TP Ticker – April 2020

Premiums and Discounts in Germany

Andreas Creutzmann and Felix Ptok published in “BewertungsPraktiker” an article on the premiums and discounts in German business valuation practice.  In the international practice, it is common to consider premiums when valuing majority shares in a business and conversely discounts for minority shares.  Especially the existence of premiums is empirically well documented from public acquisitions of majority shares by the markup paid by the acquirer on the stock price previous to the takeover bid.  From a theoretical perspective, perspective can be explained by the value of the ability to control the business and the possibility to use synergy values.  Discounts, on the other hand, can be rationalized by the lack of effective influence on the operation of the business and – where the stocks are not traded on a stock exchange – their lack of liquidity.  Both have accordingly a reciprocal relationship.  This is in line with the fair market value which is internationally the commonly used base of value and effectively aims at an exchange value.  Contrary to this, German business valuation centers around the “objectified business value” and does not translate from value to price.  After discussing the characterizations of different levels on control and the respective influence on a price, they present a summary of different empirical research on observed premiums, and the discount indicated by these, in Germany, USA, and the UK.  For Germany, three studies from 2007, 2015, and 2020 showed on average a premium of around 16%, thus a discount of 13%.  The more numerous studies for the USA and UK demonstrated average premiums of 31% and 22% respectively but are not directly comparable due to the differences between how the legal systems shape the concrete voting rights, such as blocking minorities.  The authors conclude with the recommendation that premiums and discounts should be tested with a fundamental valuation method and only applied if they can be substantiated based on the individual perspectives of the seller and buyer.

In our view, the article provides a valuable and concise look on premiums and discounts in valuation practice.  Furthermore, it demonstrates the importance of distinguishing between “value” and “price”.  This conceptual differentiation is also inherent in the OECD transfer pricing guidelines, following from the holistic two-sided perspective that underlies the arm’s-length principle.  Nevertheless, it can often be observed that an explicit translation between value and price – even if the result would be that both are equal – is not undertaken.

The article “Discounts und Premiums in der deutschen Bewertungspraxis” by Creutzmann and Ptok was published on 30 March in “BewertungsPraktiker” Nr. 1/2020 on pages 2 through 8.