Equity DLOC/DLOM question control, interest, question, discount

YouCanDoIt

True or false: If you are valuing a noncontrolling equity interest then there will be a discount for lack of control DLOC?
I think it’s true.
If it is true, that means if you are valuing a controlling equity interest, then there will NOT be a discount for lack of control?
Does that sound correct?
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How do we decide whether or not a DLOM discount for lack of marketability is applied?

Iginla2010

there is a chart in the CFA text that explains when to use DLOC and when not to - I dont have the book in front of me but that should answer your question. If my memory is working, I think you use it with GPM and sometimes with PTM but never with GPCM

Halawiz

That has to depend on the basis that you are using for your valuation. If you are using a public equity value and you are valuing a non-controlling interest, you do not need to apply a DLOC, because holding a public equity is usually a non-controlling position. On the other hand, if you are using a private equity value from another similar company (such as the guideline transaction method) which is from a controlling perspective and valuing a non-controlling interest, then you need to apply a DLOC.

dotamasta

when do we subtract the DLOC?

mik82

I think you are making this a lot more complicated then it actually is.
Follow it logically. You are comparing this transaction to another transaction but you need to make sure you are comparing apples to apples.
So answer your above question, a comparable transaction included a discount for lack of control because it was for acquiring a minority interest. However, you are acquiring a controlling interest. Therefore, you remove the discount for lack of control because it is not applicable to your transaction.

Colum

I see. Very well said. I wish everybody would explain things as clearly as just did. Good luck on saturday.

joehogue

DLOC
Minority shareholders are at a disadvantage relative to majority shareholders because for asymmetrical rights and powers over the subject corporation. Without the said rights / powers, minority shareholders cannot determine the investment and payout policies that may affect the valuation of a target company. Majority shareholders are able to implement excessive salaries to the detriment of minority shareholders. The only reason one would use DLOC is when your comparable companies (i.e., comparable peers) are based on Precedent Transaction Multiples (and not trading comps) and you intend to acquire a minority stake.

DLOM
If an interest in a firm cannot be easily sold (for reasons I will list below), discounts for lack of marketability (liquidity) would be applied. DLOC and DLOM actually are likely to be used in the same case since the presumption is that you are buying a minority stake that has some restrictions on being sold (i.e., if a controlling shareholder believes that a private firm should not be sold, minority shareholders both lack control and marketability).

DLOM may be applicable on the following circumstances:
- Contractual restrictions on selling stock of the target company
- Substantial risk and value uncertainty on the target company (e.g., uncertain cash flows to shareholders)
- Absolutely no willing buyers for acquiring the target company

In summary, the DLOC and DLOM may be only in very specific cases and should not be used as a rule-of-thumb. You may actually impute a valuation “discount” based on the WACC you will assume on the investment.