What is the most meaningful way to measure a control premium? Brad Pursel investigates data on corporate environment, buyer types, country of exchange, and other metrics in “Control Premiums: Application and Analysis,” in the current (March 2010) Business Valuation Update™. His analysis relies heavily, of course, on the Mergerstat/BVR Control Premium Study.
“The magnitude of a control premium is only part of the issue; the appropriateness of even including a control premium (or discount for lack of control) is now increasingly…debated in legal, tax, financial reporting, and other settings,” Pursel points out. The application of a control premium may introduce a faulty assumption; i.e., since public companies are acquired at a premium to their then traded-values, then there must be a buyer for every public company willing to pay such a premium. More factors may be at work, Pursel says. For instance, “recent academic research has indicated that the 52-week high price for target companies has a key role in purchase prices and control premiums.” Data on the country and exchange also play a critical role. “However, data…in this article would appear to indicate that the utilization of invested capital is a more meaningful method of measuring a control premium,” Pursel concludes. His exclusive, empirical study helps provide a reliable analytical framework for valuation specialists, financial advisors, courts, and others to assess this key input.
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