Acquisition Premium
An acquisition premium refers to the amount by which the purchase price of a target company exceeds its pre-acquisition market value or fair value. In other words, it is the additional amount that the acquiring company pays to gain control over the target company. The premium is typically offered to persuade the target company’s shareholders to sell their shares and approve the acquisition.
Acquisition premiums are usually expressed as a percentage and can be calculated as follows:
Acquisition Premium = (Purchase Price – Pre-Acquisition Market Value) / Pre-Acquisition Market Value * 100
The reasons for paying an acquisition premium may include:
- The acquiring company believes that the target company is undervalued and has strong growth potential.
- The target company possesses unique technology, intellectual property, or other strategic assets that the acquiring company desires.
- The acquiring company wants to eliminate competition by acquiring the target company.
- The acquisition will result in cost savings or synergies that justify the premium paid.
It is essential for the acquiring company to carefully evaluate the premium paid, as paying too much may result in difficulties in integrating the target company and lower returns on investment.
Example of an Acquisition Premium
Suppose Company A wants to acquire Company B. The current market value of Company B is $100 million, based on its stock price and outstanding shares. Company A believes that Company B has a strong growth potential and unique technology that will give it a competitive edge in the market.
To acquire Company B, Company A offers a purchase price of $130 million, which is $30 million more than Company B’s current market value.
To calculate the acquisition premium, we can use the following formula:
Acquisition Premium = (Purchase Price – Pre-Acquisition Market Value) / Pre-Acquisition Market Value * 100
In this case:
Acquisition Premium = ($130 million – $100 million) / $100 million * 100 = 30%
So, Company A is willing to pay a 30% acquisition premium to acquire Company B. This premium can be attributed to the strategic value and growth potential that Company A sees in Company B, and it is intended to persuade Company B’s shareholders to sell their shares and approve the acquisition.
