“One of the principles that’s been advanced to The Appraisal Foundation’s third Working Group is that a control premium is more like a premium that may be observed between voting and otherwise comparable non-voting shares,” Dayton Nordin of Ernst & Young (and a member of TAF’s third Working Group on Control Premiums) told ASA attendees. Like the AICPA’s work on IPR&D guidelines, the AF task force is also hoping to release its standards in mid-2012.
In particular, this third Working Group is developing a new term for control premium: the market participant acquisition premium (MPAP). This means:
- The premium paid by a set of market participants to acquire a controlling interest. (Some argue the set should include at least two market participants, to minimize the “stupidity premium” of overpaying for an asset, Nordin says.)
- MPAP is equal to the difference between 1) the price that these market participants would pay for subject controlling interest (fair value); and 2) the value of the marketable non-controlling interest in the subject businesses or entity prior to the hypothetical transactions.
- MPAP represents the enhanced value that market participants expect to realize as a result of gaining control; i.e., enhanced cash flows and/or reduced risk.
The third Working Group also recognizes the continuing need for a benchmark control premium analysis (e.g., the Mergerstat/BVR Control Premium Study). However, auditors (who are bound by TAF standards) will be more likely to subject benchmark comparables to much greater scrutiny.
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