Barbora Rydlova, MEcon. and Radana Smidova, MEcon. Department of Corporate Finance and Company Valuation, University of Economics Prague, W. Churchill Square 4, Prague 3, 130 67, Czech Republic
The control premiums are primarily a practical problem of business valuation. Paper deals how to apply empirically found control premium to the stock base value and what should be the magnitude. Correct application of control premiums would first demand exploration of the complex theoretical background of control premium, especially its sources and relations with the general business valuation theory and bases of value.
Numerous previous researches focused on control premium just defining and measuring the control premium in a different way and showing a one-point-of-view control premium theory.
Concerning control premium there are several questions arising:
· Is it possible to estimate market value of a whole company if the ownership is multiplex,
· and in the same time to estimate the market value at the level of the shareholder,
· if yes, what is the relation between those values at the level of the company as a whole and at the level of the shareholders,
· is it always market value, what we get as a result?
Hypothetically there could be a situation when the market value of the company equals the sum of values of interests happening only when the ownership structure of the company is totally dispersed.
Theoretically if we had a complex control premium model complying with empirical results, it should help us answer when and how to apply the control premium. At the beginning of the paper we state several hypothesis based on the results of the above mentioned one-point-of-view empirical studies and theories,
Based on the above mentioned hypothesis we develop the model of control premium and bases of values for the situations before the majority investor acquires the interest and after the interest is acquired.
We deal with the private and shared benefits of control and the ways how the recognition of the sources of the control premium and the model of the control premium and the decompositions in the bases of value chart can help us in application of the control premium.
We recognize two main sources of control premium. First, the difference between the investment value and market value which can be caused by different magnitude of expected cash flow between majority and minority shareholders or by different perception of probability of expected cash flow (or in other words by different perception of risk) or combination of both. Second, the private benefits of control (agency costs), like unreasonably high manager’s benefits (while managers are chosen by the majority shareholder), transfer prices between sister’s, mother’s and daughter’s companies owned by the majority shareholder set higher or lower than it would correspond with the market price, better conditions or contracts for affiliated companies or information asymmetry (the majority shareholder can use information obtained in one company for the benefit of another of his companies).
The last part we dedicate to the different ways of measurement of the control premiums viewed through the control premium model with the bases of value decomposition that we developed.