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Control Premium

Definition - What does Control Premium mean?

A control premium is the amount that a buyer is willing to pay over and above the current market price in order to acquire a controlling interest in that specific company. Control confers value. Gaining control gives access to the target firm’s cash flows, the rationalization of its work force, and the control of the strategy and operations of the firm. Control premiums are typically seen in takeover bids of public companies but can be present in situations where shareholders of private businesses pay a premium to obtain majority interest or a controlling position in a company.

Divestopedia explains Control Premium

A control premium that an acquirer would be willing to pay is the sum of the intrinsic value of the target firm, the value of control, and the synergies that can be expected, along with the opportunity cost of not acquiring the firm. If there is more than one bidder, the offer is generally higher.

  • Control premiums vary significantly by industry, and different industries command different control premiums.

  • Control premiums vary significantly over short periods of time and are affected by the market cycle.

  • Control premiums vary depending on the existing shareholding or toehold that the buyer has in the target company; if you lower the existing shareholdings, then you lower the control premiums and vice-versa.

  • Control premiums vary by consideration type, with higher control premiums paid in 100% cash offers and lower control premiums paid in 100% share offers. A combination of cash and shares gets the lowest control premium, as the vendor stands to gain both from the present and future growth of the firm.

  • Control premiums vary significantly depending on when the share price is measured relative to the date of announcement of proposed acquisition.

Whether a buyer will pay a premium for acquiring a controlling interest of the firm depends on whether the potential buyer can enhance the value of the firm. The amount of control premium depends upon how much the value can be increased. The acquirer believes that it can run the firm better than the existing management.

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