Netwit, the aspect of a control premium is debatable for sure. But if any entity, for example, were to acquire ENGA, once they acquired over 5% on the open market, I'm inclined to believe that some kind of control premium would be relevant if they were to acquire either the remaining shares from CMGI or an amount sufficient to give them control of the entity (50.1% of the issued and outstanding shares).
My observations are a bit different from yours. Instead of valuations locked with a stock price at the date the letter of intent is signed, I see more variations in pricing that establish an exchange ratio that is valid within a given range.
The expectation of a control premium is what drove LCOS shares to their recent highs. As news of the proposed deal became public, investors pushed up the value of the stock anticipating a large control premium. When the acquirer declined to pay a higher control premium, the deal fell apart in the marketplace.
As you know, minority shareholders basically have limited rights. And it's the aspect of controlling the company that justify (in my own head) a higher price for the controlling shares.
There have been several studies done regarding acquisitions that occurred in the stock market. Oddly enough, one of the studies tracked the price of the stock 8 days before the deal was "officially" announced. By the time the deal was properly announced, the stocks had appreciated an average of 32% in expectation of the announcement. The study also suggested that this increase reflected, in large part, the expected premium the buyer was willing to pay for the controlling ownership interest.
But I have to tell you I greatly appreciate your observations and remarks on the matter. You're absolutely right that it is an art, not a science.
And this area, there are no starving artists! ;~)
Mark A. Peterson |
