The staff of the Securities Exchange Commission (SEC) acknowledges that the determination of control premiums “is an area that does require a substantial amount of judgment,” Evan Sussholz, Professional Accounting Fellow—Valuation Specialist Office of the Chief Accountant Securities and Exchange Commission, told the 200-plus attendees at BVR’s Second Annual Fair Value Summit held in New York City this week. However, “contrary to what people might believe, the SEC does not have a bright line rule” regarding the application of control premium in any specific valuation determination, Sussholz said. It also recognizes that their application “can vary widely according to a particular industry, economic sector, etc.”
At the same time, Sussholz—who spoke at the conference’s FASB/SEC/PCAOB joint session— warned that if an appraiser uses a control premium that falls outside of what has been seen in prior transactions or industry standards, “we would expect more analysis of cash flows, benefits of control, market participant analysis,” he said, “and not simply ‘let’s just look at a broad brush average of transactions.’” (Sussholz’s comments are, of course, his personal opinions and not those of the SEC.)
What happens to control premiums in a distressed market? “The control premium is a traditional term used in the valuation profession,” said Ernst & Young’s Tony Aaron, who spoke on the Summit’s “Big Four” panel. Recent research shows that in distressed markets, control premiums would appear to expand, Aaron added, just as they contract during good economic times. However, is control really the concept captured in the number? Or does it reflect the difference between two markets—the private, M&A market and the public securities market? “Those expansions and contractions may have more to do with what’s happening in those two markets than the control premium per se,” Aaron said. The traditional term may need a name change—but no matter the moniker, these experts agree that any premium that departs from prior standards requires adequate analysis and support.
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