What is a control premium?

Control premium refers to an amount that a buyer is willing to pay in excess of the fair market value of shares in order to gain a controlling ownership interest in a publicly traded company. A buyer who pays a control premium gains access to the firm’s cash flows, day-to-day operations, and control of the firm’s strategy.

How much control premium should an acquirer pay?

The amount of control premiums that an acquirer must pay to gain control of the target depends on whether the buyer is able to enhance the value of the company. In most cases, a control premium is necessary when the target’s cash flows and profits are not being maximized.

Does the observed premium represent a premium for conceptual control?

However, the observed premium may not represent a premium for conceptual control inasmuch as it conveys the quantification of actual changes that can be made by exercising that control.

Should you pay a control premium for a target company?

There are several justifications for paying a control premium for a target company: Synergy refers to the benefits derived from the working together of two or more companies for greater effect. When two companies combine to work on the same goal, they benefit from two forms of synergies: operating synergy and financial synergy.