In mergers and acquisitions (M&A), one concept that stands out as both critical and complex is the “Control Premium.” This term refers to the additional amount that an acquiring company is willing to pay over the current market price of a target company’s shares to gain a controlling interest. Essentially, a control premium is the price of control.
What is Control Premium?
A control premium is the extra amount an acquirer pays above the target company’s market value to acquire a controlling stake. This is because control over a company provides significant benefits, including decision-making power, access to assets, the ability to influence strategic direction, and the ability to achieve potential synergies.
Why Do Acquirers Pay a Control Premium?
Acquirers pay a control premium for several reasons:
- Access to Synergies: The ability to combine operations and reduce costs or increase revenue.
- Strategic Benefits: Gaining market share, entering new markets, or acquiring valuable technology.
- Control Over Operations: Directing the target company’s strategy, management, and financial decisions.
- Access to Assets: Gaining control of valuable assets owned by the target company.
Calculation of Control Premium
The control premium is calculated as:
Control Premium (%) = ((Offer Price – Market Price) / Market Price) × 100
Example of Control Premium
Consider the acquisition of LinkedIn by Microsoft in 2016. Microsoft offered $26.2 billion to acquire LinkedIn, which was a 50% premium over LinkedIn’s stock price prior to the announcement. This premium was justified by the potential synergies Microsoft expected to achieve by integrating LinkedIn’s professional network with its own products.
Factors Influencing Control Premium
Several factors can influence the size of the control premium:
- Nature of the Industry: Highly competitive industries may demand higher premiums.
- Financial Health of the Target: Stronger financials can lead to higher premiums.
- Potential Synergies: Greater synergies may justify a higher premium.
- Shareholder Expectations: Shareholders may demand higher compensation for giving up control.
Notable Examples of Control Premium in M&A
- Time Warner by AT&T (2018): AT&T acquired Time Warner for $85 billion, paying a significant premium to gain access to its valuable content library.
- Whole Foods by Amazon (2017): Amazon acquired Whole Foods for $13.7 billion, with a premium of around 27% over its share price, aiming to expand its presence in the grocery sector.
- Activision Blizzard by Microsoft (2022): Microsoft offered $68.7 billion for Activision, representing a premium of nearly 45% over Activision’s stock price before the deal.
Conclusion
Control Premium is a fundamental concept in M&A, reflecting the value that acquiring companies place on gaining control over a target. Understanding why acquirers are willing to pay this premium and how it is calculated can help investors, analysts, and students of finance make better sense of the financial and strategic decisions behind major acquisitions.
Find more educational articles about terminology used in Mergers and Acquisitions.