The Value of Control: Implications for Control Premiums, Minority Discounts and Voting Share Differentials*

It is not uncommon in private company and acquisition valuations to see large premiums attached to estimated value to reflect the “value of control.” But what, if any, is the value of control in a firm, and, if it exists, how do we go about estimating it? In this paper, we argue that the value of controlling a firm has to lie in being able to run it differently (and better). Consequently, the value of control will be greater for poorly managed firms than well-run ones. The value of control has wide ranging implications beyond acquisitions. In this article, we will show that the expected likelihood of control changing is built into the price of every publicly traded company and that this likelihood provides a way of measuring the payoff to strong corporate governance. We will also argue that getting a better handle on the value of control can allow us to better explain the differences between voting and nonvoting share prices and the minority discount in private company valuations. What is the value of controlling a business? The answer to this question has wide-ranging implications for how stocks are priced and the premiums that should be paid in acquisitions. It is also an issue of contention in legal tussles over “fair” value in transactions. In this article, we examine why there may be value to controlling a firm and how to go about measuring this value. We then consider the wide range of cases in which the value of control applies ranging from the premiums that one would pay for voting shares (as opposed to non-voting shares) and the minority discounts in private company valuations.