Financial engineering : Question 8
What is the average control premium paid in takeovers, and what are the factors that determine this premium?
The average premium paid in takeovers is around 25 to 30%. This is obviously just an average, and premiums can be much larger or smaller.
The theoretical basis for this control premium is the present value of synergies (increase in sales, reduction in costs, etc.) that the link-up should generate. The acquiring company is thus prepared to pay a premium, as it will manage the target is such a way as to ensure that the profits made by the business combination of the target and the acquiring company will be higher after the link-up than they are today.
The theoretical basis for this control premium is the present value of synergies (increase in sales, reduction in costs, etc.) that the link-up should generate. The acquiring company is thus prepared to pay a premium, as it will manage the target is such a way as to ensure that the profits made by the business combination of the target and the acquiring company will be higher after the link-up than they are today.