What is Acquisition Premium?
A company may be selling at $40 per share, for instance, and be offered $45 per share in a takeover bid. That added amount above the current market price is an acquisition premium. Once the takeover or merger is complete, that premium is listed as an intangible asset on the balance sheet. It’s normally recorded as goodwill.
What influences acquisition premium?
The biggest influence on acquisition premium is synergy. Synergy simply means combined effort. By merging two companies, the result often produces a stronger team and collaboration. Creating a partnership and combining the efforts of two companies allows for faster growth, better market penetration, sharing of assets, and increased revenue.
However, there are several other important factors that play a role as well, as follows:
- Other bids — When more than one company is interested in acquiring the target, each company will try to outbid the other.
- Tax benefits — Sometimes a company will purchase or merge with another to reduce its own tax liability. This is useful when the target company has large tax losses that the acquiring company can write off.
- Competitive advantages — Often, an acquisition premium is paid when the target company has resources or other unique advantages. The acquiring company offers a premium on their bid for takeover as a way to acquire those resources for their own benefit.
- Market reach — Sometimes the target company simply has a strong presence in a specific industry. Sometimes the target simply has a presence in another region or country. When an acquisition company desires to have more power in a given industry, or enter a new region, they offer acquisition premium as a way to present an enticing offer to the target company.
How do you calculate acquisition premium?
Acquisition premium is simple to calculate for public companies. Since a company’s stock price reflects the current fair market value, anything offered above that is a premium.
The formula is:
Acquisition premium = (offer – current market) / current market
Example of acquisition premium
Let’s say XYZ Corp has a share price of $35. ACB Corp offers to buy it at $40 per share. The formula is:
($40 - $35) / $40 = 12.5%
Thus, ACB Corp is offering XYZ Corp a 12.5% premium to acquire them.
If XYZ Corp is not a public company however, the process is slightly more involved. First, ACB Corp must find the enterprise value of XYZ Corp. Enterprise value is the equity value plus net debt and minority interests. Once ACB Corp has that number, it can then add the premium percentage it wants to offer to calculate the dollar amount it’s willing to pay.
Acquisition premium is an additional cost above the value of an asset that a company pays to acquire an asset, typically due to the benefits the company can gain from acquiring the asset. An acquisition premium can apply to any asset, from individual shares of stock to companies targeted for takeover.