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The measurement and application of market participant acquisition premiums

'Through the early 1990s, it was generally accepted that the publicly traded price of a company’s shares represented the value of a minority interest and that, if the goal was to value a control interest, a “premium for control” would be added to the value of equity indicated by that publicly traded price. That premium generally came from market evidence in which the price paid to acquire an entire company was compared to the publicly traded price of that same company’s shares prior to the acquisition. However, in the late 1990s, this concept came into question and views have since been changing. Various points have been made regarding why the control value of an entity might be no greater than that indicated by its publicly traded price.'

The words above are the first two paragraphs of a Valuation for Financial Reporting Advisory Paper ('VFR') issued by The Appraisal Foundation in the USA in September 2017. In these eight lines it summarises the contrarian views of Eric Nath, first raised in the early 1990’s. These views are now in the full flow of the mainstream.

It has to be said that the phrase 'market participant acquisition premium' ('MPAP') is neither elegant nor memorable. It is however descriptive: in order to apply what has, up to now, been called a “control premium” it is necessary to focus on the market participants. A price above the market price will only normally be payable if a market participant sees the potential for increased cash flows or reduced risk. There needs to be confidence that this will be achieved under different stewardship or management.