¨ Empirically, the following seem to be related to the probability of management change: ¤ Stock price and earnings performance, with forced turnover more likely in firms that have performed poorly relative to their peer group and to expectations. ¤ Structure of the board, with forced CEO changes more likely to occur when the board is small, is composed of outsiders and when the CEO is not also the chairman of the board of directors. ¤ Ownership structure, since forced CEO changes are more common in companies with high institutional and low insider holdings. They also seem to occur more frequently in firms that are more dependent upon equity markets for new capital. ¤ Industry structure, with CEOs more likely to be replaced in competitive industries.
147 Manifestations of the Value of Control Aswath Damodaran 147 ¨ Hostile acquisitions: In hostile acquisitions which are motivated by control, the control premium should reflect the change in value that will come from changing management. ¨ Valuing publicly traded firms: The market price for every publicly traded firm should incorporate an expected value of control, as a function of the value of control and the probability of control changing. ¤ Market value = Status quo value + (Optimal value – Status quo value)* Probability of management changing ¨ Voting and non-voting shares: The premium (if any) that you would pay for a voting share should increase with the expected value of control. ¨ Minority Discounts in private companies: The minority discount (attached to buying less than a controlling stake) in a private business should be increase with the expected value of control.
148 1. Hostile Acquisition: Example Aswath Damodaran 148 ¨ In a hostile acquisition, you can ensure management change after you take over the firm. Consequently, you would be willing to pay up to the optimal value. ¨ As an example, Blockbuster was trading at $9.50 per share in July 2005. The optimal value per share that we estimated as $ 12.47 per share. Assuming that this is a reasonable estimate, you would be willing to pay up to $2.97 as a premium in acquiring the shares. ¨ Issues to ponder: ¤ Would you automatically pay $2.97 as a premium per share? Why or why not? ¤ What would your premium per share be if change will take three years to implement?
149 2. Market prices of Publicly Traded Companies: An example Aswath Damodaran 149 ¨ The market price per share at the time of the valuation (May 2005) was roughly $9.50. ¤ Expected value per share = Status Quo Value + Probability of control changing * (Optimal Value – Status Quo Value) ¤ $ 9.50 = $ 5.13 + Probability of control changing ($12.47 - $5.13) ¨ The market is attaching a probability of 59.5% that management policies can be changed. This was after Icahn ’ s successful challenge of management. Prior to his arriving, the market price per share was $8.20, yielding a probability of only 41.8% of management changing.
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