A control premium is an amount that a buyer is sometimes willing to pay over the current market price of a publicly traded company in order to acquire a controlling share in that company.[1]
If the market perceives that a public company's profit and cash flow is not being maximized, capital structure is not optimal, or other factors that can be changed are impacting the company's share price, an acquirer may be willing to offer a premium over the price currently established by other market participants. A discount for lack of control, sometimes referred to as a minority discount, reflects the reduction in value from a firm's perceived optimal or intrinsic value when cash flow or other factors prevent optimal value from being reached.
Transactions involving small blocks of shares in public companies occur regularly and serve to establish the market price per share of company stock. Acquiring a controlling number of shares sometimes requires offering a premium over the current market price per share in order to induce existing shareholders to sell. It is made through a tender offer with specific terms, including the price.[2] Higher control premiums are often associated with classified boards.[3]: 165
The amount of control is the acquirer's decision and is based on its belief that the target company's share price is not optimized. An acquirer would not be making a prudent investment decision if a tender offer made is higher than the future benefit of the acquisition.
Control premium vs. minority discountedit
The control premium and the minority discount could be considered to be the same dollar amount. Stated as a percentage, this dollar amount would be higher as a percentage of the lower minority marketable value or, conversely, lower as a percentage of the higher control value.
In general, the maximum value that an acquirer firm would be willing to pay should equal the sum of the target firm's intrinsic value, synergies that the acquiring firm can expect to achieve between the two firms, and the opportunity cost of not acquiring the target firm (i.e. loss to the acquirer if a rival firm acquires the target firm instead). A premium paid, if any, will be specific to the acquirer and the target; actual premiums paid have varied widely. In business practice, control premiums may vary from 20% to 40%.[5] Larger control premiums indicate a low minority shareholders' protection.
Exampleedit
Company XYZ has an EBITDA of $1,500,000 and its shares are currently trading at an EV/EBITDA multiple of 5x. This results in a valuation of XYZ of $7,500,000 (=$1,500,000 * 5) on an EV basis. A potential buyer may believe that EBITDA can be improved to $2,000,000 by eliminating the CEO, who would become redundant after the transaction. Thus, the buyer could potentially value the target at $10,000,000 since the value expected to be achieved by replacing the CEO is the accretive $500,000 (=$2,000,000–$1,500,000) in EBITDA, which in turn translates to $2,500,000 (=$500,000 * 5 or =$10,000,000–$7,500,000) premium over the pre-transaction value of the target.
^Damodaran, Aswath. "The Value of Control: Some General Propositions" (PDF). NYU Stern. Retrieved 4 March 2019.
^Damodaran, Aswath (2005). "The Value of Control: Implications for Control Premia, Minority Discounts and Voting Share Differentials". NYU Journal of Law & Business. doi:10.2139/ssrn.837405. S2CID 16798738. {{cite journal}}: Cite journal requires |journal= (help)
^Bebchuk, Lucian A.; Hirst, Scott; Rhee, June (2014-02-01). "Towards the Declassification of S&P 500 Boards". Rochester, NY. doi:10.2139/ssrn.2400652. S2CID 168499979. SSRN 2400652. {{cite journal}}: Cite journal requires |journal= (help)
^Pratt, Shannon P. (2009). Pratt, Shannon P (ed.). Business Valuation Discounts and Premiums (2nd ed.). Hoboken, N.J.: Wiley. p. 17. doi:10.1002/9781119197539. ISBN978-0-470-37148-0. Retrieved 12 August 2020.
^"CONTROL PREMIUM STUDY 2017: Insights into market dynamics, financial dynamics and other factors" (PDF). RSM International Association. Retrieved 4 March 2019.
External linksedit
Control Premiums, Minority Discounts & Marketability Discounts
Marketability Discounts and Control Premium Example
January 01, 1970
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A control premium is an amount that a buyer is sometimes willing to pay over the current market price of a publicly traded company in order to acquire a controlling share in that company 1 If the market perceives that a public company s profit and cash flow is not being maximized capital structure is not optimal or other factors that can be changed are impacting the company s share price an acquirer may be willing to offer a premium over the price currently established by other market participants A discount for lack of control sometimes referred to as a minority discount reflects the reduction in value from a firm s perceived optimal or intrinsic value when cash flow or other factors prevent optimal value from being reached Contents 1 Overview of concept 2 Control premium vs minority discount 3 Size of premium 4 Example 5 See also 6 References 7 External linksOverview of concept editTransactions involving small blocks of shares in public companies occur regularly and serve to establish the market price per share of company stock Acquiring a controlling number of shares sometimes requires offering a premium over the current market price per share in order to induce existing shareholders to sell It is made through a tender offer with specific terms including the price 2 Higher control premiums are often associated with classified boards 3 165 The amount of control is the acquirer s decision and is based on its belief that the target company s share price is not optimized An acquirer would not be making a prudent investment decision if a tender offer made is higher than the future benefit of the acquisition Control premium vs minority discount editThe control premium and the minority discount could be considered to be the same dollar amount Stated as a percentage this dollar amount would be higher as a percentage of the lower minority marketable value or conversely lower as a percentage of the higher control value Minority discount 1 1 1 Control premium displaystyle mbox Minority discount mbox 1 left 1 over mbox 1 Control premium right nbsp Source 4 Size of premium editIn general the maximum value that an acquirer firm would be willing to pay should equal the sum of the target firm s intrinsic value synergies that the acquiring firm can expect to achieve between the two firms and the opportunity cost of not acquiring the target firm i e loss to the acquirer if a rival firm acquires the target firm instead A premium paid if any will be specific to the acquirer and the target actual premiums paid have varied widely In business practice control premiums may vary from 20 to 40 5 Larger control premiums indicate a low minority shareholders protection Example editCompany XYZ has an EBITDA of 1 500 000 and its shares are currently trading at an EV EBITDA multiple of 5x This results in a valuation of XYZ of 7 500 000 1 500 000 5 on an EV basis A potential buyer may believe that EBITDA can be improved to 2 000 000 by eliminating the CEO who would become redundant after the transaction Thus the buyer could potentially value the target at 10 000 000 since the value expected to be achieved by replacing the CEO is the accretive 500 000 2 000 000 1 500 000 in EBITDA which in turn translates to 2 500 000 500 000 5 or 10 000 000 7 500 000 premium over the pre transaction value of the target See also editBusiness valuation Divestment Equity value Enterprise value Goodwill accounting M amp A TakeoverReferences edit Damodaran Aswath The Value of Control Some General Propositions PDF NYU Stern Retrieved 4 March 2019 Damodaran Aswath 2005 The Value of Control Implications for Control Premia Minority Discounts and Voting Share Differentials NYU Journal of Law amp Business doi 10 2139 ssrn 837405 S2CID 16798738 a href Template Cite journal html title Template Cite journal cite journal a Cite journal requires journal help Bebchuk Lucian A Hirst Scott Rhee June 2014 02 01 Towards the Declassification of S amp P 500 Boards Rochester NY doi 10 2139 ssrn 2400652 S2CID 168499979 SSRN 2400652 a href Template Cite journal html title Template Cite journal cite journal a Cite journal requires journal help Pratt Shannon P 2009 Pratt Shannon P ed Business Valuation Discounts and Premiums 2nd ed Hoboken N J Wiley p 17 doi 10 1002 9781119197539 ISBN 978 0 470 37148 0 Retrieved 12 August 2020 CONTROL PREMIUM STUDY 2017 Insights into market dynamics financial dynamics and other factors PDF RSM International Association Retrieved 4 March 2019 External links editControl Premiums Minority Discounts amp Marketability Discounts Marketability Discounts and Control Premium Example Retrieved from https en wikipedia org w index php title Control premium amp oldid 1176393905, wikipedia, wiki, book, books, library,
