“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 the Working Group) told ASA attendees this morning in Chicago. The AF review, similar to AICPA and other task forces, is hoping to release their standards in mid-2012.
So, the Working Group is developing a new term for what has been known as the control premium: the Market Participant Acquisition Premium (MPAP). What does this term mean, and how does it differ from the previous sense of the value of control?
- The premium paid by a set of market participant in order to acquire a controlling interest. (One argument is that there has to be at least two market participants who will pay this premium to minimize the influence of the “stupidity premium” of overpaying for an asset, Nordin says.)
- It is also the difference between 1. The price that would be paid by those market participant 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
- Represents the enhancement to value that market participant would expect to realize as a result of enhanced cash flows and/or reduced risk if they gain control
The Working Group also recognizes the need for a benchmark control premium analysis (such as the Mergerstat/BVR Control Premium Study). However, the comparables will likely be subjected to much greater scrutiny in the future.