Investigating the discount on trade sale transactions

Officer (2007) finds that subsidiaries sold between public companies trade at a 30% discount relative to comparable public market acquisitions. This discount is attributed to target parents selling assets under liquidity pressures and adverse credit market conditions. This implies a transfer of wealth from sellers to buyers, and a material friction in the market for corporate control. I present an alternative view. Assets sold by target parents are more likely to be poorly performing, non-core and sold at a tax loss. The reported discounts reflect this difference in underlying value, not a transfer of wealth from seller to buyer. I test whether reported discounts are driven by liquidity-pressured target parents or reflect the sale of less valuable subsidiaries. I present four key results. First, Officer (2007) uses the combination of arithmetic mean and percent discounts, procedures which are strongly influenced by asymmetric distribution of discounts. Alternative methods result in lower, or even zero, discounts. Second, measurement of discounts needs to allow for asset specific characteristics. I find that the target’s income status and size are associated with reported discounts. Third, using measures of financial constraints and new measures of seasoned equity market conditions, I find little correlation between discounts, measures of financial constraints and measures of equity market conditions. There is some evidence of a fire sale mechanism operating but the circumstances apply to a small portion of the sample, and cannot be used to explain pervasive discounts. Finally, acquirers buying assets at a discount should attract a larger share of wealth created in a sale. This result may explain the so-called listing effect. I find no association between discounts and the acquirer’s share of wealth created or returns. It is tempting to apply the logic of the private company discount to the sale of subsidiaries by public companies. However publicly listed target parents have a wider range of funding strategies and exit strategies than privately owned companies. The case that sizable discounts on the sale of subsidiaries exist, and are attributable to liquidity pressures on target parents, is still to be made.