Sinceahostileacquisitionofsuchacompanyisnotfeasible,
theexpectedvalueofcontrolwillbecomeanissueonlywhen
the private company is fully or partially sold. With
partnershipsormultipleinvestorsowningsharesofaprivate
business,the expectedvalueof control canbe an issuein
valuing an ownership stake, with larger controlling stakes
commanding a premium over smaller minority stakes.
Finally,withprivatecompanieswherethereisseparationof
ownership and management—the private owner hires a
management team to run the firm—the expectedvalue of
control can be a factor in whether management is replaced.
61
Minority Discounts and Control Premiums
If we accept the premise that holding 51 percent of the
outstanding equity at a private business gives the owner
effectivecontrolofsuchabusiness,therewillbeasignificant
differencebetweenacquiring 51 percentormoreofabusiness
and 49 percentorlessofthesamebusiness.Withthefirst,
yougeteffectivecontrolofthebusiness,andwiththelatter,
youdonot.Inprivatecompanyvaluationparlance,thelatter
(buying 49 percentorless)istermedaminorityholdingand
is usually valued at a discount. The discount is often
substantial,butitisalsoarbitraryinpractice.Wemaybeable
togetamorereasonableestimateofthediscountusingthe
expectedvalueofcontrolframeworkthatwehavedeveloped
in this chapter.
Ifyouareabletobuyamajorityandcontrollingstakeofa
firm,themaximumyou shouldbe willing topay for your
shareshouldreflecttheoptimalvalueforthefirm,reflecting
thechangesyouthinkyoucanmaketothefirmafteryoutake