Damodaran on Valuation

13.2. MANIFESTATIONS OF THE VALUE OF CONTROL

If the value of control is derived from changing the way a business is run and the expected value of control is a function of the value of control and the likelihood that you can change the management of a company, it has implications for almost every aspect of valuation, from valuing publicly traded firms for acquisitions to valuing a stake in a private business. In this section, we consider the range of applications where the value of control plays a role.

13.2.1. Hostile Acquisitions

While any merger can have a component of its value derived from control, hostile acquisitions offer the clearest example of control premiums at work, since the managers of the target firm are put on notice by the acquirer that they will be replaced after the acquisition.

13.2.1.1. Valuing Control Premiums in Acquisitions

Valuing control premiums in an acquisition is a three-step process that closely mirrors our analysis in the prior section. The first step is a status quo valuation of the target firm, with the existing management policies on investing, financing, and dividend policy. The second step is a restructured valuation with the changes that the acquiring firm is planning to make in the way the target company is run. The difference between the restructured and the status quo valuations is the value of control. The third step is determining what portion of this premium should be paid on the acquisition. Note that paying a price that reflects ...