Control Premium
A control premium in M&A refers to the additional amount a buyer is willing to pay above the fair market value of a company's shares to acquire a controlling interest, reflecting the value of gaining decision-making authority and control over the company's strategic direction, operations, and resources.
Example
Company A trades at $20 a share.
Company B agrees to acquire Company A at $25 a share.
The $5 difference in share price is the control premium.
This is why the Precedent Transactions valuation method typically produces higher multiples than the Comparable Companies valuation method.
In the room
This concept explains why precedent transactions produce higher multiples than comparable companies, which is a guaranteed interview question. Buyers pay above market price for decision-making control and the synergies that come with it.