itover.Thus,whenacquiringa 51 percentstakeofafirm,
youshouldbewillingtopay 51 percentoftheoptimalvalue
forthatfirm.Ifyouaresettlingforminority stakewith no
controlinthefirm,themaximumyoushouldbewillingto
pay will reflect the status quo value for the firm.
Thedifferencebetween a majorityand minority stake(the
minoritydiscount)canbeverylargeforcompanieswherethe
valueofcontrolishigh.Forinstance,ifweassumethatthe
statusquovalueforthefirmis$100millionandtheoptimal
valueis$150million,youwouldbewillingtopay 51 percent
ofoptimalvalue($150million)fora controllingstakeand
only 49 percentofthestatusquovalue($100million)fora
minoritystake.Thedifferenceof 2 percentin votingrights
translates into a difference of $26.5 million in value:
Valueof51%ofoptimalvalue=51%of$150
million
$76.5
million
Valueof49%ofstatusquovalue=49%of$100
million
$49.0
million
Minority discount
$27.5
million
Whydoesthis samereasoningnotapplytopublicly traded
firms where most ofus buysmall stakes with no obvious
controllingpower?Itdoes,butinmoresubtleways.Aswe
notedinanearliersection,thestockpriceofapubliclytraded
firmalreadyreflectstheexpectedvalueofcontrol.Whenyou
buyasmallstakeinapubliclytradedfirm,say1,000shares
ofCiscoorIBM,youpayforthisexpectedvalueofcontrolin
the market price. In other words, you take the market’s
assessment of the likelihood of control changing and the
valueofthatchangeasagiven.Whenyoubuyalargerstake