A control premium is the amount a buyer is willing to pay over market value for a company’s shares to gain control. The premium varies based on factors such as commercial value, potential industry growth, and the buyer’s desire for control. Those aware of the premium can exploit it during a takeover attempt. A minority discount is the opposite, reducing stock value for buyers who won’t gain control. Buyers can prepare by setting clear goals and consulting available information.
A control premium is an amount over the market value of a company’s shares that a buyer is willing to pay to gain control of the company. People in the process of trying to buy control shares tend to be willing to pay more than those shares are worth, because the ability to control the outcome of votes and other events is seen as worth the extra expense. People aware of the control premium can exploit it to get a better price for their shares during a takeover attempt. The opposite is a minority discount, a reduction in stock value for buyers who will not gain a controlling stake in the company with their purchase.
The amount over market value that people are willing to pay varies greatly, depending on various factors. A person who already owns a large number of shares, such as 35% of a company, is often willing to pay a high control premium, since the person is already on the path to owning a controlling share. If there are a limited number of shareholders, the share price may also rise, as individuals will be well aware of the takeover attempt and may set their share price correspondingly higher.
Commercial value is also a consideration. A controlling stake in a valuable or rising company is generally worth more to someone than a stake in a company with lower or faltering value. People can also consider the potential of an industry as a whole, as well as issues like general economic well-being. Another problem may be how much the person wants control; Someone who desperately wants to oust board members may be willing to pay a high control premium to be able to do so.
When people start buying stocks in an attempt to take over, they are usually low-key about it, aiming not to tip people off. They can buy through proxies to hide what they are doing. As people become more aware of the intent, the control premium may increase, as people will value their shares more in the sale because they feel the buyer has an incentive and a willingness to pay a higher price.
As people prepare for an acquisition, they can sit down and decide upfront how much above market value they are willing to pay. Setting clear goals after consulting all available information will allow people to develop a proper buying strategy to gain control without spending more money than is wise. If an acquisition attempt fails, the person can try again at a later date.
Smart Asset.
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