i think I never figured out when to use control premium for the guideline public company method.
In the Kaplan example on page 277 in the third book.
It states that" the application of control premiums is difficult and requres subjective judgement. The control premium of 30% is probably not relevant for hte valuation of Rensselaer…"
Can someone help explain how do you determine it the control premium is relevant or not? Mant thanks!
When using GPCM you always need to add a control premium if you are valuing a controlling interest. Always. However the amount of premium that you will estimate will depend on the type of buyer you are considering - strategic vs. financial buyer among other items.
Now the example you are looking at isn’t necessarily the best one. It states that a premium of 30% was paid for a firm by an acquiring in the same industry. By nature this implies a strategic transaction so this 30% premium has something to do with synergies that will be realized. Since we are assuming a financial buyer in our case this 30% premium would probably be too high. Definitely more art than science here.
Thanks for your help!
How can we assume we are inancial buyer when the transaction is strategic? The example does not mention anything about what kind of transaction?
It may be an art in real life but in the exam I think we need to be systematic. The information is either explicitly given (whether or not to use a premium) or it is given implicitly so you can deduce. In this case it is good to think of a permutation problem and a matrix table
If the subject and the benchmark transactions were similar then no premium applies. Premium or discount, in other words, are adjusting factors to highlight the fact that though we are comparing two companies, we know they are different. Think of leveraging and deleveraging betas…
Thank you for the explanations!