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CMA Final · Strategic Performance Management and Business Valuation · Valuation in Mergers and Acquisitions

In a merger valuation, a 'control premium' paid over the target's undisturbed market price is mainly justified by:

A control premium is justified by the acquirer's ability to take control of the target's decisions and extract synergies or better cash flows than the market price reflects. It is not driven by book value, shareholder numbers or any universal legal requirement to pay above market.

  1. AThe buyer's ability to direct operations and realise synergies or improved cash flowsCorrect
  2. BThe target's higher book value than market value
  3. CA reduction in the target's number of shareholders
  4. DThe statutory requirement to pay above the market price in every acquisition

Explanation

A control premium reflects the value of being able to change strategy, management and capital structure and capture synergies. Book value, shareholder count and a universal statutory premium do not justify it.

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