Cost of Capital: Applications and Examples, + Website, 5th Edition

CHAPTER 35

Minority versus Control Implications of Cost of Capital Data

Introduction

Minority versus Control Has Little or No Impact on Cost of Capital

Company Efficiency versus Owner Exploitation

Impact of the Standard of Value

Under What Circumstances Should a Control Premium Be Applied?

Projected Net Cash Flow May Not Reflect What a Control Owner Would Achieve

Investment Value Reflecting Synergies

Factors Affecting a Control Premium a Financial Buyer Might Pay

A Tale of Two Markets

Many Takeovers at Less Than Public Trading Price

Summary

INTRODUCTION

There is much confusion about whether the results of applying cost of capital data, as discussed in this book, produce a minority value or a control value. The difference between the per-share value of a share that represents control and the per-share value of a share that represents a minority interest can be quite significant. (See Exhibit 35.1.) As with many such questions in economics and finance, the answer is: It depends.

More than anything else, when the cost of capital is used in the context of valuation, the question of whether the result of discounting or capitalizing represents a minority or a control value depends primarily on the nature of the cash flows being discounted or capitalized rather than on the discount or capitalization rate.

In some cases, the answer to this question may hinge on the definition of value sought—for example, fair market value (the value to a hypothetical buyer and/or seller) or investment ...