CHAPTER 13
The Value of Control
Whatisthevalueofcontrollingabusiness?Theanswerto
this questionhaswide-rangingimplications forhow stocks
are priced and the premiums that should be paid in
acquisitions.Inthischapter,weexaminewhytheremaybe
valuetocontrollingafirmandhowtogoaboutmeasuring
thisvalue.Wethenconsiderthewidearrayofcaseswherethe
valueofcontrolappliesrangingfromthepremiumsthatyou
wouldpayforvotingshares(asopposedtononvotingshares)
to the minority discounts in private company valuations.
MEASURING THE EXPECTED VALUE OF CONTROL
Thevalueofcontrollingafirmderivesfromthebelief that
someonewouldoperatethefirmdifferentlyfromthewayitis
operatedcurrently.Webeginthissectionbyconsideringthe
dimensionson which management decisionscanaffect the
valueofthefirmandhowtomeasuretheeffectofreplacing
existing managers. We follow up by considering the
probabilitythatexistingmanagementpoliciescanbechanged.
Theexpected valueof controlis theproduct ofthese two
variables:thechangeinvaluefromchangingthewayafirm
is operated and the probability that this change will occur.
Value of Controlling the Business
Thevalueofabusinessisdeterminedbydecisionsmadeby
themanagersofthatbusinessonwheretoinvestitsresources,
howtofundtheseinvestments,andhowmuchcashtoreturn