Control Premium

The Value of Control: Some General Propositions

Aswath Damodaran Home Page: www.damodaran.com E-Mail: adamodar@stern.nyu.edu

Stern School of Business

Aswath Damodaran

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Why control matters…

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When valuing a firm, the value of control is often a key factor is determining value. For instance,

• In acquisitions, acquirers often pay a premium for control that can be substantial • When buying shares in a publicly traded company, investors often pay a premium for voting shares because it gives them a stake in control. • In private companies, there is often a discount attached to buying minority stakes in companies because of the absence of control.

Aswath Damodaran

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What is the value of control?

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The value of controlling a firm derives from the fact that you believe that you or someone else would operate the firm differently (and better) from the way it is operated currently. The expected value of control is the product of two variables:

• • the change in value from changing the way a firm is operated the probability that this change will occur

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In a private business or an acquisition, we can assume that the latter will be one (if we succeed in acquiring the business) and concentrate on the first component.

Aswath Damodaran

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DISCOUNTED CASHFLOW VALUATION

Cashflow to Firm EBIT (1-t) - (Cap Ex - Depr) - Change in WC = FCFF Expected Growth Reinvestment Rate * Return on Capital

Firm is in stable growth: Grows at constant rate forever

Value of Operating Assets + Cash & Non-op Assets = Value of Firm - Value of Debt = Value of Equity

FCFF1

FCFF2

FCFF3

FCFF4

Terminal Value= FCFF n+1 /(r-g n) FCFF5 FCFFn ......... Forever

Discount at WACC= Cost of Equity (Equity/(Debt + Equity)) + Cost of Debt (Debt/(Debt+ Equity))

Cost of Equity

Cost of Debt (Riskfree Rate + Default Spread) (1-t)

Weights Based on Market Value

Riskfree Rate : - No default risk - No reinvestment risk - In same currency...