What is a Control Premium?

A control premium is an amount over the market value of shares in a company that a buyer is willing to pay in order to gain control of the company. People in the process of trying to buy up controlling shares tend to be willing to pay more than those shares are worth, because the ability to control the outcome of votes and other events is considered worth the extra expense. People aware of the control premium can exploit it to get a better price for their shares during a takeover attempt. The opposite is a minority discount, a reduction in share value for buyers who will not obtain a controlling share in the company with their purchase.

The amount over market value people are willing to pay is highly variable, depending on a number of factors. A person who already owns a large number of shares, such as 35% of a company, is often willing to pay a high control premium, as the person is already well on the path to owning a controlling share. If there is a limited number of shareholders, the share price can also go up, as people will be well aware of the takeover attempt and can price their shares correspondingly higher.

Business value is also a consideration. A controlling share in a valuable or rising company is usually worth more to someone than a share in a company with a lower or faltering value. People may also consider the potential of an industry as a whole, as well as issues like general economic well being. Another issue can be how badly the person wants control; someone who desperately wants to oust board members may be willing to pay a high control premium to be able to do that.

When people start to buy up shares in an attempt to take over, they are usually discreet about it, with the goal of not tipping people off. They may buy through proxies in order to conceal what they are doing. As people become more aware of the attempt, the control premium can rise, as people will price their shares higher at sale because they sense that the buyer has an incentive and a willingness to pay a higher price.

As people prepare for a takeover, they may sit down and decide at the outset on how much over market value they are willing to pay. Setting clear goals after consulting all the available information will allow people to develop an appropriate buying strategy for gaining control without spending more money than is wise. If a takeover attempt fails, the person may try again at a later date.