To include (or not include) a negative control premium

BVWireIssue #67-3
April 16, 2008

When using the Mergerstat®/BVR Control Premium Study™, not quite half (40%) of BV respondents to a recent poll use the negative premiums in their analysis.  Only 17% exclude the negatives entirely, however.  Nearly a quarter (21%) of those who use the negative control premium cite the mean, while the clear majority (66%) use the median.  “This is the crux of the issue when using the database,” comments Adam Manson, BVResources Financial Analyst, who also participated in the recent BVR/NACVA webinar on “Getting the Most from the Mergerstat/BVR Control Premium Study,” with Shannon Pratt, Alina Niculita, and Rob Stutz.  “This is not a topic you want to avoid,” Manson says.  “The practitioner needs to have an opinion.”

“We like to include the negative premiums in the analysis,” offers Niculita, in response to our request for additional comment.  “Since the inception of the Mergerstat data, about 15% of companies were taken over at a discount over the public trading price.  Because the negative premiums are part of the dataset, they need to be taken into account.”  Also, she adds, “ignoring these transactions will have the effect of overstating the median control premium.”

“Any time there is data available and you exclude it for whatever reason, we feel that you are hindering full disclosure,” comments Stutz.  “At the same time, “When you are doing an SIC search for an industry that trades consistently at a certain control premium (or in a close range) and one deal is at a negative, it suggests that that company had a specific issue.”  In that case, the information might not be relevant to the industry, and Stutz would most likely discard any negative control premiums (discounted price paid for a control position).  For the complete transcript and CD of the webinar, terrific for training purposes, click here.

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