The Control Premium
When investors purchase stock in a business, they gain the right to dividends, any appreciation in the market price of the stock, and any final share in the proceeds if the business is sold. If an investor buys at least a 51% controlling interest in a business, then it also obtains the right to redirect the business in any way it chooses. Consequently, obtaining a controlling interest is worth an additional price, which is known as the control premium.
This premium can be an insignificant issue if the target is on the verge of bankruptcy, since the presumably short-term nature of the business makes the control premium essentially irrelevant. However, if the target is a robust business that can be enhanced by the acquirer, then the control premium can be a significant factor. Historical evidence shows that control premiums for healthy businesses can range from 30% to 75% of the market price of a company’s stock.
The control premium is not a black-and-while concept, where the first 51% of ownership is more valuable than the remaining 49%. Instead, consider the multitude of situations where ownership is split among many owners. For example, what if there are three shareholders, with two owning 49% and one owning 2% of the shares? In this case, the 2% shareholder owns an extremely valuable piece of the business, given its ability to impact votes, and which would certainly command a premium. Alternatively, what if there are hundreds of small shareholders and one shareholder who owns 35% of a business? Owning that 35% might not result in outright control of the business, but it may be so much easier to obtain in comparison to the pursuit of hundreds of other shareholders that it commands a premium.
The control premium concept is a key reason why acquirers sometimes reduce their offer prices for any remaining shares outstanding in a two-tier acquisition. If an acquirer has already attained control over a business, there is no longer a control premium associated with any additional shares, which therefore reduces their value.