sophisticatedmodelstomaketheseassessments,theydotry
to value and price in control.
Implications
Marketsarenot prescientorall-knowingbut theydobuild
expectationsintoprices.Totheextentthattheexpectedvalue
of controlis already builtinto themarket value,there are
important implications for acquirers, investors, and
researchers:
- Payingapremiumoverthemarketpricecanresultin
overpayment.Ifthecurrentmarketpriceincorporates
some or all of the value of control, the effect of
managementchangeonmarketvalue(asopposedto
statusquovalue)willbesmallornonexistent.Ina
firm where the market already assumes that
management willbe changedand buildsitintothe
stock price, acquirers should be wary of payinga
premiumonthecurrentmarketpriceevenforabadly
managed firm. Consider an extreme example.
Assumethatyouhaveafirmwithastatusquovalue
of$100millionandanoptimallymanagedvalueof
$150millionandthatthemarketisalreadybuilding
ina 90 percentchance thatthemanagement ofthe
firmwillchangeinthenearfuture.Themarketvalue
ofthiscompanywillbe$145million.Ifanacquirer
decides to pay a substantial premium (say $40
million) for this firm based on the fact that the
company is badly managed, he will overpay
substantially; in this example, he will pay $185
million for a company with a value of $150 million.