The public markets provide much better data to illustrate the 50+% increase in business valuation that can be realized when you sell a business.
This increase in value is much more familiar to public market investors, in part because the increase in price is so easy to see. In the public market vernacular this is usually referred to as the control premium. This is another way to look at strategic value. In my opinion, the illiquidity in the market (when you are buying the whole company) and investor psychology are just as big a factor as they are in the private markets.
This is a classic example. Hostopia is a Toronto based web hosting company. They went public on the TSX in November of 2006 raising $25 million at $6.00 per share. In June of 2008, a US company Deluxe Corporation agreed to purchase the company for $10.55 per share.
As you can see from the chart below this is 100% more than the stock had been trading at.
Prior to the offer, the stock had been trading for a year at prices between $5.00 and $6.00. This means that hundreds, or possibly thousands, of investors made decisions that Hostopia’s stock was fairly valued at $5 to $6.00. Nevertheless Deluxe paid $10.55 per share to buy the entire company. No wonder public market investors get excited about acquisitions.
This is another very similar example from this week. Xantrex is a Vancouver company that acquired Statpower, one of the companies that was part of the Nexus Group – my first startup. Xantrex had been trading for years at prices of around $10.00 +/- $2.00. This year, the average price was around $9.00. They were acquired by Schneider Electric for $15.00 per share – over a 50% increase from the price it had been trading at.
Another familiar recent example is Microsoft’s offer to buy Yahoo.
It had been rumored for some time, but on January 31, 2208 Microsoft offered to purchase Yahoo at $31.00 per share a 62% premium over what the stock had been trading at.
As hopes for the acquisition faded, the stock dropped back to just about where it was before the announcement.
I am sure there are many other good examples of this 50+% increase in business valuation that is possible when a public company is sold. If you come across other good examples, please let me know so I can expand this section.