Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

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