Control Premium in Legally-Constrained Markets for Corporate Control: the Italian Case (1993-2003)

Abstract

We discuss the simple model pioneered by Barclay and Holderness (1989) and recently re-proposed by Dyck and Zingales (2004) 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 measure 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. Our estimate of the control premium is sensibly lower than that presented in previous studies based on similar methodologies: particularly, we find that block-transaction (tender) premium equals on average 8% of the firm's equity value in case of pure block-trades, 9% in case of block-trades followed by a mandatory tender offer, while increases to 18% in the case of voluntary tender offers. This suggests 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 case of voluntary tender offers, in which the raider's bargaining power collapses. 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.