Whether you’re buying a company or selling one, you need to know about a few things. Control premiums and takeover valuations are an integral part of any merger and acquisition process.

This blog briefs you on the relationship between the two things and how it actually works.

Before we delve deep into the link between control premiums and takeover valuation, we need to understand what they mean.

What is Control Premium?

A control premium is a price paid by an acquirer to gain control in a publicly-traded company. With a control premium, acquirers don’t just buy stakes in the acquired company. Instead, they have the authority to come up with new business strategies, change or replace management personnel, and even control business contracts.

Paying a control premium ensures that the buyer acquires the rights to the company’s cash flows and their daily operations and strategies.

What is a Takeover Valuation?

Takeover value or takeout value is the overall price of a target company. This price includes its cash flows, company income, the value of its assets, and other specific metrics.

An investment banker or a professional business appraiser can perform a detailed takeover valuation for a company.

What’s The Link between Control Premiums and Takeover Valuation?

When investors observe that a target company isn’t performing to its optimum, buyers may be willing to pay above the fair market price. This happens because acquirers can enhance business operations, develop winning strategies, and help tap financial and growth potential.

However, if a target company is on the brink of bankruptcy or predicts a downward trend, a control premium becomes unnecessary.

A takeout valuation helps acquirers settle on a control premium in several ways. It determines the current intrinsic value of the company, its assets, and its income. Moreover, it identifies the post-acquisition value for the investors.

This takeout value can be collated with the target company’s actual fair market value. It helps acquirers decide on a takeover bid, pay a control premium, and ward off competitor acquirers.

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