The regression model indicates that there is a significant relationship
between the values of the pure control option and reported control premi-
ums. The adjusted R^2 is 22 percent, and the coefficient of the pure control
option, 2.63, is statistically significant. While these results are promising
and support the use of the option pricing framework when estimating the
size of a control premium, much additional research needs to be done. How-
ever, these results do lend support to the view that control owners have con-
trol options that are valuable apart from the expected cash flows of their
firms.
SUMMARY
This chapter reviewed research that analyzed acquisition (control) premium
paid for private firms relative to those paid for public firms. In general, the
results suggest that private firm control premiums are greater than those of
public firms by a wide margin. The results also suggest that the private firm
increment should be higher, indicating that prices paid for private firms may
be too low.
The chapter then developed a control premium model based on op-
tionpricing theory. Most private firm transactions reflect a purchase by a
business-as-usual buyer as opposed to a strategic acquirer. In these cases, the
control value should reflect only the value of pure control. Implicitly includ-
ing a synergistic component, for example, by using the median value from
published control studies, creates a significant bias in the firm’s control
value. Second, the value of control is not represented in the expected cash
flows of the stand-alone firm. While these expected cash flows represent the
expected exercise of control owner options, the value of pure control repre-
sents control options not yet exercised. Hence, the pure control option has
a value in excess of the firm’s expected cash flows that is independent of the
value that a buyer hopes to create based on expectations of combinatorial
synergies. The chapter also presented some preliminary test results that indi-
cate the value of pure control is correlated with and lower than the reported
control premium. This result is consistent with the option pricing theory of
control.
128 PRINCIPLES OF PRIVATE FIRM VALUATION