Damodaran on Valuation

13.3. CONCLUSION

The value of control in a firm should lie in being able to run that firm differently and better. Consequently, the value of control should be greater in poorly performing firms where the primary reason for the poor performance is the management. In this chapter, we first considered how the management of a firm can affect its value and then the likelihood that incumbent management in the firm can be changed. It is our contention that the market value of every firm reflects the expected value of control, which is the product of the probability of management changing and the effect on value of that change. This has far-ranging implications.

In acquisitions, the premiums paid should reflect how much the price already reflects the expected value of control; in a market that already reflects a high value for expected control, the premiums should be smaller. With companies with voting and nonvoting shares, the premium on voting shares should reflect the expected value of control. If the probability of control changing is small and/or the value of changing management is small (because the company is well run), the expected value of control should be small and so should the voting stock premium. In firms where there is potential for changing the way management is run, the expected value of control and the voting share premium should be large. Finally, in private company valuation, the discount applied to minority blocks should be a reflection of the value of control.