I am performing a research & valuation piece on a company with voting and non-voting common shares and was wondering if anyone had ever performed a similar valuation and had any advice on how to handle the valuation aspect between the shares. Does anyone know how this is commonly done in the industry? I’ve heard two competing strategies. One involves using the historical empiracal average premium (5.44%) in some research paper. The other method I’ve heard is to perform a full analysis of the value impact of voting rights, but I have no idea where to even start with that. Any pointers?
You could do days worth of review of empirical studies on this, and you would come up with “about 5%”, or you could just use 5%. It’s kind of like being a banker - do days worth of analysis to come with 7X, or just use 7X.
It’s part of a competition, so I do have motivation to go the extra mile here. Beyond that, I just checked and the company is currently trading around 2.3% spread.
Put-call parity doesn’t include voting rights so if there are, say, LEAPS on the stock you can get a time aspect of voting rights, i.e., Stock + Put = Call + Bond except the left side includes voting rights until expiration and the right side doesn’t.
Well you could just use the historical average for the last few years. I just think those is one of those theoretical wild goose chases with little application. People have been whining for the CMG voting/non-voting spread to come into line literally since it went public. Apparently there is a premium for not having to control that company.
JoeyDVivre Wrote: ------------------------------------------------------- > Put-call parity doesn’t include voting rights so > if there are, say, LEAPS on the stock you can get > a time aspect of voting rights, i.e., > > Stock + Put = Call + Bond except the left side > includes voting rights until expiration and the > right side doesn’t. That’s really clever - using put-call parity to create a voteless synthetic stock and compare to a voteable real stock. I guess the only issue is that any other things that come with a real stock and don’t come with the synthetic are also going to be priced into the difference, so you have to make sure you’ve thought through what they are. Dividends are one… anything else? I guess you’d value a synthetic stock as: Synthetic Stock = Call - Put + Bond Vote Premium = Voting stock - Synthetic stock. I would think that the premium on voting stock would depend on whether the management was doing a good job (don’t mess up stuff if mgmt is doing well).
Thanks guys, I particularly appreciate your insights Joey and bchadwick, is there any other things besides dividends I would have to factor into the equation to further develop the model?
Hey Black Swan, You need to consider the following aspects: 1) If there is any difference in the cash flow claims (ex: differential divided) 2) Value of Control rights (ex: if you owned the company what value would be accrued from change in management and most importantly the probability of changing the management) 3) What would be the liquidity levels available, the number shares in the free float and type of holders of those shares (insiders vs institutions) While 5% is considered to be the norm you would find extremes depending on the interaction of the above listed points. Voting rights is just the start, liquidity and dividend too play a role.