What it means
A company's ordinary share price reflects what small investors will pay for a minority stake. Buying the whole company is different, because the buyer gains control, and shareholders expect to be paid extra for giving it up.
Takeout value is the estimate of what that complete purchase would cost. The calculation starts with the market value of the equity and adds a control premium, which is the extra amount paid for control.
Premiums in takeovers often fall somewhere between 20% and 40%, though the range varies with the industry and the market mood. A stronger rival bid or a very cheap share price tends to push the premium higher, because shareholders can see that the buyer has room to pay more.
Many analysts then add the target's net debt, meaning borrowings less cash, because a buyer takes on those obligations along with the shares. The result is an enterprise-level takeout value, which shows the total price of owning the operating business.
This version is used when comparing deals across companies with different amounts of debt. Investors use takeout value in two directions.
A potential buyer uses it to test whether the price is affordable and whether the purchase will earn a sensible return. A shareholder uses it to judge whether an offer is fair compared with what the company might fetch in a sale.
The figure is an estimate, not a fact. It depends on assumptions about the premium, on how much the buyer can save by combining the businesses, and on whether other bidders appear.
Treating it as a range is wiser than treating it as a single number. One practical use is as a ceiling for negotiation.
A buyer who knows the most it can pay without destroying value is less likely to be carried away by competitive bidding. A seller who knows what a fair premium looks like is better placed to turn down a low offer.
In practice
Real-world examples.
Example
A food manufacturer considers buying a smaller rival and estimates that shareholders would want a 25% premium. The finance team calculates the equity takeout value and adds the rival's net debt. The board only proceeds if the expected savings from combining the two businesses exceed the premium.
Example
An activist investor argues that a listed retailer is worth more in a sale than on the stock market. Using comparable deals, she estimates a takeout value 35% above the current share price. She uses the figure to press the board to explore a sale.
Example
A small engineering company receives an unsolicited approach at $9.50 a share. Its advisers compare the offer with a takeout value of about $11.00 based on recent deals in the industry. The board rejects the approach and says the offer undervalues the company.
Formula
Calculation
Takeout value (equity) = market price per share x (1 + control premium) x number of shares
Takeout value (enterprise) = equity takeout value + debt - cash
A company has 8,000,000 shares trading at $10.00, so its market value is 8,000,000 x 10.00 = $80,000,000. With a 30% control premium, the offer per share is 10.00 x 1.30 = $13.00, and the equity takeout value is 13.00 x 8,000,000 = $104,000,000. The company has $40,000,000 of debt and $10,000,000 of cash, so the enterprise takeout value = 104,000,000 + 40,000,000 - 10,000,000 = $134,000,000.Case study
Seen in the real world.
Silverfen Plastics is an illustrative, fictional listed company with 5,000,000 shares trading at $16.00, a market value of $80,000,000. It also had $25,000,000 of debt and $5,000,000 of cash.
A larger competitor estimated that a 30% premium would be needed to win approval, which gave an offer of $20.80 a share and an equity takeout value of $104,000,000. Adding net debt of $20,000,000 brought the enterprise takeout value to $124,000,000.
The competitor expected annual savings of $6,000,000 from merging factories, which it valued at about $48,000,000. That comfortably exceeded the $24,000,000 premium, so the deal looked worthwhile on paper. The illustrative catch was that integration costs had not yet been estimated, and the board asked for those figures before it agreed to bid.
Watch out
Common mistakes.
- Using the current share price as the takeout value, which ignores the premium that shareholders will expect for giving up control.
- Forgetting to add the target's debt and subtract its cash, so the true cost of owning the business is understated.
- Treating one estimate as exact, when the right premium depends on competition for the target and on market conditions.
Questions
People also ask.
Is takeout value the same as market capitalisation?
No, market capitalisation is the value of all shares at the current price, while takeout value adds the premium needed to buy the company outright.
What is a typical control premium?
Premiums often fall between 20% and 40% of the undisturbed share price, but there is no fixed rule.
Who uses takeout value?
Corporate buyers, investment bankers, activist shareholders and company boards all use it to judge offers and plan deals.
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