Question

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1c. True/ False - An acquirer should be willing to pay a higher control premium for a well managed company than a poorly managed one

Why is control considered so valuable? Identify a company which paid-up for a controlling interest and assess why it was done?

Answer 1

False.

The control premium should be larger for a poorly managed company because if the acquirer gets majority control, they can change the management of the company.

Control is considered valuable to the acquirer because :

• Control over the firm's business and long-term strategy can be achieved.
• The cash flows to the firm can be distributed or reinvested as per the acquirer's choice.
• Business operations can be controlled by the acquirer.
• The target firm may have valuable assets such as technology.

For example, in 2012, Facebook paid $1 billion to acquire Instagram. There was a substantial control premium in the acquisition price. The control premium was paid to have complete control over Instagram's strategy, users and data. The control was also valuable in fending off competition from other social media companies.