Control Premium (Stock) - Explained
What is a Control Premium?
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Table of ContentsWhat is a Control Premium?How does a Control Premium Work? Academic Research on Control Premium
What is a Control Premium?
A control premium refers to an amount a buyer is willing to pay to acquire a majority or controlling the share of a publicly-traded company. This amount is often over and above the current market price, buyers an investors pay this amount to acquire a majority share in a company.
A control premium is often higher than the current market price of a public company. When an acquirer is willing to pay an excessive amount for the controlling shares of a company which is more than the price the company is currently trading in the market, a control premium is paid.
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How does a Control Premium Work?
The purchase of minority shares of a public company is often done at the price established by market participants. However, when a buyer or an acquiree wants to acquire the majority (controlling) shares of a publicly-traded company, a premium must be offered, this is an amount more than the current market price of the company's shares.
A control premium, when offered by an acquiree is done through a tender offer that is given to the publicly traded company. The tender offer included the amount of the majority shares of the company the acquirer wants and the price offered for the purchase. Generally, the amount an acquirer offers to pay for the majority shares of a company must match the intrinsic value of the target company. Actual premiums paid by acquirers differ, the premium is specific to the company whose shares are to be purchased and the type of synergy the acquirer hopes to build with the company.
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