You know the drill – buying and selling shares of stock in public companies is just a mouse click away. You pick up a few shares you like, hold on to them as long as you want, then unload them if you like the current market price.
Sounds easy enough, but here is a trick question: what if you decided to buy the whole business. Why do this? In short, to control the company.
Just think of all the exciting things a company’s owner can do:
- hire and fire executives
- invest in new markets
- declare dividends
- put his best buddies on the board
- raise additional capital
- sell off unwanted operations.
In short, to define the future course for the entire business.
You might think that to get to the magical 50.1% of the company’s ownership all you have to do is offer to pay the market price per share, right?
Not so fast. Consider the individual investors holding a few shares of the company apiece. They are enjoying the benefits of dividend payouts and capital appreciation as time goes by. You come along and make a tender offer to buy their stock.
The question is: what is the incentive for all these independent investors to part with their holdings? They know they can sell their shares at the current market price if they so chose. To motivate all these investors to give up their shares at once you need to offer more.
That’s where the control premium comes in. You need to offer a per-share price that is high enough in order to induce these investors to sell. How high? Enough to convince them that giving up their future benefits from holding on to the stock is worth it.
So there you have it. Control premium increases the per-share price in order to get the current investors to tender their shares. For the acquiror, control premium paid is the additional value of controlling the business.
However you slice it, the whole company is worth more than just the sum of individual share prices.