economic Loss Analysis, 2010, 5(1): 1–23.CrossRefGoogle Scholar
  4. [4]
    Block S, The liquidity discount in valuing privately owned companies, Journal of Applied Finance, 2007, 17(2): 33–40.Google Scholar
  5. [5]
    Wang Y and Shao Y, Motivations of Chinese outward direct investment: The sector perspective, Journal of Systems Science and Complexity, 2016, 29(3): 698–721.CrossRefGoogle Scholar
  6. [6]
    Roll R, The hubris hypothesis of corporate takeovers, Journal of Business, 1986, 59(2): 197–216.CrossRefGoogle Scholar
  7. [7]
    Chari V V, Kehoe P J, and McGrattan E R, Are sructural VARs with long-run restrictions useful in developing business cycle theory?, Journal of Monetary Economics, 2008, 55(8): 1337–1352.CrossRefGoogle Scholar
  8. [8]
    Fuller K, Netter J, and Stegemoller M, What do returns to acquiring firms tell us? Evidence from firms that make many acquisitions, The Journal of Finance, 2002, 57(4): 1763–1793.CrossRefGoogle Scholar
  9. [9]
    Hertzel M and Smith R L, Market discounts and shareholder gains for placing equity privately, Journal of Finance, 1993, 48(2): 459–485.CrossRefGoogle Scholar
  10. [10]
    Comment R, Revisiting the illiquidity discount for private companies: A new (and “Skeptical”) restricted-stock study, Journal of Applied Corporate Finance, 2012, 24(1): 80–91.CrossRefGoogle Scholar
  11. [11]
    Emory Sr J D, Dengel III F R, and Emory Jr J D, The value of marketability as illustrated in initial public offerings of dot-com companies: May 1997 through March 2000, Business Valuation Review, 2000, 19(3): 111–121.CrossRefGoogle Scholar
  12. [12]
    Garland P J and Reilly A S, Update on the willamette management associates pre-IPO discount for lack of marketability study for the period 1998 through 2002, Insights (Willamette Management Associates) (Spring 2004), 2004, 38–44.Google Scholar
  13. [13]
    Kooli M, Kortas M, and L’her J F, A new examination of the private company discount: The acquisition approach, The Journal of Private Equity, 2003, 6(3): 48–55.CrossRefGoogle Scholar
  14. [14]
    DiGabriele J A, The Sarbanes-Oxley act and the private company discount: An empirical investigation, Critical Perspectives on Accounting, 2008, 19(8): 1105–1121.CrossRefGoogle Scholar
  15. [15]
    Faccio M, McConnell J J, and Stolin D, Returns to acquirers of listed and unlisted targets, Journal of Financial and Quantitative Analysis, 2006, 41(1): 197–220.CrossRefGoogle Scholar
  16. [16]
    Zou X, Wei Q, and Zhang B, Empirical research on M&A performance of private enterprises in China, Quality & Quantity, 2012, 46(2): 639–651.CrossRefGoogle Scholar
  17. [17]
    Chang S, Takeovers of privately held targets, methods of payment, and bidder returns, Journal of Finance, 1998, 53(2): 773–784.MathSciNetCrossRefGoogle Scholar
  18. [18]
    Masulis R W, Wang C, and Xie F, Corporate governance and acquirer returns, The Journal of Finance, 2007, 62(4): 1851–1889.CrossRefGoogle Scholar
  19. [19]
    Moeller S B, Schlingemann F P, and Stulz R M, Firm size and the gains from acquisitions, Journal of Financial Economics, 2004, 73(2): 201–228.CrossRefGoogle Scholar
  20. [20]
    Moeller S B, Schlingemann F P, and Stulz R M, Wealth destruction on a massive scale? A study of acquiring-firm returns in the recent merger wave, The Journal of Finance, 2005, 60(2): 757–782.CrossRefGoogle Scholar
  21. [21]
    Dong M, Hirshleifer D, Richardson S, et al, Does investor misvaluation drive the takeover market?, The Journal of Finance, 2006, 61(2): 725–762.CrossRefGoogle Scholar
  22. [22]
    Chao J C, Hausman J A, Newey W K, et al, Testing overidentifying restrictions with many instruments and heteroskedasticity, Journal of Econometrics, 2014, 178: 15–21.MathSciNetCrossRefzbMATHGoogle Scholar
  23. [23]
    Betton S, Eckbo B E, and Thorburn K S, Merger negotiations and the toehold puzzle, Journal of Financial Economics, 2009, 91(2): 158–178.Google Scholar
  24. [24]
    Villalonga B, Diversification discount or premium? New evidence from the business information tracking series, Journal of Finance, 2004, 59(2): 479–506.CrossRefGoogle Scholar
  25. [25]
    Zhou B, Guo J M, Hua J, et al, Does state ownership drive M&A performance? Evidence from China, European Financial Management, 2012, 21(1): 79–105.CrossRefGoogle Scholar
  26. [26]
    Cetorelli N and Strahan P E, Finance as a barrier to entry: Bank competition and industry structure in local US markets, The Journal of Finance, 2006, 61(1): 437–461.CrossRefGoogle Scholar
  27. [27]
    Lang L H P and Stulz R M, Contagion and competitive intra-industry effects of bankruptcy announcements: An empirical analysis, Journal of Financial Economics, 1992, 32(1): 45–60.CrossRefGoogle Scholar
  28. [28]
    Bajaj M, Denis D J, Ferris S P, et al, Firm value and marketability discounts, The Journal of Corporate Law, 2001, 27: 89–114.Google Scholar
  29. [29]
    Servaes H, Tobin’s Q and the gains from takeovers, Journal of Finance, 1991, 46(1): 409–419.CrossRefGoogle Scholar

Copyright information

© Institute of Systems Science, Academy of Mathematics and Systems Science, CAS and Springer-Verlag GmbH Germany 2017

Authors and Affiliations

  1. 1.School of Economics and ManagementUniversity of Chinese Academy of SciencesBeijingChina

Personalised recommendations