Control Premium in Legally Constrained Markets for Corporate Control: The Italian Case (1993–2003)*

Author： Massari Mario Monge Vittorio Zanetti Laura

ISSN： 1385-3457

Source： Journal of Management & Governance, Vol.10, Iss.1, 2006-03, pp. : 77-110

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Abstract

We discuss the simple model pioneered by Barclay and Holderness (1989, Journal of Financial Economics 25: 371–395) and recently reproposed by Dyck and Zingales (2004a, Journal of Finance 2, 537–600; 2004b Journal of Applied Corporate Finance 16, 51–72) in order to measure the value of control in countries, like Italy, where transfer of control is regulated by law. We demonstrate that it is possible to broaden the application of B&H approach to block trades followed by mandatory tender offers and we show the conditions under which we may obtain significant measures of private benefits also when voluntary tender offers are considered. In order to test for our theoretical predictions, we analyse the pricing of 27 control transactions involving the common stock of Italian listed corporations between 1993 and 2003. We find that block-transaction (tender) premium equals on average 8% of the firm’s equity value in the case of pure block-trades, 9% in the case of block trades followed by a mandatory tender offer, while it increases to 18% in the case of voluntary tender offers. The results suggest that, in the case of block trades followed by a mandatory tender offer, the acquirer does not transfer a larger portion of its surplus. This doesn’t take place in the case of voluntary tender offers, in which the raider’s bargaining power collapses. Our estimate of the control premium is sensibly lower than that presented in previous studies based on similar methodologies, providing up-to-date evidence for control stake valuation purposes and for comparison with cross country studies aiming at assessing the quality of rules devoted to minority shareholders’ protection. We also perform a cross-sectional regression analysis of private benefits of control and confirm some of the findings presented in the previous literature: particularly, we find evidence of a positive relation between the magnitude of private benefits of control and the target’s degree of stock-pyramiding. We also find that foreign acquirers and financial investors seem likely to face greater difficulties in extracting private benefits of control.