Investigating premiums paid to acquire control: evidence from UK transactions

Measuring the quantum of the control premium

As noted above, take-private deals provide us with a source of evidence for the existence of the control premium. Similarly, they would also be able to provide a guideline as to the quantum of such a premium.

The benefits of using previously listed companies in this way (as opposed to acquisitions of private companies) is that the market capitalisation of the target company – which in turn is derived from trades in small parcels of its shares – provides us with a reliable source of market values immediately prior to any announcement. The value of a private company’s shares before a takeover however – in the absence of any contemporaneous trade in those shares (which is true in most cases) – can only be estimated.

We do note here that this does not constitute a perfect comparison however, owing to both the role of synergies and the possibility of selection bias – which may serve to inflate the observed premium. 

With regard to the former, it is entirely possible that an acquirer may have been willing to pay an additional amount for the acquisition to be able to access what they considered to be even more valuable synergies from a combined business. This would have the effect of inflating any observed premium, meaning that the quantum of the observed premium would arguably not then be purely about the price paid for control.

Selection bias may arise because not all listed companies get taken over, and as such we can only draw observations from those companies that are acquired: it may be therefore that there is a natural bias arising as those entities subject to takeovers are those which are perceived to be significantly undervalued. Accordingly, while an acquirer may be willing to pay a premium for a more ‘fully’ valued business, that premium may be so small that it would not be considered worthwhile to make such an attempt because of the greater risk of the deal falling through. The implication of this therefore is that the premiums observed (all other things being equal) may tend to be large, relative to the average which would be observed under the hypothetical scenario that all public companies ultimately became subject to a takeover.

Against these upward pressures on the observed premiums, there may be a degree of ‘offset’ arising from the impact of relative liquidity. By taking a company private, an acquirer loses the ability to quickly realise the value of their investment in the target company (which it should be noted is a benefit available to individual holders of the shares ahead of any deal). The liquid nature of listed shares – all other things being equal – would have the effect of inflating share values relative to a comparable holding in a private company. This in turn suggests that the control premium paid by the acquirer may in effect be larger, as they are acquiring shares which will lose this liquidity benefit subsequent to the deal.

Other factors which may conceivably impact upon observed premiums are market conditions prevailing at the time, the industry sector, the objectives of the acquirer, competitive tension in the bidding process and the size of the transaction – although again it is difficult to control for these factors.

Noting the above, and in common with any attempt to use market benchmarks to perform a valuation, our assessment of an applicable “control premium“ should be considered carefully, and the limitations of our study acknowledged, owing to the volume of variables at play. However, it should be noted that any attempt to assess a meaningful measure of control premium will face the same or similar obstacles, and so in our view this remains a useful guide for consideration of this very subjective area.