controlvalue

controlvalue - 1 The Value of Control: Implications for...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
1 1 The Value of Control: Implications for Control Premia, Minority Discounts and Voting Share Differentials Aswath Damodaran Stern School of Business June 2005
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 2 The Value of Control It is not uncommon in private company and acquisition valuations to see large premiums attached to estimated value to reflect the “value of control’. But what, if any, is the value of control in a firm, and if it exists, how do we go about estimating it? In this paper, we examine the ingredients of the control premium. In particular, we argue that the value of controlling a firm has to lie in being able to run it differently (and better). Consequently, the value of control will be greater for poorly managed firms than well run ones. The value of control has wide ranging implications beyond acquisitions. We show that the expected likelihood of control changing is built into the price of every publicly traded company and that this provides a way of measuring the payoff to strong corporate governance. We also argue that getting a better handle on the value of control can allow us to better explain the differences between voting and non-voting share prices and the minority discount in private company valuations.
Background image of page 2
3 3 What is the value of controlling a business? The answer to this question has wide- ranging implications for how stocks are priced and the premiums that should be paid in acquisitions. In this paper, we examine why there may be value to controlling a firm and how to go about measuring this value. We then consider the wide range of cases where the value of control applies ranging from the premiums that you would pay for voting shares (as opposed to non-voting shares) and the minority discounts in private company valuations. Measuring the Expected Value of Control The value of controlling a firm derives from the fact that you believe that you or someone else would operate the firm differently from the way it is operated currently. We will begin this section by considering the dimensions on which management decisions can affect the value of the firm and how to measure the effect of the change. We will follow up by considering the probability that existing management policies can be changed. The expected value of control is the product of these two variables: the change in value from changing the way a firm is operated and the probability that this change will occur. The Value of Control The value of a business is determined by decisions on made by the managers of that business on where to invest its resources, how to fund these investments and how much cash to return to the owners of the business. Consequently, when we value a business, we make implicit or explicit assumptions about both who will run that business and how they will run it. In other words, the value of a business will be much lower if we assume that it is run by incompetent managers rather than by competent ones. When valuing an existing company, private or public, where there is already a management in
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 12/01/2011 for the course FINANCE 350 taught by Professor Aswath during the Summer '10 term at NYU.

Page1 / 60

controlvalue - 1 The Value of Control: Implications for...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online