Control Premium

Buying control of a company gives the buyer the power to make important decisions: appointing management, changing strategy, selling assets, merging operations and deciding on dividends. Buyers are usually willing to pay extra for these rights.

The control premium is typically expressed as a percentage above the share price before the deal was announced. For example, if a company's shares trade at 40 before a takeover bid and the buyer offers 52 per share, the control premium is 30%.

Control premiums vary widely, depending on factors such as expected synergies, competition from other bidders, the industry and market conditions. Premiums of 20% to 40% are common in many public takeovers, but they can be much higher or lower.

Control premiums are relevant in valuation. When valuing a company for a takeover, analysts often add a control premium to a value based on minority share prices. Conversely, when valuing a small, non-controlling stake in a private company, they may apply a discount for lack of control. Buyers must be careful not to overpay; paying too high a premium is a common reason acquisitions fail to create value.