Acquisition Premium

Definition

Acquisition premium refers to the extra amount, expressed as a percentage, that an acquiring company is willing to pay over the target company’s current market value in order to gain control of that company. This premium is paid because the acquirer believes the target company’s assets, technology, market share, or potential synergies have a value higher than their current valuation. Essentially, the acquisition premium is a reflection of the perceived future benefits and growth prospects the acquirer expects to gain from the deal.

Phonetic

The phonetic pronunciation of the keyword “Acquisition Premium” is:/ˌakwəˈzɪʃən ˈpriːmiəm/It can be broken down as:- Acquisition: /ˌakwəˈzɪʃən/- Premium: /ˈpriːmiəm/

Key Takeaways

1. Definition of Acquisition Premium: An acquisition premium refers to the difference between the price paid by the acquirer for the acquisition of a target company and the pre-announcement market value of that target company. Essentially, it is the amount paid above the market price to incentivize shareholders of the target company to sell their shares.
2. Reasons for Acquisition Premiums: Companies may offer acquisition premiums for various reasons, some of which include gaining control over valuable assets, improving market share, obtaining strategic benefits, or benefiting from operational synergies. In some cases, acquirers may also be willing to pay a premium to pre-empt a competing bid or to close a deal quickly.
3. Assessing the Appropriateness of an Acquisition Premium: When evaluating an acquisition premium, both acquirers and target shareholders must consider various factors. These include the potential synergies created, alternative options for the acquirer, relative valuations of the two companies, and the target’s future earnings potential. If the acquisition premium is justified by these factors, it is more likely to result in a successful and mutually beneficial transaction for both parties.

Importance

The term “Acquisition Premium” is important in business and finance because it represents the additional amount that an acquiring company pays over the target company’s pre-announcement market value to gain control and ownership. This premium is essential as it serves as an incentive for the target company’s shareholders to approve the transaction, reflecting the acquiring company’s confidence in the potential synergies, growth prospects, and other value-enhancing factors of the acquired company. Moreover, it helps determine the total acquisition cost, allowing both entities to assess the financial viability and potential return on investment of the deal. A well-justified acquisition premium can lead to successful mergers or acquisitions, resulting in increased overall value and competitive advantage within the market.

Explanation

Acquisition premium refers to the additional amount that a prospective buyer is willing to pay above the current market value of a target company in order to gain control of that company. This is a crucial aspect in mergers and acquisitions (M&A) transactions, as it can serve as the impetus for shareholders to accept the deal. The purpose of the acquisition premium is to create a more attractive offer by compensating the target company’s shareholders for the risks associated with giving up control of their investment. Additionally, the premium can also be a reflection of the buyer’s positive expectations of the synergies, potential growth, and cost savings that they believe can be achieved by merging the two companies. One objective use of acquisition premium is to incentivize the target company’s shareholders to agree to the deal by offering them a higher value for their shares. The size of the premium could depend on various factors, such as the target company’s attractiveness, its growth potential, future cash flows, the acquiring company’s strategic goals, and possible synergies resulting from the merger. A well-calculated acquisition premium can facilitate the successful completion of an M&A transaction by ensuring that both the acquiring company and the target company’s shareholders are satisfied with the arrangement. In essence, the acquisition premium serves to bridge the gap in valuation expectations and acts as a valuable tool in achieving a satisfactory final agreement.

Examples

An acquisition premium refers to the extra amount an acquiring company pays to buy a target company beyond its fair market value. This premium is often offered to persuade the target company’s shareholders to sell their shares and approve the acquisition. Here are three real-world examples of acquisition premiums in the business/finance sector: 1. Disney’s acquisition of 21st Century Fox (2019): In a landmark deal, the Walt Disney Company acquired the entertainment assets of 21st Century Fox for about $71.3 billion. Disney’s acquisition price reflected a 36% premium over Fox’s market value at the time of the initial offer. Disney paid this premium to consolidate its position in the entertainment industry and expand its content portfolio. 2. Microsoft’s acquisition of LinkedIn (2016): Microsoft acquired LinkedIn, the professional networking platform, for $26.2 billion in cash. The acquisition represented a 50% premium over LinkedIn’s closing share price before the announcement, valuing the company’s shares at $196 each. Microsoft paid this premium to secure LinkedIn’s vast professional network and integrate its technology into Microsoft’s products. 3. Bayer’s acquisition of Monsanto (2018): In one of the largest mergers in the agribusiness sector, German pharmaceutical and chemical giant Bayer AG acquired American multinational Monsanto Company for $63 billion. The deal represented a 44% premium over Monsanto’s market value at the time of the offer. Bayer paid this premium to strengthen its position in the global agriculture market and create synergies through the combined expertise of both companies.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Mergers and Acquisitions (M&A)
• Target Company
• Control Premium
• Deal Synergies
• Shareholder Value

Sources for More Information

• Investopedia
• Corporate Finance Institute
• AccountingTools
• WallStreetPrep