What is a control premium, and how big is it usually?

Define it as the percentage paid above the unaffected share price to buy the whole company. Explain why control has value, give about 20% to 40% as a rough range, and measure from the price before any leak.

The numbers, step by step

The examples from the answer: a $40 unaffected price, a $52 offer, and a 25% median premium from similar deals.

Premium on the $52 offer$52 ÷ $40 − 1

30%

Price implied by a 25% median$40 × 1.25

$50

What the interviewer listens for

• Do you define it against the unaffected share price?
• Do you explain why control is worth paying for?
• Do you give the size as a rough range and say what moves it?
• Do you know leaks distort the price before the announcement?

Common mistakes

• Measuring the premium against a price that already moved on rumors, which understates it.
• Giving one premium as a rule.It's a rough range that varies widely from deal to deal.
• Saying the premium exists only because of synergies.A sponsor with none still pays one.
• Quoting a premium for a private target, which has no share price.Private deals are compared on multiples.

Likely follow-ups

• What's the opposite of a control premium?A discount for lack of control, used when valuing a minority stake. A private stake often takes a marketability discount too.
• Why might a premium be unusually small?The stock may already trade up on takeover talk, the buyer may be the only realistic bidder, or it's a merger of equals where neither side takes control.
• Where does the premium show up in your other methods?Precedent transactions include it, since each price bought control. Trading comps don't, because a share price is a minority price.

More finance technicals

• How do you estimate a company's cost of debt?
• What is the mid-year convention in a DCF, and what does it do to the value?
• Terminal value makes up most of your enterprise value. Is that a problem?
• A company with no debt, worth $10 billion with 100 million shares at $100, borrows $1 billion at 6% to pay a special dividend. What happens to its WACC, enterprise value, equity value and share price?
• Walk me through a DCF.

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