Definition (plain)
– Acquisition premium: the extra amount an acquirer pays above a chosen measure of a target’s value to secure a takeover. It is usually stated as a dollar amount and as a percentage of the reference value.
Key terms
– Acquirer: the buyer in an M&A transaction.
– Target firm: the company being bought.
– Enterprise value (EV): a measure of a company’s total value including equity, debt, and cash adjustments.
– Goodwill: in accounting, the portion of the purchase price that exceeds the fair value of the target’s identifiable net assets (intangible value recorded on the buyer’s balance sheet).
– Impairment: a write-down recorded when goodwill or other assets decline in value below their recorded carrying amount.
– Negative goodwill (badwill): when the purchase price is less than the fair value of net identifiable assets.
How acquisition premiums work (stepwise)
1. Select a reference value for the target — common choices are the market share price, the enterprise value from a valuation, or the fair value of net identifiable assets.
2. Decide the offer price the acquirer is willing to pay to win the deal (this may reflect expected synergies, strategic value, or competitive pressure).
3. Compute the premium both in dollars and percentage using the formula below.
4. If the deal closes above the reference value, the excess becomes goodwill on the buyer’s balance sheet (subject to accounting rules and future impairment tests).
Formula and quick calculation
– Premium (dollars) = Offer price − Reference value
– Premium (%) = (Offer price − Reference value) / Reference value × 100
Worked numeric examples
1) Enterprise-value based example
– Reference: enterprise value = $11.81 billion.
– Acquirer offers a 20% premium → Offer = $11.81B × 1.20 = $14.172B.
– Premium (dollars) = $14.172B − $11.81B = $2.362B.
– Premium (%) = 20%.
2) Share-price example
– Market price = $26 per share.
– Offer price = $33 per share.
– Premium (%) = (33 − 26) / 26 = 0.2692 = 26.92% (≈27%).
3) Unintended premium due to price drop before close
– Agreed offer = $26 per share; target falls to $16 before closing.
– Effective premium paid = (26 − 16) / 16 = 0.625 = 62.5%.
Accounting treatment (brief)
– When a buyer pays more than the fair value of identifiable net assets, the excess is recorded as goodwill on the acquirer’s balance sheet.
– Goodwill represents intangible benefits (brand, customer relationships, IP, workforce). It is not amortized but tested periodically for impairment; an impairment requires a loss on the income statement.
– If purchase price < fair value of net assets, the result is negative goodwill (sometimes recognized as an immediate gain after verification) — treatments vary by accounting standards.
Why acquirers pay premiums (common rationales)
– To make an offer attractive and persuade shareholders to sell.
– To fend off competing bidders (auction dynamics).
– To pay for expected synergies: cost savings, cross-selling, market access, or proprietary assets.
– For strategic reasons (market entry, vertical integration, talent acquisition).
Checklist for evaluating whether a premium is justified
– Have you established a defensible reference value (EV, DCF, comparables, or current market price)?
– Are expected synergies quantifiable, and do projected synergy benefits exceed the premium paid?
– Is there auction/competitive pressure that will force a higher offer?
– Are the target’s intangible assets (brand, patents, customers) valuable and durable?
– Have you run thorough due diligence on liabilities, litigation, and contingent risks?
– Is the premium affordable within financing constraints and acceptable to your shareholders?
– Have you modeled sensitivity scenarios (no-synergy, partial synergy, delayed synergies)?
– Have you assessed potential goodwill impairment triggers and accounting implications?
– Are there regulatory, antitrust, or integration risks that could reduce value?
Key takeaways
– A premium is optional; it reflects what an acquirer is willing to pay above a reference value.
– Premiums arise for strategic and competitive reasons but must be weighed against realistic synergy realizations.
– In accounting, the excess paid over net identifiable assets becomes goodwill and is subject to impairment testing.
– A “discount” purchase can happen; when it does, negative goodwill (badwill) is recognized.
Reputable sources
– Investopedia — Acquisition Premium: https://www.investopedia.com/terms/a/acquisitionpremium.asp
– U.S. Securities and Exchange Commission (SEC) — Mergers and Acquisitions resources: https://www.sec.gov/fast-answers/answersmergershtm.html
– IFRS Foundation — IFRS 3 Business Combinations (standard on accounting for acquisitions): https://www.ifrs.org/issued-standards/list-of-standards/ifrs-3-business-combinations/
– Corporate Finance Institute — Acquisition Premium: https://corporatefinanceinstitute.com/resources/valuation/acquisition-premium/
Educational disclaimer
This explainer is for educational purposes only. It is not personalized investment advice or a recommendation to buy or sell securities. For decisions about specific transactions, consult a qualified financial, tax, or legal advisor.