Stocks (stocks of listed companies etc.) can be replaced with cash at a price close to the market price. However, in the case of selling all the stocks that are held in large quantities in the market, the market price may be lowered by itself due to the sale and the cash can be made only at a price lower than the initial market price. In such a case, it is called liquidity discount to evaluate the discount at a fixed rate without evaluating the shares held at the market price. There are many cases where M & A’s ultimate objective is to improve corporate value when M & A is implemented and to obtain profits by selling stocks. Liquidity is an indication of the ease of cashing stocks. If it is a listed company’s stock, cashing will not be so difficult. Therefore liquidity is considered high. Therefore, it is necessary to consider the fluctuation by the liquidity discount. Likewise, the risks of liquidity clearly differ between companies that have just set up and companies that are listed.
In M & A the acquirer keeps liquidity risk to the utmost
In industries where M & A is popular, acquirers can minimize liquidity risk by M & A as much as possible. Liquidity is low in cases where it is a transfer restricted stock like an unlisted company. In the case of low liquidity, investors will be deprived of the freedom to cash. That’s why that risk increases and you will need a corresponding premium. Therefore, you will receive a discount from the valuation according to liquidity risk, which will be a non-liquidity discount. Non-liquidity discount refers to the value portion that discounts the valuation because stock liquidity does not exist or is small. The extent to which non-liquidity discount is to be made is practically very difficult judgment. Because it is difficult to evaluate transaction contents of unlisted companies because they are rarely made public. For non-liquidity discounts, sufficient empirical research and statistical data are not published, so non-liquidity discount may be said to be a subjective judgment area in evaluation practice.