The Value of Control: Implications for Control Premia, Minority Discounts and Voting Share Differentials

Abstract

It is not uncommon in private company and acquisition valuations to see large premiums attached to estimated value to reflect the 'value of control'. But what, if any, is the value of control in a firm, and if it exists, how do we go about estimating it? In this paper, we examine the ingredients of the control premium. In particular, we argue that the value of controlling a firm has to lie in being able to run it differently (and better). Consequently, the value of control will be greater for poorly managed firms than well run ones. The value of control has wide ranging implications beyond acquisitions. We show that the expected likelihood of control changing is built into the price of every publicly traded company and that this provides a way of measuring the payoff to strong corporate governance. We also argue that getting a better handle on the value of control can allow us to better explain the differences between voting and non-voting share prices and the minority discount in private company valuations.

Keywords: Control premium, voting shares, minority discounts, hostile acquisitions

JEL Classification: G12, G34