Control premium
M&A / Merger ModelThe excess over the traded share price an acquirer pays for the right to direct the whole business.
A minority shareholder owns a claim on cash flows. An owner of the whole company owns the right to change strategy, replace management, alter the capital structure and capture synergies. That difference is worth paying for, and the control premium is what it costs.
It is the structural reason precedent transactions sit above trading comps. The two methods are not disagreeing about the business; they are pricing different things.
Typical premiums cluster in the twenties to thirties of percent but vary widely with circumstance: a competitive auction pushes it up, a distressed or forced seller pushes it down, and a bidder with unique synergies may pay far more than anyone else could justify.
In UK practice the premium is measured against a reference price before any leak, which is why announcements quote premiums to the undisturbed price rather than to the day before, when the shares may already have moved on speculation.
Worked example
A target trades at €40.00 before any leak. An acquirer offers €50.00, a 25% premium to the undisturbed price.
If the shares had already run to €46.00 on speculation, the premium to the last close is only 8.7%, which is why announcements quote the premium to an undisturbed reference price.
At 8.0x trading comps, that 25% premium is what turns the multiple into roughly 10.0x on a precedent basis.