What Does
Dual Capitalization Mean?
Dual capitalization can be used in two different senses. The first meaning refers to the presence of two classes of stock in a publicly traded company with different voting rights assigned. The second meaning refers to a method of business valuation differentiating levels of risk associated to tangible and intangible assets.
Divestopedia Explains Dual Capitalization
A firm may consider dual capitalization of their share capital where they want to raise cash from issuance of stock while still maintaining control of the firm. In this scenario, a single share in each class would have the same face value but a share in one class entitles the holder to multiple votes. The senior management of the firm would typically be the holders of the superior class of shares.
In the event of a hostile takeover, an acquirer will not be necessarily be able to gain control of the firm by simply buying 51% of the total number of shares and will have to take into account the dual capitalization of stock. More value is given to a class of shares in terms of voting rights to provide the management a stronger control over the firm. This additional control gives them the ability to direct the firm’s actions. While dual capitalization may provide an effective measure against hostile bidders, it violates the principle of corporate democracy.
In reference to business valuations, dual capitalization is a valuation method that applies separate discount rates to operating earnings generated from tangible and intangible assets. This method applies a higher discount rate (lower multiple) to earnings from intangible assets given the presumption that these assets are riskier. The dual capitalization approach is most often used as a test to support other more commonly used valuation method such as the market approach.