Is The Mergerstat Control Premium Overstated?
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Dan Jordan
This paper examines a random sample of 100 acquisitions of U.S. target firms acquired between the first quarter of 1999 through the first quarter of 2003 comparing the ``Control Premium" reported by Mergerstat/Shannon Pratt's Control Premium StudyTM to a comparable ``Abnormal Return" calculated using established academic ``event study" methodology. One of the differences between the Mergerstat methodology and the event study methodology is the removal of general market movements from the total stock return to arrive at the abnormal return while no such adjustments are made to the Mergerstat control premium.The ``Control Premium" reported by Mergerstat averaged 49.02% compared to 53.64% calculated using the event study methodology, a difference of -4.62%. During the event periods, the S&P 500 Index experienced a -4.45% average change, accounting for 96% of the difference in average result between the two methods. However, when the sample is split between up and down market periods, anomalies appear.An analysis of the up market periods reveals an average event study abnormal return of 59.97% compared to a 34.95% average Mergerstat Control Premium. This 25% difference is explained by Mergerstat's methodology understating the ``run-up" of target firms' stock prices prior to the acquisition announcement.
©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
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- Is The Mergerstat Control Premium Overstated?
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- The Effect of Sales Terms on Goodwill, Risk and Return in Transfers of Closely Held Accounting Practices
- Valuation of Small Business: An Alternative Point of View
- Owner Employee Compensation is Not Free Cash Flow
- Post-Employment Covenants and Economic Losses
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Articles in the same Issue
- Article
- Privatization and Financial Performance: Can Value Be Created by Privatizing State Owned Enterprises in the Middle East & North Africa (MENA) Region?
- Recoverable Damages for Wrongful Death in the States: A Decennial View
- Is The Mergerstat Control Premium Overstated?
- Quantifying Risk When Using the Income Approach
- The Value of Life: A Labor-Based Theory
- The Effect of Sales Terms on Goodwill, Risk and Return in Transfers of Closely Held Accounting Practices
- Valuation of Small Business: An Alternative Point of View
- Owner Employee Compensation is Not Free Cash Flow
- Post-Employment Covenants and Economic Losses
- Valuing Complex Stock Options Containing Reload Features
- Examination and Comparison of Hispanic and White Unemployment Rates
