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Control Premium

By on October 2, 2018

The control premium refers to the amount of money paid, or has to be paid, in order for a party to gain controlling interest in a company.

Because gaining this control can greatly influence the direction in which business operations move forward, the control premium is almost always priced higher than the fair market value of the company shares.

For example if a company has a share price of $1 and a party is 1% short of winning controlling interest, he might have to pay more than $1 a share in order to secure that additional 1%.

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If he ends up paying $1.50 per share, then the extra $0.50 is the control premium paid.

This can be partly due to potential sellers knowing how much the buyer would value these final 1% of shares.

If the buyer goes into the open market to buy them, he would inevitably drive up the share price. But more importantly, reveal his intentions which can trigger responses from others that might jeopardize his strategy.

Moreover, other shareholders who are intent on stopping the buyer might make offers for the share too. Further driving up prices.

This is why parties who are going after controlling interest in a company will often have to pay a control premium to acquire them.

This can happen in property investment companies or real estate investment groups when certain parties (or members) feel that the business is going in the wrong direction and the value of their investment can be further enhanced if things are done right.

Or when opportunities arise for investors to buy an undervalued asset for much less than what it is worth in the market.



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