Determining the control premium in business valuation of shares

The finance, investments, insurance

Substantiating the adjustments used in the valuation of share packages has become especially important recently due to a growing number of offers on the part of owners. The paper proposes a methodology for distributing the business market value depending on the size of the package to be assessed. The utility of a package depends on the legally certified rights of the future package holder to participate in the company’s management. The suggested methodology models the actual number of members in the Board of directors on the basis of the analyzed register of shareholders. The methodology proposed in this paper allows making a transition from the proportional value of a share to the market value of a share within the specific package. The transfer is possible due to designation of weight coefficients obtained by the iterative calculation method. The weight coefficients are selected for a company with the specified market value of one hundred percent share package based on the data of the stock market about the market value of a share in the minority package. Based on the methodology proposed in the paper, the value of a share is determined in various packages. It is suggested that the control premium should be calculated as a ratio of a share in the controlling interest package to a share in the minority package. The paper describes the obtained weight coefficients for significant packages of the joints stock company and derived market control premiums according to the financial statements of PJSC LUKOIL for December 2016. In the paper, the market premium has been obtained at the level of 39.9 % for a controlling interest package as big as 90 %. For other packages premiums are calculated by using linear approximation. The methodology detailed in this paper allows making a transition from the proportional value of a share to the market value of a share in the composition of a certain package. The proposed methodology is different from the methods developed earlier as it makes it possible to take into account the effect of share distribution among owners. The control premiums, obtained in accordance with the methodology proposed in this paper, have been empirically checked.