Acquisition Premium

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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.

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:

  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:

  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.