Acquisition Premium: Difference Between Real Value and Price Paid An acquisition premium is the amount a buyer pays over a target company's estimated fair value when completing a merger or acquisition. It represents the extra cost paid to persuade shareholders to sell, outbid rivals, or capture expected benefits from combining the businesses. Why acquirers pay a premium Common reasons an acquirer will pay an acquisition premium include:
Securing the deal when multiple bidders are interested.
Capturing expected synergies (cost savings, revenue gains, cross-selling).
Obtaining strategic assets such as brands, customers, patents, or distribution channels.
Gaining market share, eliminating a competitor, or accelerating growth. Explore More Resources
An acquirer is not required to pay a premium; in some situations the buyer may acquire the target at a discount. How the premium is calculated Two common ways to express an acquisition premium: Explore More Resources
1. Using enterprise value (EV):
2. Premium amount = Offer price − Estimated EV of target
3. Premium percentage = (Offer price / EV) − 1
Example: If EV = $11.81 billion and the buyer offers 20% above EV, offer = $11.81B × 1.20 = $14.17B. Premium = $14.17B − $11.81B = $2.36B (20%).
4. Using share price: Explore More Resources
5. Premium% = (Offer price per share − Current price per share) / Current price per share
Example: If shares trade at $26 and the buyer offers $33, premium = ($33 − $26) / $26 = 27%.
Note: Premiums can arise unintentionally. If an agreed price is set and the market value of the target falls before closing, the buyer may end up paying a large premium relative to the lower market price. Accounting treatment: Goodwill and impairment
* In financial accounting, the portion of the purchase price above the fair value of identifiable net assets is recorded as goodwill on the acquirer's balance sheet.
* Goodwill reflects intangible benefits such as brand value, customer relationships, patents, and employee talent.
* If the acquired business underperforms or market conditions deteriorate, goodwill may be impaired. An impairment reduces the goodwill balance and is recognized as a loss on the income statement.
* If a buyer acquires a target for less than the fair value of identifiable net assets, the result is negative goodwill (sometimes called badwill), which is accounted for as a gain.
Key takeaways
* An acquisition premium is the extra amount paid over a target’s estimated fair value in an M&A transaction.
* Premiums are paid to win deals, deter competitors, and capture synergies or strategic benefits.
* Premiums can be calculated using enterprise value or share price; examples commonly express premium as a percentage.
* The excess paid is recorded as goodwill; subsequent impairment can create losses, while negative goodwill is recorded as a gain.