changed.Itisourcontentionthatthemarketvalueofevery
firm reflects the expected value of control, which is the
productoftheprobabilityofmanagementchangingandthe
effect on value of that change. This has far-ranging
implications.
Inacquisitions,thepremiumspaidshouldreflecthowmuch
thepricealreadyreflectstheexpectedvalueofcontrol;ina
marketthatalreadyreflectsahighvalueforexpectedcontrol,
thepremiumsshouldbesmaller.Withcompanieswithvoting
andnonvotingshares,thepremiumonvotingsharesshould
reflect theexpected value of control.If the probability of
control changing is small and/or the value of changing
managementissmall(becausethecompanyiswellrun),the
expectedvalueofcontrolshouldbesmallandsoshouldthe
votingstockpremium.Infirmswhere thereispotentialfor
changingthewaymanagementisrun,theexpectedvalueof
control and the voting share premium should be large.
Finally,inprivatecompanyvaluation,thediscountappliedto
minority blocks should be a reflection of the value of control.
1 Ifthedoublinginreturnoncapitaloccursoverfiveyears,
forinstance,thegrowthrateeachyearcanbe estimatedas
follows:
The compounded annual growth rate will be 14.87 percent.
2 Atfirst sight, divesting businessesthat areearning poor
returns orlosing moneymayseemlike theticketto value
creation. However, the real test is whether the divestiture