Whileanymergercanhaveacomponentofitsvaluederived
fromcontrol,hostileacquisitionsoffertheclearestexampleof
controlpremiumsatwork,sincethemanagersofthetarget
firm are put on notice by the acquirer that they will be
replaced after the acquisition.
Valuing Control Premiums in Acquisitions
Valuingcontrol premiumsin an acquisition isa three-step
processthatcloselymirrorsouranalysisinthepriorsection.
Thefirststepisastatusquovaluationofthetargetfirm,with
theexistingmanagementpoliciesoninvesting,financing,and
dividendpolicy.Thesecondstepisarestructuredvaluation
withthechangesthattheacquiringfirmisplanningtomake
inthewaythetargetcompanyisrun.Thedifferencebetween
therestructuredandthestatusquovaluationsisthevalueof
control. Thethirdstep is determiningwhat portion ofthis
premiumshouldbepaidontheacquisition.Notethatpayinga
pricethatreflectstheentirepremiumgivestheentirevalueof
control to the target company stockholders.
Itisalsoworthnotingthatthisprocesshasnothingtodowith
the other widely quoted motive for acquisitions, which is
synergy. In other words, if there is value from potential
synergyin a merger,itwillbe in additionto thevalue of
control. A key difference is that synergy requires two
entities—anacquiringfirmandatargetfirm—toexist,since
itaccruesasanadvantage(costorgrowth)tothecombined
firm.Controlresidesentirelywiththetargetfirmanddoesnot
requireanacquiringfirm;anindividualcanacquireapoorly
run firm and change the way it is run.
Implications