Control premium

Control premium is an amount that a buyer is usually willing to pay over the current market price of a publicly traded company. Contrary to a widely held view, this premium is not justified by the expected synergies, such as the expected increase in cash flow resulting from cost savings and revenue enhancements achievable in the merger. Synergies are achieved whenever two companies combine their operations and therefore, should not be included in the control premium. It is accepted that synergies should be captured by the shareholders of the acquirer. The justification for the control premium lies in the expected value that the acquirer expects to achieve from obtaining control and results from the changes in the company management that will follow the acquisition.

Normally, the control premium is industry-specific and amounts to 20–30% of the market capitalization of a company calculated based on a 20-trading-day average of its stock price.

Example

Company XYZ has 1,000,000 shares outstanding. The 20-day average price per share is $1. To buy control, an acquirer usually needs to consolidate more than 50% of the shares. Say, the buyer wants to acquire 60% of the stock. The market price will be 600,000 * $1.00 = $600,000. However, the buyer estimates that he will be able to realize 25%-synergy, so the maximum price he is willing to pay is $600,000 * (1 + 25%) = $750,000

See also

• Business valuation
• Divestment
• Equity value
• Enterprise value
• Goodwill (accounting)
• M&A
• Takeover

External links

• Marketability Discounts and Control Premium Example