Empirically the following seem to be related to the

¨
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.